UNITED STATES SECURITIES AND
EXCHANGE COMMISSION |
|
(X) |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2006 |
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( ) |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission File Number 0-11242 |
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First Commonwealth Financial Corporation |
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(Exact name of registrant as specified in its charter) |
|
|
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification No.) |
22 North Sixth Street, Indiana, PA |
15701 |
(Address of principal executive offices) |
(Zip Code) |
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|
724-349-7220 |
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N/A |
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Indicate
a check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |
|
Yes
X
No . |
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Act). |
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X |
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FIRST COMMONWEALTH FINANCIAL
CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
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Included in Part I of this report: |
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First Commonwealth Financial Corporation and |
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Subsidiaries Consolidated Balance Sheets............ |
3 |
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Consolidated Statements of Income................... |
4 |
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Consolidated Statements of Changes in |
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Shareholders' Equity.............................. |
5 |
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Consolidated Statements of Cash Flows............... |
7 |
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Notes to Consolidated Financial Statements.......... |
8 |
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ITEM 2. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL |
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ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES |
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ITEM 4. |
CONTROLS AND PROCEDURES............................... |
34 |
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PART II - OTHER INFORMATION
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ITEM 1A. |
RISK FACTORS............................................ |
35 |
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ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES |
35 |
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ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES......................... |
35 |
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ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... |
35 |
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ITEM 5. |
OTHER INFORMATION....................................... |
35 |
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ITEM 6. |
EXHIBITS................................................ |
36 |
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Signatures.............................................. |
37 |
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Exhibits |
|
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
|
|
March 31, 2006 |
|
December 31, 2005 |
ASSETS |
|
|
|
|
Cash and due from banks |
$ |
84,627 |
$ |
84,555 |
Interest-bearing bank deposits |
|
391 |
|
473 |
Federal funds sold |
|
-0- |
|
1,575 |
Securities available for sale, at market |
|
1,737,899 |
|
1,851,986 |
Securities
held to maturity, at amortized cost, |
|
85,673 |
|
87,757 |
Loans held for sale |
|
553 |
|
1,276 |
|
|
|
|
|
Loans: |
|
|
|
|
Portfolio loans |
|
3,651,632 |
|
3,623,102 |
Unearned income |
|
(98) |
|
(119) |
Allowance for credit losses |
|
(38,017) |
|
(39,492) |
|
|
|
|
|
Net loans |
|
3,613,517 |
|
3,583,491 |
|
|
|
|
|
Premises and equipment |
|
61,230 |
|
60,860 |
Other real estate owned |
|
1,499 |
|
1,655 |
Goodwill |
|
122,702 |
|
122,702 |
Amortizing intangibles, net |
|
14,686 |
|
15,251 |
Other assets |
|
221,733 |
|
214,739 |
|
|
|
|
|
Total assets |
$ |
5,944,510 |
$ |
6,026,320 |
|
|
|
|
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LIABILITIES |
|
|
|
|
Deposits (all domestic): |
|
|
|
|
Noninterest-bearing |
$ |
499,161 |
$ |
491,644 |
Interest-bearing |
|
3,496,577 |
|
3,504,908 |
|
|
|
|
|
Total deposits |
|
3,995,738 |
|
3,996,552 |
|
|
|
|
|
Short-term borrowings |
|
601,426 |
|
665,665 |
Other liabilities |
|
37,952 |
|
43,314 |
|
|
|
|
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Subordinated debentures |
|
108,250 |
|
108,250 |
Other long-term debt |
|
685,395 |
|
691,494 |
|
|
|
|
|
Total long-term debt |
|
793,645 |
|
799,744 |
|
|
|
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Total liabilities |
|
5,428,761 |
|
5,505,275 |
|
|
|
|
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SHAREHOLDERS' EQUITY |
|
|
|
|
Preferred
stock, $1 par value per share, 3,000,000 |
|
-0- |
|
-0- |
Common
stock $1 par value per share, 100,000,000 |
|
71,978 |
|
71,978 |
Additional paid-in capital |
|
173,369 |
|
173,967 |
Retained earnings |
|
319,523 |
|
318,569 |
Accumulated other comprehensive loss |
|
(17,349) |
|
(9,655) |
Treasury
stock (1,478,499 shares at March 31, 2006 |
|
(18,672) |
|
(20,214) |
Unearned ESOP shares |
|
(13,100) |
|
(13,600) |
|
|
|
|
|
Total shareholders' equity |
|
515,749 |
|
521,045 |
|
|
|
|
|
Total liabilities and shareholders' equity |
$ |
5,944,510 |
$ |
6,026,320 |
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
3
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
|
|
For
the Quarter |
||
|
|
2006 |
|
2005 |
|
|
|
|
|
Interest Income |
|
|
|
|
Interest and fees on loans |
$ |
58,314 |
$ |
52,591 |
Interest and dividends on investments: |
|
|
|
|
Taxable interest |
|
17,585 |
|
19,273 |
Interest exempt from Federal income taxes |
|
3,219 |
|
3,053 |
Dividends |
|
603 |
|
709 |
Interest on Federal funds sold |
|
46 |
|
4 |
Interest on bank deposits |
|
14 |
|
7 |
|
|
|
|
|
Total interest income |
|
79,781 |
|
75,637 |
|
|
|
|
|
Interest Expense |
|
|
|
|
Interest on deposits |
|
23,384 |
|
16,502 |
Interest on short-term borrowings |
|
6,364 |
|
5,558 |
|
|
|
|
|
Interest on subordinated debentures |
|
2,054 |
|
1,902 |
Interest on other long-term debt |
|
6,532 |
|
6,743 |
|
|
|
|
|
Total interest on long-term debt |
|
8,586 |
|
8,645 |
|
|
|
|
|
Total interest expense |
|
38,334 |
|
30,705 |
|
|
|
|
|
Net Interest Income |
|
41,447 |
|
44,932 |
Provision for credit losses |
|
908 |
|
1,744 |
|
|
|
|
|
Net interest income after provision for credit losses |
|
40,539 |
|
43,188 |
|
|
|
|
|
Other Income |
|
|
|
|
Net securities gains |
|
63 |
|
485 |
Trust income |
|
1,394 |
|
1,325 |
Service charges on deposit accounts |
|
3,869 |
|
3,540 |
Insurance commissions |
|
719 |
|
840 |
Income from bank owned life insurance |
|
1,375 |
|
1,321 |
Merchant discount income |
|
-0- |
|
839 |
Card related interchange income |
|
1,298 |
|
1,087 |
Other income |
|
1,578 |
|
2,003 |
|
|
|
|
|
Total other income |
|
10,296 |
|
11,440 |
|
|
|
|
|
Other Expenses |
|
|
|
|
Salaries and employee benefits |
|
19,357 |
|
18,298 |
Net occupancy expense |
|
3,402 |
|
2,992 |
Furniture and equipment expense |
|
2,767 |
|
2,870 |
Data processing expense |
|
795 |
|
939 |
Pennsylvania shares tax expense |
|
1,350 |
|
1,266 |
Intangible amortization |
|
565 |
|
565 |
Other operating expenses |
|
7,357 |
|
8,463 |
|
|
|
|
|
Total other expenses |
|
35,593 |
|
35,393 |
|
|
|
|
|
Income before income taxes |
|
15,242 |
|
19,235 |
Applicable income taxes |
|
2,304 |
|
4,016 |
|
|
|
|
|
Net income |
$ |
12,938 |
$ |
15,219 |
|
|
|
|
|
Average Shares Outstanding |
|
69,469,709 |
|
69,346,722 |
Average Shares Outstanding Assuming Dilution |
|
69,918,151 |
|
70,024,400 |
Per Share Data: |
|
|
|
|
Basic earnings per share |
$ |
0.19 |
$ |
0.22 |
Diluted earnings per share |
$ |
0.19 |
$ |
0.22 |
Cash dividends per share |
$ |
0.170 |
$ |
0.165 |
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
|
Common |
Additional |
|
Accumulated |
|
Unearned |
Total |
|||||||
|
|
|||||||||||||
Balance December 31, 2004 |
$ |
71,978 |
$ |
175,453 |
$ |
307,363 |
$ |
10,002 |
$ |
(26,643) |
$ |
(6,175) |
$ |
531,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
-0- |
|
-0- |
|
15,219 |
|
-0- |
|
-0- |
|
-0- |
|
15,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses on securities |
|
|
|
|
|
|
|
(17,961) |
|
|
|
|
|
(17,961) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification adjustment for |
|
|
|
|
|
|
|
(305) |
|
|
|
|
|
(305) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses on derivatives |
|
|
|
|
|
|
|
(637) |
|
|
|
|
|
(637) |
|
|
|||||||||||||
Total other comprehensive loss |
|
-0- |
|
-0- |
|
-0- |
|
(18,903) |
|
-0- |
|
-0- |
|
(18,903) |
|
|
|||||||||||||
Total comprehensive loss |
|
‑0- |
|
-0- |
|
15,219 |
|
(18,903) |
|
-0- |
|
-0- |
|
(3,684) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared |
|
-0- |
|
-0- |
|
(11,535) |
|
-0- |
|
-0- |
|
-0- |
|
(11,535) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in unearned ESOP shares |
|
-0- |
|
-0- |
|
-0- |
|
-0- |
|
-0- |
|
(3,786) |
|
(3,786) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount on dividend reinvestment plan purchases |
|
-0- |
|
(221) |
|
-0- |
|
-0- |
|
-0- |
|
-0- |
|
(221) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock reissued |
|
-0- |
|
(130) |
|
-0- |
|
-0- |
|
550 |
|
-0- |
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of stock options |
|
-0- |
|
(35) |
|
-0- |
|
-0- |
|
-0- |
|
-0- |
|
(35) |
|
|
|||||||||||||
Balance at March 31, 2005 |
$ |
71,978 |
$ |
175,067 |
$ |
311,047 |
$ |
(8,901) |
$ |
(26,093) |
$ |
(9,961) |
$ |
513,137 |
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
5
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
|
Common |
Additional |
|
Accumulated |
|
Unearned |
Total |
|||||||
