Business Context and Reporting Period
Company: First Commonwealth Financial Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A Pennsylvania-based financial holding company operating primarily through its subsidiary, First Commonwealth Bank. The company provides commercial, consumer, and mortgage banking services.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Interest Income | $50.98 million | $47.93 million | $153.07 million | $135.94 million |
| Provision for Credit Losses | $23.02 million | $3.91 million | $79.51 million | $12.45 million |
| Net Non-Interest Income | $1.00 million | $6.27 million | $10.46 million | $32.82 million |
| Total Non-Interest Expense | $41.95 million | $39.00 million | $130.63 million | $116.74 million |
| Net (Loss) Income | $(5.86) million | $10.16 million | $(22.79) million | $34.20 million |
| Diluted EPS | $(0.07) | $0.14 | $(0.27) | $0.47 |
| Total Assets | $6.51 billion | $6.43 billion (Dec 31, 2008) | - | - |
| Total Loans | $4.65 billion | $4.42 billion (Dec 31, 2008) | - | - |
| Allowance for Credit Losses | $90.47 million | $52.76 million (Dec 31, 2008) | - | - |
| Shareholders' Equity | $643.15 million | $652.78 million (Dec 31, 2008) | - | - |
Material Changes vs. Prior Period
- Net Loss: The company reported a net loss of $5.86 million for Q3 2009, a reversal from the $10.16 million net income in Q3 2008. For the nine months ended Sept 30, 2009, the loss was $22.79 million compared to $34.20 million income in the prior year.
- Provision for Credit Losses: Increased significantly by $19.1 million in Q3 2009 (to $23.02 million) and by $67.1 million year-to-date. This was driven by deteriorating commercial real estate construction loans and Shared National Credits (SNC) outside Pennsylvania.
- Impairment Charges: Net impairment losses on securities increased by $3.3 million in Q3 2009 ($11.9 million total) due to credit deterioration in pooled trust preferred collateralized debt obligations (CDOs).
- Nonperforming Assets: Nonaccrual loans increased by $83.5 million to $133.2 million. Other real estate owned (OREO) rose to $24.1 million from $3.3 million at year-end 2008.
- Net Interest Margin: Improved slightly to 3.62% in Q3 2009 (from 3.58% in Q3 2008) and 3.69% for the nine-month period (from 3.47%), aided by lower funding costs despite lower asset yields.
- FDIC Expenses: Increased by $1.9 million in Q3 2009 due to higher assessment rates and a special assessment.
Outlook, Risks, and Management Commentary
- Capital Position: The company remains "well capitalized" with a total capital to risk-weighted assets ratio of 11.5% and Tier 1 capital ratio of 10.2%. However, management reduced the quarterly dividend to $0.03 per share (from $0.12 in March 2009) to preserve capital.
- Credit Risk: Significant concentration of nonperforming loans exists in out-of-state commercial real estate construction and commercial/industrial sectors. 42.1% of the Q3 provision was related to Shared National Credits (SNC).
- Investment Portfolio Risk: The company holds $75.3 million in pooled trust preferred CDOs with a fair value of $33.6 million. Management expects further credit-related impairment charges if underlying bank defaults increase.
- Liquidity: Liquidity is supported by a core deposit base and unused wholesale borrowing capacity, including $651.2 million at the Federal Reserve. However, the company is currently not meeting certain debt covenants related to return on assets and nonperforming loan ratios and is seeking waivers.
- Market Risk: The company has a negative interest rate gap for the next 12 months (ratio of 0.73), indicating higher liability repricing than asset repricing, which exposes earnings to rising interest rates.
Investor Verification Checklist
- Allowance Adequacy: Verify if the $90.5 million allowance (1.95% of loans) is sufficient given the rapid rise in nonperforming loans to 2.88% of the portfolio.
- CDO Exposure: Review the specific composition and stress-test results of the $75.3 million pooled trust preferred CDO portfolio to assess future impairment risks.
- Out-of-State Concentration: Analyze the geographic concentration of the $133.2 million in nonaccrual loans, specifically the exposure to Florida, Nevada, and Texas markets.
- Covenant Compliance: Monitor the status of negotiations regarding the waiver or modification of debt covenants currently in breach.
- Dividend Sustainability: Assess the impact of the reduced dividend on shareholder returns and capital preservation strategies in a prolonged downturn.