First Commonwealth Announces Fourth Quarter and Full-Year 2014 Financial Results; Declares Quarterly Dividend

INDIANA, PA--(Marketwired - January 28, 2015) - First Commonwealth Financial Corporation (NYSE: FCF) today announced financial results for the fourth quarter and full-year 2014.

Fourth Quarter 2014 Highlights

Franchise Growth

• Solid loan growth of $47.0 million from the prior quarter, or 4.3% on an annualized basis.
• Acquisition of a local insurance agency that expands First Commonwealth's fee-based product lines and provides access to key insurance carriers, which was completed on October 1, 2014.

 Expense

• Expense reductions of $1.6 million in the fourth quarter as a result of lower technology, employment and other operational expenses following the IT systems conversion.

 Net Income

• Net income for the fourth quarter was $7.7 million and was impacted by the following items:
  • a $5.6 million ($0.06 diluted earnings per share) after-tax charge for a legal contingency reserve in connection with a preliminary global settlement of a previously disclosed litigation relating to a discontinued bank product known as the Market Rate Savings IRA;
  • a $1.4 million ($0.02 diluted earnings per share) after-tax recovery of an external fraud loss incurred during the third quarter of 2012; and
  • a $0.4 million after-tax charge from the donation of a former headquarters building to a local university.

"2014 was an unprecedented year for our organization," stated T. Michael Price, President and Chief Executive Officer. "We successfully executed a comprehensive systems conversion that has already led to process efficiencies and cost savings. Our newly launched mortgage initiative is ramping up quickly and will be an important component of revenue growth in 2015. Our acquisition of a local insurance agency expanded our carrier access. And we maintained solid loan growth for the last three consecutive quarters. So despite the unusual, non-recurring items that impacted our fourth quarter earnings, we achieved earnings per share growth of 12% in 2014, and remain on track with our strategic initiatives and growth objectives."

Financial Results Summary

For the three months ended December 31, 2014, net income was $7.7 million, or $0.08 diluted earnings per share, compared to net income of $12.5 million, or $0.13 diluted earnings per share, in the third quarter of 2014 and net income of $9.3 million, or $0.10 diluted earnings per share, in the fourth quarter of 2013. The decrease in net income compared to the third quarter of 2014 was driven by a decrease in noninterest income, excluding net securities gains, of $1.6 million and an increase in noninterest expense of $5.8 million primarily as a result of the aforementioned legal reserve, offset by a partial recovery of $2.1 million for a 2012 external fraud loss. Return on average assets and return on average equity were 0.48% and 4.26%, respectively, compared to 0.60% and 5.14% in 2013. The legal reserve charge reduced return on average assets and return on average equity by 35 basis points and 306 basis points, respectively, in the fourth quarter.

For the year ended December 31, 2014, net income was $44.5 million, or $0.48 diluted earnings per share, compared to net income of $41.5 million, or $0.43 diluted earnings per share, for 2013. The increase in net income compared to 2013 was primarily the result of a decrease in provision expense of $8.0 million, offset by a decline of $1.7 million in net interest income and an increase in noninterest expense of $2.4 million. Noninterest expense included $7.4 million of non-routine technology conversion-related expenses incurred during 2014 (as compared to $4.6 million in 2013) and the previously mentioned legal reserve incurred in the fourth quarter of 2014. Return on average assets and return on average equity were 0.71% and 6.18%, respectively, compared to 0.68% and 5.70% in 2013. The legal reserve charge reduced return on average assets and return on average equity by 9 basis points and 77 basis points, respectively, in 2014.

Net Interest Income and Net Interest Margin

Fourth quarter 2014 net interest income, on a fully taxable-equivalent basis, decreased slightly by $0.4 million to $47.0 million, as compared to $47.4 million in the third quarter of 2014. The decrease from the prior quarter was primarily the result of a four basis point decline in the net interest margin to 3.22% due to lower replacement yields, partially offset by a two basis point decline in funding costs and a $25.4 million increase in average interest-earning assets.

As compared to the fourth quarter of 2013, net interest income, on a fully taxable-equivalent basis, decreased slightly by $0.3 million. The net interest margin of 3.22% in the fourth quarter of 2014 was 13 basis points lower than in the fourth quarter of 2013 due to lower replacement loan yields, despite a $200.7 million, or 3.6%, increase in average interest-earning assets. A 20 basis point decline in the yield on interest-earning assets between the periods was partially offset by a seven basis point decline in funding costs.

For the year ended December 31, 2014, net interest income, on a fully taxable-equivalent, basis decreased $1.7 million to $187.0 million as compared to 2013. Average interest-earning assets increased $166.5 million, or 3.0%; however, lower replacement yields on interest-earning assets compressed the margin by 20 basis points compared to the prior-year period, partially offset by a seven basis point decline in funding costs. The decrease was also impacted by $1.0 million of income recognized on other-than-temporarily impaired pooled trust preferred collateralized debt obligations that received payments, which resulted in a two basis point benefit to the net interest margin in the 2013 year-to-date period. The net interest margin for the year ended December 31, 2014 was 3.27%, 12 basis points lower than the prior-year period.