|
|
|||||||||||||
Balance December 31, 2005 |
$ |
71,978 |
$ |
173,967 |
$ |
318,569 |
$ |
(9,655) |
$ |
(20,214) |
$ |
(13,600) |
$ |
521,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
-0- |
|
-0- |
|
12,938 |
|
-0- |
|
-0- |
|
-0- |
|
12,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding losses on securities |
|
|
|
|
|
|
|
(7,859) |
|
|
|
|
|
(7,859) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification adjustment for |
|
|
|
|
|
|
|
(41) |
|
|
|
|
|
(41) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for |
|
|
|
|
|
|
|
206 |
|
|
|
|
|
206 |
|
|
|||||||||||||
Total other comprehensive loss |
|
-0- |
|
-0- |
|
-0- |
|
(7,694) |
|
-0- |
|
-0- |
|
(7,694) |
|
|
|||||||||||||
Total comprehensive income (loss) |
|
‑0- |
|
-0- |
|
12,938 |
|
(7,694) |
|
-0- |
|
-0- |
|
5,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared |
|
-0- |
|
-0- |
|
(11,984) |
|
-0- |
|
-0- |
|
-0- |
|
(11,984) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in unearned ESOP shares |
|
-0- |
|
-0- |
|
-0- |
|
-0- |
|
-0- |
|
500 |
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount on dividend reinvestment plan purchases |
|
-0- |
|
(227) |
|
-0- |
|
-0- |
|
-0- |
|
-0- |
|
(227) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock reissued |
|
-0- |
|
(367) |
|
-0- |
|
-0- |
|
1,542 |
|
-0- |
|
1,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of stock options |
|
-0- |
|
(4) |
|
-0- |
|
-0- |
|
-0- |
|
-0- |
|
(4) |
|
|
|||||||||||||
Balance at March 31, 2006 |
$ |
71,978 |
$ |
173,369 |
$ |
319,523 |
$ |
(17,349) |
$ |
(18,672) |
$ |
(13,100) |
$ |
515,749 |
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
6
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
|
|
For
the 3 Months |
||
|
|
|
||
|
|
2006 |
|
2005 |
|
|
|
|
|
Operating Activities |
|
|
|
|
Net income.................................................... |
$ |
12,938 |
$ |
15,219 |
Adjustments to
reconcile net income to net cash |
|
|
|
|
Provision for credit losses ................................ |
|
908 |
|
1,744 |
Depreciation and amortization............................... |
|
2,858 |
|
2,794 |
Net gains on sales of assets................................ |
|
(152) |
|
(833) |
Income
from increase in cash surrender value of |
|
(1,375) |
|
(1,321) |
Decrease in interest receivable............................... |
|
1,012 |
|
69 |
Decrease in interest payable.................................. |
|
(466) |
|
(807) |
Increase (decrease) in income taxes payable................... |
|
(1,856) |
|
7,418 |
Net decrease in loans held for sale........................... |
|
723 |
|
52 |
Change in deferred taxes...................................... |
|
532 |
|
(3,366) |
Other-net..................................................... |
|
(5,983) |
|
(4,762) |
|
|
|
|
|
Net cash provided by operating activities................. |
|
9,139 |
|
16,207 |
|
|
|
|
|
Investing Activities |
|
|
|
|
Transactions with securities held to maturity: |
|
|
|
|
Proceeds from maturities and redemptions.................... |
|
1,233 |
|
4,709 |
Purchases................................................... |
|
-0- |
|
(9,948) |
Transactions with securities available for sale: |
|
|
|
|
Proceeds from sales......................................... |
|
17,239 |
|
17,636 |
Proceeds from maturities and redemptions.................... |
|
109,779 |
|
112,800 |
Purchases................................................... |
|
(24,170) |
|
(103,114) |
Proceeds from sales of other assets........................... |
|
3,160 |
|
3,421 |
Net decrease in interest-bearing bank deposits................ |
|
82 |
|
1,668 |
Net increase in loans......................................... |
|
(32,763) |
|
(44,281) |
Purchases of premises and equipment........................... |
|
(3,330) |
|
(4,119) |
|
|
|
|
|
Net cash provided (used) by investing activities............ |
|
71,230 |
|
(21,228) |
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
Repayments of other long-term debt............................ |
|
(5,600) |
|
(5,497) |
Discount on dividend reinvestment plan purchases.............. |
|
(227) |
|
(221) |
Dividends paid................................................ |
|
(11,964) |
|
(11,528) |
Net increase in Federal funds purchased....................... |
|
93,075 |
|
52,750 |
Net decrease in other short-term borrowings................... |
|
(157,314) |
|
(79,589) |
Net increase (decrease) in deposits........................... |
|
(814) |
|
47,207 |
Proceeds from sale of treasury stock.......................... |
|
972 |
|
217 |
|
|
|
|
|
Net cash provided (used) by financing activities............ |
|
(81,872) |
|
3,339 |
|
|
|
|
|
Net decrease in cash and cash equivalents................... |
|
(1,503) |
|
(1,682) |
|
|
|
|
|
Cash and cash equivalents at January 1........................ |
|
86,130 |
|
79,591 |
|
|
|
|
|
Cash and cash equivalents at March 31......................... |
$ |
84,627 |
$ |
77,909 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
7
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE 1 Management Representation
The consolidated financial statements include the accounts of First
Commonwealth Financial Corporation and its subsidiaries ("First
Commonwealth"). All intercompany
transactions and balances have been eliminated. The accounting and reporting policies of First Commonwealth
conform with accounting principles generally accepted in the United States of
America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates, assumptions and judgments that affect the amounts
reported in the financial statements and accompanying notes. Actual realized amounts could differ from
those estimates. In the opinion of
management, the unaudited interim consolidated financial statements include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair statement of financial position as of March 31, 2006, and the results of
operations for the three month periods ended March 31, 2006 and 2005, and
statements of cash flows and changes in shareholders' equity for the three
month periods ended March 31, 2006 and 2005.
The results of operations for the three months ended March 31, 2006 and 2005,
are not necessarily indicative of the results that may be expected for the full
year or any other interim period. These
interim financial statements should be read in conjunction with First
Commonwealth's 2005 Annual Report on Form 10-K which is available on the First
Commonwealth's website at http://www.fcbanking.com. First Commonwealth's website also provides additional information
of interest to investors and clients, including other regulatory filings made
to the Securities and Exchange Commission, press releases, historical stock
prices, dividend declarations and corporate governance, as well as information
about products and services offered by First Commonwealth.
NOTE 2 Cash Flow Disclosures (Dollar amounts in thousands)
|
2006 |
2005 |
||
|
|
|
||
Cash paid during the first three months of the year for: |
|
|
|
|
|
|
|
|
|
Interest |
$ |
38,800 |
$ |
31,513 |
Income Taxes |
$ |
3,750 |
$ |
-0- |
|
|
|
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
ESOP loan reductions |
$ |
500 |
$ |
214 |
ESOP borrowings |
$ |
-0- |
$ |
4,000 |
Loans
transferred to other real estate |
|
1,205 |
|
1,405 |
Gross
decrease in market value |
|
(12,154) |
|
(28,101) |
Gross
increase (decrease) in market value |
|
317 |
|
(980) |
Treasury
stock reissued for business |
$ |
203 |
$ |
203 |
8
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE 3 Comprehensive Income Disclosures
The following table identifies the related tax effects allocated to each
component of other comprehensive income in the Statements of Changes in Shareholders'
Equity (Dollar amounts in thousands):
|
March 31, 2006 |
March 31, 2005 |
||||||||||
|
|
|
||||||||||
|
|
Tax |
Net of |
|
Tax |
Net of |
||||||
|
|
|
||||||||||
Unrealized losses on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses |
|
(12,091) |
|
4,232 |
|
(7,859) |
|
(27,632) |
|
9,671 |
|
(17,961) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification |
|
(63) |
|
22 |
|
(41) |
|
(469) |
|
164 |
|
(305) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding |
|
-0- |
|
-0- |
|
-0- |
|
(980) |
|
343 |
|
(637) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: reclassification |
|
317 |
|
(111) |
|
206 |
|
-0- |
|
-0- |
|
-0- |
|
|
|
||||||||||
Other comprehensive loss |
$ |
(11,837) |
$ |
4,143 |
$ |
(7,694) |
$ |
(29,081) |
$ |
10,178 |
$ |
(18,903) |
|
|
|
NOTE 4 Accounting for Stock Options Granted
Prior
accounting guidelines permitted two alternate methods of accounting for
stock-based compensation: the intrinsic value method of APB Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees," and
the fair value method of FASB Statement No. 123 ("FAS No. 123"),
"Accounting for Stock-Based Compensation." In December 2002, the FASB issued Statement No. 148 ("FAS
No. 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure." FAS No. 148 did not
amend FAS No. 123 to require companies to account for employee stock options
using the fair value method but required all companies with stock-based
compensation to provide additional disclosures, regardless of whether they
accounted for
9
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE 4 Accounting for Stock Options Granted (continued)
that compensation using the fair value method of FAS No. 123 or the intrinsic
value method of APB 25. As permitted
under FAS No. 123, First Commonwealth had elected to use the intrinsic value
method to measure stock-based compensation under APB 25 and to disclose in a
footnote to the financial statements, net income and earnings per share
determined as if the fair value methodology of FAS No. 123 had been
implemented. No stock-based employee
compensation expense was reflected in First Commonwealth's net income as
reported in the Consolidated Statements of Income because all stock options
granted under First Commonwealth's plan had an exercise price equal to the
market value of the underlying common stock on the date of the grant.
In December 2004, the FASB issued FASB Statement No.123 (Revised) ("FAS
No. 123(R)"), "Share-Based Payment." FAS No. 123(R) replaces FAS No. 123 and supersedes APB 25. FAS No. 123(R) requires companies to measure
compensation costs for all share-based payments including employee stock
options using the fair value method. FAS
No. 123(R) applies to new awards and to awards modified, repurchased or
cancelled beginning on January 1, 2006.
Public companies that used the fair value based method for either
recognition or disclosure under FAS No. 123, will apply FAS No. 123(R) using a
modified prospective application. Under
the modified prospective application, compensation cost is recognized on or
after the required effective date for the portion of the outstanding awards for
which the requisite service has not yet been rendered, based on the grant-date
fair value of those awards calculated under FAS No. 123 for either recognition
or pro forma disclosures. According to
FAS No. 123(R), the grant-date fair value of stock options will be recognized
as compensation expense in the company's income statement over the requisite
service period or the vesting period.
As of December 31, 2005, First Commonwealth did not have any outstanding
options for which the requisite service had not already been rendered. In addition, First Commonwealth's
stock-based compensation plan expired on October 15, 2005; therefore, no
additional options were granted during the first three months of 2006.
A summary of the status of First Commonwealth's outstanding stock options as of
March 31, 2006 and changes for the years ending on that date is presented
below:
|
2006 |
||
|
|
||
|
|
Weighted |
|
|
|
|
|
Outstanding at beginning of year |
2,164,421 |
$ |
10.63 |
Granted |
-0- |
$ |
-0- |
Exercised |
(105,282) |
$ |
9.24 |
Forfeited |
(24,882) |
$ |
14.69 |
|
|
|
|
Outstanding at end of year |
2,034,257 |
$ |
10.66 |
|
|
|
|
Exercisable at end of year |
2,034,257 |
$ |
10.66 |
|
|
|
|
10
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE 4 Accounting for Stock Options Granted (continued)
The weighted-average remaining contractual life on these options is 4.9 years.
The following table illustrates the effect on net income and earnings per share
if First Commonwealth had applied the fair value recognition provisions of FAS
No. 123 to stock-based employee compensation for the three-month period ended
March 31, 2005(Dollar amounts in thousands, except per share data):
|
|
|
Net Income, as reported |
$ |
15,219 |
Deduct:
Total stock-based employee |
|
(43) |
|
|
|
Pro forma net income |
$ |
15,176 |
|
|
|
Earnings per share: |
|
|
Basic - as reported |
$ |
0.22 |
Basic - pro forma |
$ |
0.22 |
Diluted - as reported |
$ |
0.22 |
Diluted - pro forma |
$ |
0.22 |
|
|
|
Average shares outstanding |
69,346,722 |
|
Average shares outstanding assuming dilution |
70,024,400 |
NOTE 5 Restructuring Charges
During the third and fourth quarters of 2005, First Commonwealth recorded
restructuring charges of $5,437 thousand.
These charges included $700 thousand related to an Executive Officer who
executed his right to receive severance payments and benefits under a management
contract, as well as one-time termination benefits of $4,737 thousand in
connection with First Commonwealth's reorganization initiative. One-time termination benefits include
severance payments, hospitalization costs and payroll taxes. No additional charges related to this
reorganization plan are expected in future periods. The restructuring charges were for 72 employees whose positions
were eliminated as part of the reorganization initiative.
The following is a summary of the restructuring liability (Dollar amounts in
thousands):
Restructuring liability as of January 1, 2005 |
$ |
-0- |
Accrual related to management contract |
|
700 |
Accrual related to reorganization initiative |
|
4,737 |
One-time benefit payments during 2005 |
|
(2,122) |
|
|
|
Restructuring liability as of December 31, 2005 |
|
3,315 |
One-time benefit payments during 2006 |
|
(2,202) |
|
|
|
Restructuring liability as of March 31, 2006 |
$ |
1,113 |
|
|
|
11
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE 6 Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities," and in
December 2003, issued FIN 46 (Revised 2003) ("FIN 46R"). FIN 46R clarified some of the provisions of
FIN 46 and exempted certain entities from the original requirements of FIN
46. As defined by FIN 46 a variable
interest entity ("VIE") is a corporation, partnership, trust or any
other legal structure used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its
activities. Under FIN 46R, an entity
that holds a variable interest in a VIE is required to consolidate the VIE if
the entity is subject to a majority of the risk of loss from the VIE's
activities, is entitled to receive a majority of the entity's residual returns
or both.
As part of its community reinvestment initiatives, First Commonwealth invests
in qualified affordable housing projects as a limited partner. First Commonwealth receives federal
affordable housing tax credits and rehabilitation tax credits for these limited
partnership investments. First
Commonwealth's maximum potential exposure to these partnerships is $4,809
thousand, consisting of the limited partnership investments as of March 31,
2006. Based on FIN 46R, First
Commonwealth has determined that these investments will not be consolidated but
continue to be accounted for under the equity method whereby First
Commonwealth's portion of partnership losses are recognized as incurred.
NOTE 7 Guarantees
Standby letters of credit are conditional commitments issued by First
Commonwealth to guarantee the performance of a customer to a third party. The contract or notional amount of these
instruments reflects the maximum amount of future payments that could be lost
under the guarantees if there were a total default by the guaranteed parties without
consideration of possible recoveries under recourse provisions or from
collateral held or pledged. In
addition, many of these commitments are expected to expire without being drawn
upon; therefore, the total commitment amounts do not necessarily represent
future cash requirements. The table
below identifies the notional amounts of these guarantees at March 31, 2006
(Dollar amounts in thousands):
Financial standby letters of credit |
$ |
16,390 |
Performance standby letters of credit |
$ |
4,451 |
The current notional amounts outstanding above include financial standby
letters of credit of $2,620 thousand and performance standby letters of credit
of $103 thousand issued during the first quarter of 2006. There is currently no liability recorded on
First Commonwealth's balance sheet related to the above letters of credit.
12
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE 8 Other-Than-Temporary Impairment of Investments
The following table presents the gross unrealized losses and fair values at
March 31, 2006 by investment category and time frame for which the loss has
been outstanding (Dollar amounts in thousands):
|
Less Than 12 Months |
12 Months or More |
Total |
|||||||||
|
|
|
|
|||||||||
Description of |
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
||||||
|
|
|
|
|
|
|
||||||
U.S. Treasury |
$ |
-0- |
$ |
-0- |
$ |
2,960 |
$ |
(32) |
$ |
2,960 |
$ |
(32) |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
Agency |
|
44,500 |
|
(678) |
|
197,074 |
|
(3,509) |
|
241,574 |
|
(4,187) |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
Agency |
|
419,705 |
|
(8,105) |
|
547,216 |
|
(25,717) |
|
966,921 |
|
(33,822) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities |
|
23,006 |
|
(376) |
|
18,823 |
|
(223) |
|
41,829 |
|
(599) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities |
|
48,607 |
|
(766) |
|
672 |
|
(29) |
|
49,279 |
|
(795) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Backed |
|
943 |
|
(15) |
|
-0- |
|
-0- |
|
943 |
|
(15) |
|
|
|
|
|
|
|
||||||
Total Debt Securities |
|
536,761 |
|
(9,940) |
|
766,745 |
|
(29,510) |
|
1,303,506 |
|
(39,450) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
150 |
|
(6) |
|
-0- |
|
-0- |
|
150 |
|
(6) |
|
|
|
|
|
|
|
||||||
Total Securities |
$ |
536,911 |
$ |
(9,946) |
$ |
766,745 |
$ |
(29,510) |
$ |
1,303,656 |
$ |
(39,456) |
|
|
|
|
|
|
|
Management does not believe any individual loss as of March 31, 2006 represents
an other-than-temporary impairment. The
unrealized losses are predominantly attributable to changes in interest rates
and not from the deterioration of the creditworthiness of the issuer. Management has both the intent and ability
to hold the securities represented in the table for a time necessary to recover
the amortized cost.