Based on average balances, loan growth for the fourth quarter of 2014 was $41.9 million over the prior quarter and $152.1 million over the year-ago quarter. Average deposits decreased $28.3 million in the fourth quarter of 2014 from the prior quarter and $231.2 million from the same quarter a year ago, partially due to the intentional runoff of higher-cost deposits in favor of more cost-effective short-term borrowings. As a result, average short-term borrowings increased $71.5 million from the prior quarter and $449.6 million over the year-ago period. Average noninterest-bearing demand deposits were essentially flat as compared to the prior quarter and increased $99.9 million from the year-ago quarter.

Credit Quality

The provision for credit losses totaled $2.6 million for the three months ended December 31, 2014, an increase of $0.5 million as compared to the prior quarter and an increase of $1.4 million from the same quarter last year. For the year ending December 31, 2014, the provision for credit losses was $11.2 million, a decrease of $8.0 million as compared to the $19.2 million provision in the prior-year period.

At December 31, 2014, nonperforming loans were $55.3 million, an increase of $10.0 million from September 30, 2014 and a decrease of $4.1 million from December 31, 2013. The increase is primarily related to one commercial credit totaling $9.9 million that was placed into nonperforming status in the fourth quarter of 2014. This loan had previously been considered a potential problem loan. Nonperforming loans as a percentage of total loans were 1.24%, 1.03% and 1.39% for the periods ended December 31, 2014, September 30, 2014 and December 31, 2013, respectively.

During the fourth quarter of 2014, net charge-offs were $1.3 million, compared to $2.0 million in the prior quarter and $1.9 million in the fourth quarter of 2013. There were no significant individual charge-offs in the fourth and third quarters of 2014 and fourth quarter of 2013. For the year ended December 31, 2014, net charge-offs were $13.4 million, or 0.31% of average loans, compared to $32.2 million, or 0.76% of average loans, for the same period of 2013.

The allowance for credit losses was $52.1 million at December 31, 2014 and as a percentage of total loans outstanding was 1.17%, 1.15% and 1.27% for December 31, 2014, September 30, 2014 and December 31, 2013, respectively. General reserves as a percentage of non-impaired loans were 0.97%, 1.06% and 1.07% for December 31, 2014, September 30, 2014 and December 31, 2013, respectively.

Other real estate owned ("OREO") acquired through foreclosure was $7.2 million at December 31, 2014 as compared to $7.8 million at September 30, 2014 and $11.7 million at December 31, 2013. There were no significant additions to OREO in the fourth quarter of 2014.

Noninterest Income

Noninterest income, excluding net securities gains and losses, decreased $1.6 million, or 10.8%, in the fourth quarter of 2014 as compared to the prior quarter and decreased $1.3 million, or 8.7%, compared to the same quarter last year. The decrease from the prior quarter is primarily the result of a $0.5 million decrease in service charges on deposit accounts, a $0.3 million decrease in trust income and a $0.4 million decrease in commercial loan swap-related revenues included in other income. The decrease from the prior-year period of $1.3 million is primarily related to a decrease of $0.6 million in service charges on deposit accounts and decreases in other revenue of $0.7 million in commercial loan swap-related revenues and $0.4 million in investment management income (due to the sale of our advisory business in the first quarter of 2014), offset by a $0.4 million increase from insurance due to increased production and our recent agency acquisition.

During the fourth quarter of 2014, a gain of $0.5 million was recognized as the result of a recovery on a trust preferred security. In the fourth quarter of 2013, a loss of $1.4 million was recognized when this trust preferred security was liquidated. The $0.5 million received in the fourth quarter of 2014 represents the additional proceeds distributed as part of the final liquidation of the trust.

For the year ended December 31, 2014, noninterest income, excluding securities gains and losses, decreased $1.0 million, or 1.7%, as compared to the same period of 2013. Changes in noninterest income included decreases of $2.3 million in commercial loan swap-related revenues and $1.1 million primarily related to lower investment management income (due to the previously mentioned sale of our advisory business) as well as a decrease of $0.3 million in letter of credit fees over the year-ago period. These decreases were partially offset by increases of $2.9 million from the gain on sale of assets primarily from the sale of an OREO property and the $1.2 million gain from the sale of our registered investment advisory business during 2014, together with increases of $0.5 million in insurance revenues and $0.5 million in interchange revenue compared to the year-ago period.

Noninterest Expense

Noninterest expense increased $5.8 million, or 13.9%, in the fourth quarter of 2014 from the prior quarter and increased $2.0 million, or 4.5%, compared to the fourth quarter of 2013. The increase during the fourth quarter is primarily attributable to the aforementioned legal reserve and building donation to a local university, partially offset by the external fraud recovery and a $2.1 million reduction in IT conversion-related expenses. There was $2.2 million in IT conversion-related expense in the third quarter of 2014 as compared to $0.1 million in the fourth quarter of 2014. In addition, noninterest expense reductions of $1.6 million in the fourth quarter can be directly attributed to the successful completion of the IT conversion in the third quarter of 2014.