NOTE 9 Subsequent Event
On April 27, 2006, First Commonwealth announced the execution of a definitive
agreement to acquire Laurel Capital Group, Inc. ("Laurel Capital"),
headquartered in Allison Park, Pennsylvania.
Under the terms of the agreement, Laurel Capital shareholders will be
entitled to receive $28.25 in cash, an equivalent value of First Commonwealth
common stock or a combination of cash and First Commonwealth stock in exchange
for their shares of Laurel Capital common stock, subject to proration to ensure
that 70% of the aggregate merger consideration is paid in First Commonwealth
common stock and 30% in cash. The definitive
agreement was unanimously approved by the Boards of Directors of First
Commonwealth and Laurel Capital. The
merger is expected to be completed during the third quarter of 2006, subject to
customary conditions, including the receipt of regulatory approvals and the
approval of Laurel Capital shareholders.
13
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE 10 Post Retirement Benefit Plan of Acquired Company
Employees of the former Southwest Bank and GA Financial, Inc. were covered by a
post retirement benefit plan. The net
periodic benefit cost of this plan as of March 31 was as follows (Dollar
amounts in thousands):
|
|
2006 |
|
2005 |
|
|
|
|
|
Service cost |
$ |
-0- |
$ |
-0- |
Interest
cost on projected benefit |
|
61 |
|
55 |
Amortization of transition obligation |
|
1 |
|
1 |
(Gain) Loss amortization |
|
15 |
|
(1) |
|
|
|
|
|
Net periodic benefit cost |
$ |
77 |
$ |
55 |
|
|
|
|
|
This is an unfunded post retirement plan.
Future payments will only consist of benefit payments for life and
health insurance premiums for plan participants.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
"Act") introduced a prescription drug benefit under Medicare Part D.
The Act also introduced a federal subsidy to sponsors of retiree health care
benefit plans that provide a prescription drug benefit that is at least
actuarially equivalent to Medicare Part D.
The postretirement plans of First Commonwealth are provided through
insurance coverage; therefore, First Commonwealth will not receive a direct
federal subsidy. The preceding measure
of the net periodic postretirement benefit cost assumes that First Commonwealth
will not receive the subsidy due to the relatively small number of retirees.
NOTE 11 New Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154 ("FAS 154"), "Accounting Changes and Error Corrections - a
replacement of APB Opinion No. 20 and FASB Statement No. 3." As it states in the title, FAS 154 replaces
APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements." FAS 154 applies to all voluntary changes in
accounting principle and changes the requirements for the accounting for and
reporting of a change in accounting principle.
Unlike APB Opinion No. 20, FAS 154 requires changes in accounting
principle to have retrospective application to the financial statements from
prior periods to which the change applies unless it is impracticable. FAS 154 was effective for accounting changes
and corrections of errors made in fiscal years beginning after December 31,
2005. The implementation of FAS 154 did
not have an impact on First Commonwealth's financial condition or results of
operations.
14
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and results of operations of First Commonwealth Financial Corporation including its subsidiaries ("First Commonwealth"). In addition to historical information, this discussion and analysis, as well as the notes to the consolidated financial statements, contain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995), which reflect management's beliefs and expectations based on information currently available and may contain the words "expect," "estimate," "project," "anticipate," "should," "intend," "probability," "risk," "target," and similar expressions. These forward-looking statements are inherently subject to significant risks and uncertainties, including but not limited to: anticipated cost savings resulting from the recent corporate restructuring initiative, the timing and magnitude of changes in interest rates, changes in general economic and financial market conditions, First Commonwealth's ability to effectively carry out its business plans, changes in regulatory or legislative requirements, changes in competitive conditions and continuing consolidation of the financial services industry. Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results could differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this report. First Commonwealth undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.
RESULTS
OF OPERATIONS
First Three Months of 2006 as Compared to the First Three Months of 2005
Net income for the first three months of 2006 was $12.9 million compared to
$15.2 million for the same period of 2005.
Basic and diluted earnings per share were $0.19 for the first quarter of
2006 and $0.22 for the first quarter of 2005.
The following is an analysis of the impact of changes in net income on diluted
earnings per share:
Net income per share, as of March 31, 2005 |
$ |
0.22 |
|
|
|
Increase (decrease) from changes in: |
|
|
Net interest income |
|
(0.05) |
Provision for credit losses |
|
0.01 |
Security transactions |
|
(0.01) |
Service charges on deposits |
|
0.01 |
Merchant discount income |
|
(0.01) |
Salaries and employee benefits |
|
(0.02) |
Net occupancy expense |
|
(0.01) |
Other operating expenses |
|
0.03 |
Applicable income taxes |
|
0.02 |
|
|
|
Net income per share, as of March 31, 2006 |
$ |
0.19 |
|
|
|
|
|
|
15
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
First Three Months of 2006 as Compared to the
First Three Months of 2005
(continued)
Return on average assets was 0.88% and return on average equity was 9.95% for
the first quarter of 2006 compared to 1.00% and 11.48%, respectively, for the
first quarter of 2005. The decrease in
net income was primarily the result of the decrease in net interest income.
Net Interest Income
Net interest income, the most significant component of earnings, is the amount
by which interest income generated from earning assets exceeds interest expense
on liabilities. Net interest income
decreased $3.5 million for the first quarter of 2006 compared to the first
quarter of 2005 as average earning assets decreased by $227.8 million or 4.0%
compared to 2005 averages.
Net interest margin (net interest income, on a fully tax-equivalent basis, as a
percentage of average earning assets) was 3.31% for the first three months of
2006 compared to 3.41% for the same period of 2005. The decline in net interest margin was due primarily to funding
costs increasing at a faster rate than yields on earning assets. The first quarter yield on earning assets
(on a fully tax-equivalent basis) increased 55 basis points to 6.13% from 5.58%
in the same period last year, while the cost of funds increased 74 basis points
to 3.15% from 2.41% in last year's first quarter.
The following is an analysis of the average balance sheets and net interest
income for the three months ended March 31 (Dollar amounts in thousands):
|
Average Balance Sheets and Net Interest Analysis |
|||||||||||
|
|
|||||||||||
|
2006 |
2005 |
||||||||||
|
|
|
||||||||||
|
Average |
|
Yield |
Average |
Income/ |
Yield |
||||||
|
|
|
||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits with banks |
$ |
1,041 |
$ |
14 |
|
5.31% |
$ |
964 |
$ |
7 |
|
3.08% |
Tax free investment |
|
280,673 |
|
3,219 |
|
7.16 |
|
270,945 |
|
3,053 |
|
7.03 |
Taxable investment |
|
1,574,530 |
|
18,188 |
|
4.68 |
|
1,923,907 |
|
19,982 |
|
4.21 |
Federal funds sold |
|
4,162 |
|
46 |
|
4.53 |
|
659 |
|
4 |
|
2.46 |
Loans, net of unearned |
|
3,650,953 |
|
58,314 |
|
6.68 |
|
3,542,655 |
|
52,591 |
|
6.21 |
|
|
|
|
|
|
|
||||||
Total interest-earning |
|
5,511,359 |
|
79,781 |
|
6.13 |
|
5,739,130 |
|
75,637 |
|
5.58 |
|
|
|
|
|
|
|
||||||
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
77,807 |
|
|
|
|
|
78,997 |
|
|
|
|
Allowance for credit losses |
|
(40,282) |
|
|
|
|
|
(42,024) |
|
|
|
|
Other assets |
|
426,722 |
|
|
|
|
|
422,736 |
|
|
|
|
|
|
|
|
|
|
|
||||||
Total noninterest- |
|
464,247 |
|
|
|
|
|
459,709 |
|
|
|
|
|
|
|
|
|
|
|
||||||
Total Assets |
$ |
5,975,606 |
|
|
|
|
$ |
6,198,839 |
|
|
|
|
|
|
|
|
|
|
|
16
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
First Three Months of 2006 as Compared to the
First Three Months of 2005
(continued)
|
2006 |
2005 |
||||||||||
|
|
|
||||||||||
|
Average |
|
Yield |
Average |
Income/ |
Yield |
||||||
|
|
|
||||||||||
Liabilities and |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
$ |
558,100 |
|
1,913 |
|
|
|
562,152 |
|
949 |
|
|
Savings deposits (e) |
|
1,179,984 |
|
4,982 |
|
1.71 |
|
1,261,576 |
|
3,647 |
|
1.17 |
Time deposits |
|
1,773,440 |
|
16,489 |
|
3.77 |
|
1,580,456 |
|
11,906 |
|
3.06 |
Short-term borrowings |
|
630,035 |
|
6,364 |
|
4.10 |
|
916,021 |
|
5,558 |
|
2.46 |
Long-term debt |
|
796,961 |
|
8,586 |
|
4.37 |
|
838,378 |
|
8,645 |
|
4.18 |
|
|
|
|
|
|
|
||||||
Total interest-bearing |
|
4,938,520 |
|
38,334 |
|
3.15 |
|
5,158,583 |
|
30,705 |
|
2.41 |
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
480,733 |
|
|
|
|
|
478,653 |
|
|
|
|
Other liabilities |
|
28,770 |
|
|
|
|
|
24,158 |
|
|
|
|
Shareholders' equity |
|
527,583 |
|
|
|
|
|
537,445 |
|
|
|
|
|
|
|