The increase in noninterest expense in the fourth quarter of 2014 as compared to the fourth quarter of 2013 is primarily attributable to the aforementioned legal reserve and building donation, offset by the external fraud recovery and reductions of $4.4 million in IT conversion-related expenses. There was $4.5 million in IT conversion-related expense in the fourth quarter of 2013 and $0.1 million in the fourth quarter of 2014.

Despite $2.8 million in increased non-routine technology conversion charges and accelerated depreciation in 2014, as well as the aforementioned legal reserve charge and building donation, noninterest expense increased by only $2.4 million for the year ended December 31, 2014 compared to 2013. Improvements included decreases of $1.9 million in Pennsylvania shares tax expense, $0.4 million in amortization of intangibles, $1.1 million in loan collection costs, and $0.3 million in FDIC expense. Also contributing to the year-over-year comparison of noninterest expense was the aforementioned $3.0 million partial recovery for a 2012 external fraud loss in 2014, a $1.6 million charge for the early extinguishment of debt in 2013 and a $0.8 million contingency accrual for client tax reporting in 2013.

Full time equivalent staff declined to 1,328 at December 31, 2014 from 1,362 at December 31 2013. The decrease is primarily attributable to staff reductions as a result of the completion of our IT systems conversion and reductions in our branch network, offset by the recent launch of our mortgage initiative and the acquisition of an insurance agency.

The efficiency ratio, calculated as total noninterest expense as a percentage of total revenue (which consists of net interest income on a fully taxable equivalent basis plus total noninterest income, excluding net securities gains), was 78.45% and 69.23% for the three months and year ended December 31, 2014, respectively, as compared to 73.15% and 67.52% for the three months and year ended December 31, 2013. IT conversion expenses added 0.19% and 2.98% to the efficiency ratio, respectively, for the three months and year ended December 31, 2014. The legal reserve charge increased the efficiency ratio by an additional 14.17% and 3.46% for the three months and year ended December 31, 2014.

Dividends and Capital

First Commonwealth Financial Corporation declared a common stock quarterly dividend of $0.07 per share which is payable on February 20, 2015 to shareholders of record as of February 9, 2015. This dividend represents a 3.3% projected annual yield utilizing the January 27, 2015 closing market price of $8.53.

During the third quarter of 2014, First Commonwealth completed a previously announced $25.0 million common stock repurchase program under which the corporation repurchased 2,924,066 shares at an average price of $8.58 per share. On January 27, 2015, First Commonwealth's Board of Directors authorized an additional $25.0 million common stock repurchase program.

First Commonwealth's capital ratios for Total, Tier I and Leverage at December 31, 2014 were 12.8%, 11.7% and 9.9%, respectively. Our current capital levels would meet the fully-phased in Basel III capital requirements issued by the U.S. bank regulators.

Conference Call

First Commonwealth will host a quarterly conference call to discuss its financial results for the fourth quarter and full-year 2014 on Wednesday, January 28, 2015 at 2:00 PM (ET). The call can be accessed by dialing (toll free) 1-877-353-0037 or through the company's web page, http://www.fcbanking.com/InvestorRelations. A replay of the call will be available approximately two hours following the conclusion of the conference. A link to the call replay will be accessible at this web page for 30 days.

About First Commonwealth Financial Corporation

First Commonwealth Financial Corporation, headquartered in Indiana, Pennsylvania, is a financial services company with $6.4 billion in total assets and 110 banking offices in 15 counties throughout western and central Pennsylvania. First Commonwealth provides a full range of commercial banking, consumer banking, mortgage, wealth management and insurance products and services through its subsidiaries First Commonwealth Bank and First Commonwealth Insurance Agency.

Forward-Looking Statements

This release contains forward-looking statements about First Commonwealth's future plans, strategies and financial performance. These statements can be identified by the fact that they do not relate strictly to historical or current facts and often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate" or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may." Such statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control and may cause actual results, performance or achievements to differ materially from the results, performance or achievements contemplated by the forward-looking statements. Global and domestic economies could fail to recover from the recent economic downturn or could experience another severe contraction, which could adversely affect our revenues, increase credit-related costs and reduce the values of our assets and liabilities. Global financial markets could experience a recurrence of significant turbulence, which could reduce the availability of funding to certain financial institutions and lead to a tightening of credit, a reduction of business activity, and increased market volatility. Continued stress in the commercial real estate markets, as well as a delay or failure of recovery in the residential real estate markets, could cause additional credit losses and deterioration in asset values. In addition, our business and financial performance is likely to be negatively impacted by effects of recently enacted and future legislation and regulation. Our results could also be adversely affected by continued deterioration in general business and economic conditions; changes in interest rates; deterioration in the credit quality of our loan portfolios or in the value of the collateral securing those loans; deterioration in the value of securities held in our investment securities portfolio; legal and regulatory developments; increased competition from both banks and non-banks; changes in customer behavior and preferences; effects of mergers and acquisitions and related integration; effects of critical accounting policies and judgments; and management's ability to effectively manage credit risk, market risk, operational risk, compliance and legal risk, interest rate risk, and liquidity risk. Forward-looking statements speak only as of the date on which they are made. First Commonwealth undertakes no obligation to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.