|
|
|
|
||||||
Total noninterest- |
|
1,037,086 |
|
|
|
|
|
1,040,256 |
|
|
|
|
|
|
|
|
|
|
|
||||||
Total
Liabilities |
$ |
5,975,606 |
|
|
|
|
$ |
6,198,839 |
|
|
|
|
|
|
|
|
|
|
|
||||||
Net Interest Income and |
|
|
|
41,447 |
|
|
|
|
$ |
44,932 |
|
|
|
|
|
|
|
|
|
(a) |
Yields on interest-earning assets have been computed
on a tax equivalent basis using the 35% Federal income tax statutory rate. |
(b) |
Average balances include loans held for sale. |
(c) |
Income on nonaccrual loans is accounted for on the
cash basis, and the loan balances are included in interest-earning assets. |
(d) |
Loan income includes net loan fees. |
(e) |
Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits which were made for regulatory purposes. |
17
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
First Three Months of 2006 as Compared to the
First Three Months of 2005
(continued)
The
following table shows the effect of changes in volumes and rates on interest
income and interest expense (Dollar amounts in thousands):
|
Analysis of Changes in Net Interest Income |
|||||
|
|
|||||
|
2006 Change From 2005 |
|||||
|
|
|||||
|
Total |
Change
Due |
Change
Due |
|||
Interest-earning assets: |
|
|
|
|||
Time deposits with banks |
$ |
7 |
$ |
1 |
$ |
6 |
Tax free investment securities |
|
166 |
|
169 |
|
(3) |
Taxable investment securities |
|
(1,794) |
|
(3,627) |
|
1,833 |
Federal funds sold |
|
42 |
|
21 |
|
21 |
Loans |
|
5,723 |
|
1,658 |
|
4,065 |
|
|
|
|
|||
Total interest income |
|
4,144 |
|
(1,778) |
|
5,922 |
|
|
|
|
|||
Interest-bearing liabilities: |
|
|
|
|
|
|
Interest-bearing demand deposits |
|
964 |
|
(7) |
|
971 |
Savings deposits |
|
1,335 |
|
(236) |
|
1,571 |
Time deposits |
|
4,583 |
|
1,454 |
|
3,129 |
Short-term borrowings |
|
806 |
|
(1,735) |
|
2,541 |
Long-term debt |
|
(59) |
|
(427) |
|
368 |
|
|
|
|
|||
Total interest expense |
|
7,629 |
|
(951) |
|
8,580 |
|
|
|
|
|||
Net interest income |
$ |
(3,485) |
$ |
(827) |
$ |
(2,658) |
|
|
|
|
(a) Changes in interest income
or expense not arising solely as a result of volume or rate variances are
allocated to rate variances due to interest sensitivity of consolidated assets
and liabilities.
On a positive note, the net interest margin increased 11 basis point (0.11%) in
the first quarter of 2006 compared to the 3.20% reported in the fourth quarter
of 2005, due to the previously disclosed balance sheet changes that occurred
during the fourth quarter of 2005.
Interest and fees on loans increased $5.7 million for the first quarter of 2006
compared to 2005 levels for the same period as the average balance of loans
increased by $108.3 million or 3.1%.
The first quarter yield on loans increased by 47 basis points (0.47%) to
6.68% from the 6.21% reported in 2005.
The increase in interest and fees on loans for the first quarter of 2006
was partially offset by a decrease in interest income on investment securities.
18
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
First Three Months of 2006 as Compared to the
First Three Months of 2005
(continued)
Interest and dividend income on investments decreased $1.6 million for the
first quarter of 2006 compared to the first quarter of 2005. The decrease was largely due to volume
decreases as average investments decreased $339.6 million or 15.5% for the
first quarter of 2006 compared to the same period of 2005. Due to the relatively flat yield curve,
First Commonwealth has limited the amount it has reinvested in investment
securities that have matured or have been paid down. Additionally, First Commonwealth liquidated $100 million
lower-yielding investment securities in the fourth quarter of 2005 to fund the
sale of branches. The total yield on
investments was 5.06% for the first three months of 2006 compared to 4.56% for
the same period of 2005.
Interest on deposits increased $6.9 million for the first quarter of 2006
compared to the same period of 2005.
The increase was largely due to the increase in rates. Volumes were also slightly up over prior
year levels despite the reduction of $126.0 million in deposits related to
branch sales in 2005. Deposit costs
were 2.38% for the first quarter of 2006 compared to 1.72% for the first
quarter of 2005, an increase of 66 basis points (0.66%). Yields were up in all of the deposit
categories. Average total deposits
increased 2.8% in the first three months of 2006 when compared to the same
period of 2005. During its management
of deposit levels and mix, First Commonwealth continues to evaluate the cost of
time deposits compared to alternative funding sources as it balances its goals
of providing clients with the competitive rates they are looking for while also
minimizing First Commonwealth's cost of funds.
Interest expense on short-term borrowings increased $806 thousand for the first
three months of 2006 compared to the same period of 2005 as a result of increases
due to rate which were partially offset by decreases due to volume. The cost of short-term borrowings for the
2006 period increased by 164 basis points (1.64%) compared to 2005 costs of
2.46%. The average balance of
short-term borrowings for the first quarter of 2006 decreased $286.0 million or
31.2% over averages for the prior year.
Interest expense on long-term debt decreased $59 thousand for the first quarter
of 2006 compared to the corresponding period of 2005. Decreases due to volume were partially offset by increases due to
rate. Average long-term debt for the
first three months of 2006 decreased by $41.4 million or 4.9% compared to 2005
averages. Yields on long-term debt for
the first quarter of 2006 increased by 19 basis points (0.19%) compared to the
first quarter of 2005. First
Commonwealth continues to analyze its exposure to any concentration of
maturities of long-term debt in any one year and the associated risks.
19
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
First Three Months of 2006 as Compared to the
First Three Months of 2005
(continued)
Provision for Credit Losses
The provision for credit losses is an amount added to the allowance against
which credit losses are charged. The
amount of the provision is determined by management based upon its assessment
of the size and quality of the loan portfolio and the adequacy of the allowance
in relation to the risks inherent within the loan portfolio. The provision for credit losses was $908
thousand for the first three months of 2006 compared to $1.7 million for the
first three months of 2005. The
analysis of the Adequacy for the Allowance of Loan Loss as of March 31, 2006,
showed continuing improvement in the credit quality of classified loans on the
primary watch list. First Commonwealth
believes that the allowance for credit losses is adequate at the present
time.
Net charge-offs against the allowance for credit losses increased by $370
thousand for the first three months of 2006 compared to the same period of
2005. Increases in net charge-offs were
primarily in the commercial and commercial real estate loan categories. The provision for credit losses as a
percentage of net charge-offs was 38.10% at March 31, 2006, compared to 86.64%
at March 31, 2005. See the "Credit
Review" section for any analysis of the quality of the loan portfolio.
20
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
First Three Months of 2006 as Compared to the
First Three Months of 2005
(continued)
Below is an analysis of the consolidated allowance for credit losses for the
three month periods ended March 31, 2006 and 2005 (Dollar amounts in
thousands):
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
Balance January 1, |
$ |
39,492 |
$ |
41,063 |
Loans charged off: |
|
|
|
|
Commercial, financial and agricultural |
|
1,618 |
|
1,254 |
Real estate-commercial |
|
226 |
|
56 |
Real estate-residential |
|
337 |
|
489 |
Loans to individuals |
|
597 |
|
538 |
Lease financing receivables |
|
24 |
|
24 |
|
|
|
|
|
Total loans charged off |
|
2,802 |
|
2,361 |
|
|
|
|
|
Recoveries of previously charged off loans: |
|
|
|
|
Commercial, financial and agricultural |
|
299 |
|
155 |
Real estate-commercial |
|
-0- |
|
-0- |
Real estate-residential |
|
1 |
|
35 |
Loans to individuals |
|
119 |
|
158 |
Lease financing receivables |
|
-0- |
|
-0- |
|
|
|
|
|
Total recoveries |
|
419 |
|
348 |
|
|
|
|
|
Net charge offs |
|
2,383 |
|
2,013 |
|
|
|
|
|
Provision charged to operations |
|
908 |
|
1,744 |
|
|
|
|
|
Balance March 31, |
$ |
38,017 |
$ |
40,794 |
|
|
|
|
|
Noninterest Income
Net
securities gains were $63 thousand during the first three months of 2006
compared to $485 thousand during the first three months of 2005.
Service charges on deposits, which continue to be First Commonwealth's most
significant component of noninterest fee income, increased $329 thousand for
the first three months of 2006 compared to the corresponding period of
2005. Increases in nonsufficient funds
(or "NSF") fees continue to drive the increase in service charges on
deposits. NSF fees increased $395
thousand for the first quarter of 2006 as compared to the first quarter of
2005. The increase in NSF fees is due
to the continuing growth of the High Performance Checking products for consumer
and business clients. In addition,
First Commonwealth increased the NSF fee for 2006 from $25 an item to $29 per
item. Management strives to implement
reasonable fees for services and closely monitors collection of those fees.
21
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
First Three Months of 2006 as Compared to the
First Three Months of 2005
(continued)
Other changes in noninterest income during the first three months of 2006
compared to the same period of 2005 included increases in card related
interchange income in the amount of $211 thousand. This increase was offset by decreases in merchant discount income
in the amount of $839 thousand and decreases in insurance commission in the
amount of $121 thousand. Card related
interchange income includes income on debit, credit and ATM cards that are
issued to consumers and/or businesses.
The card related interchange income growth was favorably affected by
additional volume related to card usage.
The decrease in merchant discount income was due to the sale of the
merchant services business in the second quarter of 2005.
Other income for the first three months of 2006 decreased $425 thousand from
the $2.0 million reported for the first three months of 2005 primarily due to
losses on the sale of other assets, including loans and other real estate
owned, in the amount of $413 thousand.
22
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
First Three Months of 2006 as Compared to the
First Three Months of 2005
(continued)
Noninterest Expense
Noninterest expense was $35.6 million for the first three months of 2006
reflecting an increase of $200 thousand from the 2005 level of $35.4
million. The most significant increase
during the 2006 period was salaries and employee benefit costs which increased
$1.1 million or 5.8%. Salaries
accounted for $322 thousand of the increase while employee benefits accounted
for $737 thousand. Salaries, adjusted
for $353 thousand in severance charges that were recorded in the first quarter
of 2006 were slightly less than the amount reported in the comparable period
last year. The most significant
employee benefit increase was unemployment compensation insurance which was
related to the organizational restructuring and related personnel changes. Unemployment compensation rates have been
affected by the large number of employees terminated during 2004 and 2005, as
part of First Commonwealth's organizational restructuring, realignment
initiatives and cost containment efforts.
Full time equivalent employees were 1,522 as of the end of the first
quarter of 2006 compared to 1,621 for the same time in 2005. First Commonwealth continues to evaluate its
current menu of employee benefits to provide a competitive benefits package
while also managing costs.
Net occupancy expense increased $410 thousand for the first quarter of 2006
over 2005 levels. The increase was
primarily the result of an adjustment to building rental expense due to an
ongoing monitoring of leases. First
Commonwealth continues to actively evaluate its branch delivery network to
optimize client service in existing branches and to continue expansion into
densely populated growth markets.
During the first quarter of 2006, First Commonwealth continued its
branch expansion plans as it began construction on two new branch offices in
the Pittsburgh-area market as well as completed two significant renovations on
existing branches. The execution of
these initiatives may impact occupancy and other expenses in future periods.
Other expenses included decreases in data processing expense and furniture and
equipment expense in the amounts of $144 thousand and $103 thousand,
respectively. The decrease in data
processing expense was due in part to the sale of the merchant services
business. The decrease in furniture and
equipment expense was largely due to a decrease in depreciation expense on
furniture and equipment and computer software.
Other operating expenses for the 2006 period were $7.4 million reflecting a
decrease of $1.1 million from the 2005 amount of $8.5 million. The most significant decreases were recorded
in plastic card interchange expenses ($697 thousand) and advertising expenses
($209 thousand). The plastic card
interchange expense was eliminated due to the 2005 sale of the merchant services
business. Advertising expenses were
higher in 2005 due in large part to new promotions for a variety of deposit and
loan products.
Income tax expense decreased $1.7 million for the first quarter of 2006
compared to the first quarter of 2005. First Commonwealth's effective tax
23
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
First Three Months of 2006 as Compared to the
First Three Months of 2005
(continued)
rate was 15.1% for the first three months of 2006 compared to 20.9% for the
corresponding period of 2005. Pretax
income for the first three months of 2006 period was $4.0 million less than it
was for the same period in 2005. This reduction in pretax income allowed the
effect of nontaxable income and tax credits to have a larger impact on the
effective tax rate in 2006.
LIQUIDITY
Liquidity is a measure of First Commonwealth's ability to efficiently meet
normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds
are generated from the banking subsidiary's core deposit base and the maturity
or repayment of earning assets, such as securities and loans. As an additional secondary source,
short-term liquidity needs may be provided through the use of overnight Federal
funds purchased, borrowings through use of lines available for repurchase
agreements and borrowings from the Federal Reserve Bank. Additionally, First Commonwealth's banking
subsidiary is a member of the Federal Home Loan Bank and may borrow under
overnight and term borrowing arrangements.
The sale of earning assets may also provide an additional source of
liquidity. In addition to the
previously described funding sources, First Commonwealth also has the ability
to access the capital markets.
Liquidity risk stems from the possibility that First Commonwealth may not be
able to meet current or future financial obligations or may become overly
reliant on alternative funding sources.
First Commonwealth maintains a liquidity risk management policy to
manage this risk. This policy
identifies the primary sources of liquidity, establishes procedures for
monitoring and measuring liquidity and quantifies minimum liquidity
requirements based on board approved limits.
The policy also includes a liquidity contingency plan to address funding
needs to maintain liquidity under a variety of business conditions. First Commonwealth's liquidity position is
monitored by the Asset/Liability Management Committee.
First Commonwealth's long-term liquidity source is a large core deposit base
and a strong capital position. Core
deposits are the most stable source of liquidity a bank can have due to the long-term
relationship with a deposit customer.
The following table shows a breakdown of the components of Fist
Commonwealth's interest-bearing deposits as of March 31, 2006 and December 31,
2005:
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
NOW and Super NOW accounts |
$ |
98,998 |
|
$ |
94,325 |
Savings and MMDA accounts |
|
1,628,313 |
|
|
1,661,482 |
Time deposits |
|
1,769,266 |
|
|
1,749,101 |
|
|
|
|
|
|
Total interest-bearing deposits |
$ |
3,496,577 |
|
$ |
3,504,908 |
|
|
|
|
|
|
24
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY (continued)
At March 31, 2006, total interest-earning assets were $5,476.1 million, a
decrease of $90.0 million from the $5,566.1 million recorded at December 31,
2005. Total loans increased $27.8
million for the first three months of 2006 while investment securities
decreased $116.2 million for the same period.
Marketable securities that First Commonwealth holds in its investment portfolio
are an additional source of liquidity.
These securities are classified as "securities available for
sale" and while First Commonwealth does not have specific intentions to
sell these securities they have been designated as "available for
sale" because they may be sold for the purpose of obtaining future
liquidity, for management of interest rate risk or as part of the
implementation of tax management strategies.
As of March 31, 2006, securities available for sale had an amortized
cost of $1,763.8 million and an approximate fair value of $1,737.9 million.
The following table shows a breakdown of loans by categories as of March 31,
2006 and December 31, 2005:
|
|
March
31, |
|
December
31, |
|
|
|
|
|
Commercial, financial, agricultural |
$ |
763,405 |
$ |
729,962 |
Real estate loans: |
|
|
|
|
Construction and land development |
|
74,145 |
|
78,279 |
1-4 family dwellings |
|
1,207,583 |
|
1,213,223 |
Other real estate |
|
995,357 |
|
987,798 |
Loans to individuals for household, |
|
608,573 |
|
610,648 |
Leases, net of unearned income |
|
3,122 |
|
4,468 |
|
|
|
|
|
Subtotal |
|
3,652,185 |
|
3,624,378 |
Unearned income |
|
(98) |
|
(119) |
|
|
|
|
|
Totals loans and leases |
$ |
3,652,087 |
$ |
3,624,259 |
|
|
|
|
|
The table above includes loans held for sale.
First Commonwealth's auto lease portfolio continues to decline since the
discontinuation of its automobile leasing activities during 2003.
25
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest Sensitivity
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, currency exchange
rates or equity prices. First
Commonwealth's market risk is composed primarily of interest rate risk. Interest rate risk results principally from
timing differences in the repricing of assets and liabilities, changes in the
relationship of rate indices and the potential exercise of free standing or
embedded options.
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks
associated with maximizing income through interest sensitivity imbalances. While no single number can accurately
describe the impact of changes in interest rates on net interest income,
interest rate sensitivity positions, or "gaps," when measured over a
variety of time periods, can be informative.
An asset or liability is considered to be interest-sensitive if the rate it
yields or bears is subject to change within a predetermined time period. If interest-sensitive assets
("ISA") exceed interest-sensitive liabilities ("ISL")
during the prescribed time period, a positive gap results. Conversely, when ISL exceed ISA during a
time period, a negative gap results.
The cumulative gap at the 365-day repricing period was negative in the amount
of $1,257.5 million or 21.15% of total assets at March 31, 2006. A positive gap tends to indicate that
earnings will be impacted favorably if interest rates rise during the period
and negatively when interest rates fall during the time period. A negative gap tends to indicate that
earnings will be affected inversely to interest rate changes. In other words, as interest rates fall, a
negative gap should tend to produce a positive effect on earnings, and when
interest rates rise, a negative gap should tend to affect earnings negatively.
The primary components of ISA include adjustable rate loans and investments,
loan repayments, investment maturities and money market investments. The primary components of ISL include
maturing certificates of deposit, money market deposits, savings deposits, NOW
accounts and short-term borrowings.
26
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest Sensitivity (continued)
The following table lists the amounts and ratios of assets and
liabilities with rates or yields subject to change within the periods indicated
as of March 31, 2006, and December 31, 2005 (Dollar amounts in thousands):
|
March 31, 2006 |
|||||||
|
|
|||||||
|
0-90 |
91-180 |
181-365 |
Cumulative |
||||
|
|
|||||||
Loans |
$ |
1,234,540 |
$ |
192,372 |
$ |
370,738 |
$ |
1,797,650 |
Investments |
|
177,365 |
|
69,920 |
|
159,155 |
|
406,440 |
Other interest-earning assets |
|
391 |
|
-0- |
|
-0- |
|
391 |
|
|
|||||||
Total interest-sensitive |
|
1,412,296 |
|
262,292 |
|
529,893 |
|
2,204,481 |
|
|
|||||||
Certificates of deposit |
|
346,825 |
|
220,868 |
|
362,687 |
|
930,380 |
Other deposits |
|
1,727,311 |
|
-0- |
|
-0- |
|
1,727,311 |
Borrowings |
|
711,471 |
|
67,173 |
|
25,639 |
|
804,283 |
|
|
|||||||
Total interest-sensitive |
|
2,785,607 |
|
288,041 |
|
388,326 |
|
3,461,974 |
|
|
|||||||
Gap |
$ |
(1,373,311) |
$ |
(25,749) |
$ |
141,567 |
$ |
(1,257,493) |
|
|
|||||||
ISA/ISL |
|
0.51 |
|
0.91 |
|
1.36 |
|
0.64 |
Gap/Total assets |
|
23.10% |
|
0.43% |
|
2.38% |
|
21.15% |
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|||||||
|
December 31, 2005 |
|||||||
|
|
|||||||
|
0-90 |
91-180 |
181-365 |
Cumulative |
||||
|
|
|||||||
Loans |
$ |
1,223,588 |
$ |
204,682 |
$ |
359,406 |
$ |
1,787,676 |
Investments |
|
179,227 |
|
115,495 |
|
159,963 |
|
454,685 |
Other interest-earning assets |
|
2,048 |
|
-0- |
|
-0- |
|
2,048 |
|
|
|||||||
Total interest-sensitive |
|
1,404,863 |
|
320,177 |
|
519,369 |
|
2,244,409 |
|
|
|||||||
Certificates of deposit |
|
465,223 |
|
189,534 |
|
288,933 |
|
943,690 |
Other deposits |
|
1,755,808 |
|
-0- |
|
-0- |
|
1,755,808 |
Borrowings |
|
711,185 |
|
4,657 |
|
49,338 |
|
765,180 |
|
|
|||||||
Total interest-sensitive |
|
2,932,216 |
|
194,191 |
|
338,271 |
|
3,464,678 |
|
|
|||||||
Gap |
$ |
(1,527,353) |
$ |
125,986 |
$ |
181,098 |
$ |
(1,220,269) |
|
|
|||||||
ISA/ISL |
|
0.48 |
|
1.65 |
|
1.54 |
|
0.65 |
Gap/Total assets |
|
25.34% |
|
2.09% |
|
3.01% |
|
20.25% |
27
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest Sensitivity (continued)
Although the periodic gap analysis provides management with a method of measuring
current interest rate risk, it only measures rate sensitivity at a specific
point in time, and as a result may not accurately predict the impact of changes
in general levels of interest rates or net interest income. Therefore, to more precisely measure the
impact of interest rate changes on First Commonwealth's net interest income,
management simulates the potential effects of changing interest rates through
computer modeling. The income
simulation model used by First Commonwealth captures all assets, liabilities,
and off-balance sheet financial instruments, accounting for significant
variables that are believed to be affected by interest rates. These variables include prepayment speeds on
mortgage loans and mortgage backed securities, cash flows from loans, deposits
and investments and balance sheet growth assumptions. The model also captures embedded options, such as interest rate
caps/floors or call options, and accounts for changes in rate relationships as
various rate indices lead or lag changes in market rates. First Commonwealth is then better able to
implement strategies which would include an acceleration of a deposit rate
reduction or lag in a deposit rate increase.
The repricing strategies for loans would be inversely related.
First Commonwealth's asset/liability management policy guidelines limit
interest rate risk exposure for the succeeding twelve-month period. Simulations are prepared under the base case
where interest rates remain flat and most likely case where interest rates are
defined using projections of economic factors.
Additional simulations are produced estimating the impact on net
interest income of a gradual 200 basis point (2.00%) movement upward or
downward over a 12 month time frame which cannot result in more than a 5.0%
decline in net interest income when compared to the base case. The analysis at March 31, 2006, indicated
that a 200 basis point (2.00%) increase in interest rates would decrease net
interest income 140 basis points (1.40%) below the base case scenario and a 200
basis point (2.00%) decrease in interest rates would decrease net interest
income by 86 basis points (0.86%) below the base case scenario, over the next
twelve months, both within policy limits.
First Commonwealth's "Asset/Liability Management Committee"
("ALCO") is responsible for the identification, assessment and
management of interest rate risk exposure, liquidity, capital adequacy and
investment portfolio position. The
primary objective of the ALCO process is to ensure that First Commonwealth's
balance sheet structure maintains prudent levels of risk within the context of
currently known and forecasted economic conditions and to establish strategies
which provide First Commonwealth with appropriate compensation for the
assumption of those risks. The ALCO
attempts to mitigate interest rate risk through the use of strategies such as
asset sales, asset and liability pricing and matched maturity funding. First Commonwealth's senior management
establishes the ALCO strategies.
First Commonwealth terminated its interest rate swaps during the fourth quarter
of 2005; however, the ALCO continues to evaluate the use of future derivative
instruments to protect against the risk of adverse price or interest rate
movements on the value of certain assets and liabilities.
28
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CREDIT REVIEW
The following table identifies amounts of loan losses and nonperforming
loans. A loan is placed in nonaccrual
status at the time when ultimate collectibility of principal or interest,
wholly or partially, is in doubt. Past
due loans are those which are contractually past due 90 days or more as to
interest or principal payments but are well secured and in the process of
collection. Renegotiated loans are
those loans which terms have been renegotiated to provide a reduction or
deferral of principal or interest as a result of the deteriorating financial position
of the borrower and are in compliance with the restructured terms.
(Dollar amounts in thousands) |
At March 31, |
|||
|
|
|||
|
2006 |
2005 |
||
|
|
|
||
Nonperforming Loans: |
|
|
|
|
|
|
|
|
|
Loans on nonaccrual basis |
$ |
14,599 |
$ |
11,200 |
Past due more than 90 days |
|
14,305 |
|
16,846 |
Renegotiated loans |
|
170 |
|
182 |
|
|
|
||
Total nonperforming loans |
$ |
29,074 |
$ |
28,228 |
|
|
|
||
Other real estate owned |
$ |
1,499 |
$ |
1,463 |
|
|
|
|
|
Loans outstanding at end of period(a) |
$ |
3,652,087 |
$ |
3,554,441 |
|
|
|
|
|
Average loans outstanding (year-to-date)(a) |
$ |
3,650,953 |
$ |
3,542,655 |
|
|
|
|
|
Nonperforming
loans a as percentage of |
|
0.80% |
|
0.79% |
|
|
|
|
|
Provision for credit losses |
$ |
908 |
$ |
1,744 |
|
|
|
|
|
Allowance for credit losses |
$ |
38,017 |
$ |
40,794 |
|
|
|
|
|
Net charge-offs |
$ |
2,383 |
$ |
2,013 |
|
|
|
|
|
Net
charge-offs as a percentage of average |
|
|
|
|
|
|
|
|
|
Provision
for credit losses as a percentage |
|
|
|
|
|
|
|
|
|
Allowance
for credit losses as a percentage |
|
|
|
|
|
|
|
|
|
Allowance
for credit losses as a percentage |
|
|
|
|
|
|
|
|
|
Allowance
for credit losses as a percentage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) includes loans held for sale |
|
|
|
|
29
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CREDIT REVIEW (continued)
First Commonwealth considers a loan to be impaired when, based on current
information and events, it is probable that the bank will be unable to collect
principal or interest due according to the contractual terms of the loan. Loan impairment is measured based on the present
value of expected cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Payments received on impaired loans are
applied against the recorded investment in the loan. For loans other than those that First Commonwealth expects
repayment through liquidation of the collateral, when the remaining recorded
investment in the impaired loan is less than or equal to the present value of
the expected cash flows, income is recorded on a cash basis. Impaired loans include loans on a nonaccrual
basis and renegotiated loans.
The following table identifies impaired loans, and information regarding the
relationship of impaired loans to the reserve for credit losses at March 31,
2006, and March 31, 2005 (Dollar amounts in thousands):
|
2006 |
2005 |
||
|
|
|
||
|
|
|
|
|
Recorded
investment in impaired loans at end |
$ |
14,769 |
$ |
11,382 |
|
|
|
|
|
Year to date average balance of impaired loans |
$ |
12,754 |
$ |
11,899 |
|
|
|
|
|
Allowance
for credit losses related to |
$ |
2,288 |
$ |
2,362 |
|
|
|
|
|
Impaired
loans with an allocation of the |
|
8,915 |
|
7,244 |
|
|
|
|
|
Impaired
loans with no allocation of the allowance |
|
5,854 |
|
4,138 |
|
|
|
|
|
Year
to date income recorded on impaired loans |
|
36 |
|
190 |
Other than those described above, there are no material credits that management
has serious doubts as to the borrower's ability to comply with the present loan
repayment terms. Additionally, the
portfolio is well diversified and as of March 31, 2006, there were no
significant concentrations of credit.
Nonperforming loans (including loans past due 90 days but still accruing) at
March 31, 2006, increased $846 thousand compared to 2005 levels. Past due loans declined $2.5 million, but
were offset by a $3.4 million increase in nonaccrual loans. The change in nonaccrual loans resulted
primarily from one commercial credit relationship. The remaining recorded balance of that relationship is believed
to be well secured, and includes a partial government agency guarantee. Nonperforming loans as a percent of total
loans increased only one basis point from 0.79% at March 31, 2005, to 0.80% at
March 31, 2006.
30
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CREDIT REVIEW (continued)
The provision for credit losses for the first quarter of 2006 decreased to $908
thousand from $1,744 thousand in the same period last year. The analysis of the Adequacy for the
Allowance of Loan Loss as of March 31, 2006, showed continuing improvement in
the credit quality of classified loans on the primary watch list. First Commonwealth believes that the
allowance for credit losses is adequate at the present time.
First Commonwealth's loan portfolio continues to be monitored by senior
management to identify potential portfolio risks and detect potential credit
deterioration in the early stages. This
process includes close monitoring of watch list credits for workout progress or
deterioration, as well as evaluating the status of significant nonperforming
credits and loan loss adequacy. Credit
risk is mitigated during the loan origination process through the use of sound
underwriting policies and collateral requirements. Management also attempts to minimize loan losses by analyzing and
modifying collection techniques on a periodic basis. Management believes that the allowance for credit losses and
nonperforming loans remained safely within acceptable levels.
First Commonwealth maintains an allowance for credit losses at a level deemed
sufficient to absorb losses which are inherent in the loan and lease portfolios
at each balance sheet date. Management
reviews the adequacy of the allowance on a quarterly basis to ensure that the
provision for credit losses has been charged against earnings in an amount
necessary to maintain the allowance at a level that is appropriate based on
management's assessment of probable estimated losses. First Commonwealth's methodology for assessing the
appropriateness of the allowance for credit losses consists of several key
elements. These elements include an assessment
of individual problem loans, delinquency and loss experience trends, and other
relevant factors. While allocations are
made to specific loans and pools of loans, the total allowance is available for
all loan losses.
While First Commonwealth consistently applies a comprehensive methodology and
procedure, allowance for credit loss methodologies incorporate management's
current judgment about the credit quality of the loan portfolio, as well as
collection probabilities for problem credits.
Although management considers the allowance for credit losses to be
adequate based on information currently available, additional allowance for
credit loss provisions may be necessary due to changes in management estimates
and assumptions about asset impairment, information about borrowers that
indicates changes in the expected future cash flows or changes in economic
conditions. The allowance for credit
losses and the provision for credit losses are significant elements of First
Commonwealth's financial statements, therefore management periodically reviews
the processes and procedures utilized in determining the allowance for credit
losses to identify potential enhancements to these processes, including
development of additional management information systems to ensure that all
relevant factors are appropriately considered in the allowance analysis. In addition, First Commonwealth maintains a
system of internal controls which are independently monitored and tested by
internal audit and loan review staff to ensure that the loss estimation model
is maintained in accordance with internal policies and procedures, as well as
generally accepted accounting principles.
31
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES
Equity capital stood at $515.7 million at March 31, 2006, a decrease of $5.3
million compared to December 31, 2005.
Dividends declared reduced equity by $12.0 million during the first
three months of 2006. The retained net
income of $954 thousand remained in permanent capital to fund future growth and
expansion. The market value adjustments
to securities available for sale and the terminated loan swaps decreased equity
by $7.7 million for the period. Payment
by First Commonwealth's Employee Stock Ownership Plan ("ESOP") to
reduce debt it incurred to acquire the First Commonwealth's common stock for
future distribution as employee compensation increased equity by $500 thousand. Amounts paid to fund the discount on
reinvested dividends reduced equity by $227 thousand during the first three
months of 2006 while the proceeds from the reissuance of treasury shares to
fund stock options exercised increased equity by $972 thousand during
2006. Equity capital was also impacted
during 2006 by an increase of $203 thousand from the reissuance of treasury
shares to fund contingent payments related to the acquisition of First
Commonwealth Financial Advisors, which consummated in 2002. This payment of First Commonwealth's common
stock was the final of four scheduled annual contingent payments.
A strong capital base provides First Commonwealth with a foundation to expand
lending, to protect depositors and to provide for growth while protecting
against future uncertainties. The
evaluation of capital adequacy depends on a variety of factors, including asset
quality, liquidity, earnings history and prospects, internal controls and
management ability. In consideration of
these factors, management's primary emphasis with respect to First
Commonwealth's capital position is to maintain an adequate and stable ratio of
equity to assets.
The Federal Reserve Board has issued risk-based capital adequacy guidelines
which are designed principally as a measure of credit risk. These guidelines require: (1) at least 50% of a banking organization's
total capital be common and other "core" equity capital ("Tier I
Capital"); (2) assets and off-balance-sheet items be weighted according to
risk; (3) the total capital to risk-weighted assets ratio be at least 8%; and
(4) a minimum leverage ratio of Tier I capital to average total assets.
32
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES (continued)
The minimum leverage ratio is not specifically defined, but is generally
expected to be 3-5 percent for all but the most highly rated banks, as
determined by a regulatory rating system.
The table below presents First Commonwealth's capital position at March 31,
2006:
|
Amount |
|
Percent of |
|
|
|
|
Tier I Capital |
$ 500,708 |
|
11.8% |
Risk-Based Requirement |
170,332 |
|
4.0 |
|
|
|
|
Total Capital |
538,725 |
|
12.7 |
Risk-Based Requirement |
340,665 |
|
8.0 |
|
|
|
|
Minimum Leverage Capital |
500,708 |
|
8.6 |
Minimum Leverage Requirement |
175,146 |
|
3.0 |
For an institution to qualify as well capitalized under regulatory guidelines,
Tier I, Total and Leverage Capital ratios must be at least 6.0%, 10.0%, and
5.0%, respectively. At March 31, 2006,
First Commonwealth's banking subsidiary exceeded those requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Information appearing in Item 2 of this report under the caption "Interest
Sensitivity" is incorporated herein by reference in response to this item.
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
|
First Commonwealth carried out an evaluation, under the supervision and with the participation of the company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of First Commonwealth's disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, First Commonwealth's Chief Executive Officer and Chief Financial Officer concluded that First Commonwealth's disclosure controls and procedures are effective. In addition, First Commonwealth's management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the company's internal control over financial reporting to determine whether any changes occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, First Commonwealth's internal control over financial reporting. No such changes were identified in connection with this evaluation. |
|
|
|
First Commonwealth's management is responsible for establishing and maintaining effective disclosure controls and procedures, including maintaining effective controls over financial reporting designed to produce reliable financial statements in accordance with generally accepted accounting principles. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by First Commonwealth in the reports that the company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by First Commonwealth in the reports that the company files under the Exchange Act is accumulated and communicated to First Commonwealth's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. |
34
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. |
LEGAL PROCEEDINGS |
|
|
|
There were no material legal proceedings to which First Commonwealth or its subsidiaries are a party, or of which any of their property is the subject. All legal proceedings presently pending or threatened against First Commonwealth or its subsidiaries arose in the normal course of business and, in the opinion of management, are not expected to have a material adverse effect on the consolidated operations or financial position of First Commonwealth and its subsidiaries. |
|
|
ITEM 1A. |
RISK FACTORS |
|
|
|
There were no material changes to the Risk Factors described in Item 1A in First Commonwealth's Annual Report on Form 10-K for the period ended December 31, 2005. |
|
|
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
|
|
|
Not applicable |
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
|
|
|
Not applicable |
|
|
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|
|
|
Not applicable |
|
|
ITEM 5. |
OTHER INFORMATION |
|
|
|
Not applicable |
35
FIRST COMMONWEALTH FINANCIAL
CORPORATION AND CONSOLIDATED SUBSIDIARIES
|
|
ITEM 6. |
EXHIBITS |
|
|
|
Exhibit
31.1 Chief Executive Officer Certification pursuant |
|
Exhibit
31.2 Chief Financial Officer Certification pursuant |
|
Exhibit
32.1 Chief Executive Officer Certification pursuant |
|
Exhibit
32.2 Chief Financial Officer Certification pursuant |
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST COMMONWEALTH FINANCIAL
CORPORATION
(Registrant)
DATED: May 4, 2006 |
/s/Joseph E. O'Dell |
|
Joseph E. O'Dell, President and Chief Executive Officer |
|
|
|
|
|
|
DATED: May 4, 2006 |
/s/John J. Dolan |
|
John J. Dolan, Executive Vice President and Chief Financial Officer |
37