Business Context and Reporting Period
Company: First Commonwealth Financial Corp (FCF)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: A financial holding company headquartered in Indiana, Pennsylvania, operating primarily through its subsidiary, First Commonwealth Bank (FCB). The company provides consumer and commercial banking, trust, wealth management, and insurance services across 115 community banking offices in western Pennsylvania. As of year-end 2009, the company held total assets of $6.4 billion, total loans of $4.6 billion, and total deposits of $4.5 billion.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Interest Income | $206.5 million | $188.6 million |
| Net Interest Margin (Tax-Equivalent) | 3.71% | 3.57% |
| Provision for Credit Losses | $100.6 million | $23.1 million |
| Net Impairment Losses (Securities) | ($36.2 million) | ($13.0 million) |
| Net (Loss) Income | ($20.1 million) | $43.1 million |
| Diluted EPS | ($0.24) | $0.58 |
| Total Assets | $6.45 billion | $6.43 billion |
| Total Loans | $4.64 billion | $4.42 billion |
| Total Deposits | $4.54 billion | $4.28 billion |
| Shareholders' Equity | $638.8 million | $652.8 million |
| Allowance for Credit Losses | $81.6 million (1.76% of loans) | $52.8 million (1.19% of loans) |
| Nonperforming Loans | $148.6 million (3.20% of loans) | $56.1 million (1.27% of loans) |
Material Changes vs. Prior Period
- Profitability Reversal: The company reported a net loss of $20.1 million in 2009, a significant decline from the $43.1 million net income in 2008. This was driven primarily by a $77.5 million increase in the provision for credit losses and a $23.2 million increase in other-than-temporary impairment (OTTI) losses on securities.
- Credit Quality Deterioration: Nonperforming loans increased by $92.5 million (165%) to $148.6 million. This was largely due to deterioration in commercial real estate construction loans (particularly out-of-state) and a large commercial and industrial loan in Pennsylvania. Net charge-offs rose to $71.7 million from $12.7 million.
- Investment Portfolio Impairment: The company recorded $36.2 million in OTTI charges, primarily related to pooled trust preferred collateralized debt obligations (CDOs) and bank equity securities. The unrealized loss on these securities was approximately $43.4 million.
- Dividend Reduction: To preserve capital, the quarterly cash dividend was reduced from $0.17 per share in 2008 to $0.03 per share in 2009 (total annual dividends of $0.18 vs. $0.68).
- Deposit Growth: Despite the economic environment, total deposits grew by $255.4 million (6%), driven by a 22% increase in savings deposits, which helped fund loan growth and reduce reliance on short-term borrowings.
Guidance, Outlook, and Risks
Management Commentary: Management emphasized a strategy of deleveraging the balance sheet by reducing investment securities to fund loan growth and pay down short-term borrowings. While the company achieved growth in loans and deposits and remains "well-capitalized" under regulatory guidelines, earnings were severely impacted by credit losses and investment impairments.
Key Risks and Contingencies:
- Investment Portfolio Risk: Significant exposure to trust preferred securities and CDOs with an aggregate book value of $91.9 million and unrealized losses of $43.4 million. Further impairment charges are possible if credit quality deteriorates.
- Lending Concentration: Approximately 62% of the loan portfolio consists of commercial loans. The company has significant exposure to out-of-state commercial real estate construction loans, which contributed heavily to charge-offs.
- Liquidity: The company relies on core deposits and wholesale funding sources (FHLB advances and FRB Term Auction Facility). A reduction in credit ratings or market disruption could impair liquidity.
- Goodwill Impairment: Goodwill represents approximately 2% of total assets. While no impairment was recorded in 2009 after a two-step test, changing economic conditions could trigger future non-cash write-downs.
- Regulatory Capital: The company remains "well-capitalized," but continued losses could impact capital ratios and the ability to pay dividends.
Investor Verification Checklist
- Allowance Adequacy: Verify if the 1.76% allowance for credit losses is sufficient given the 3.20% nonperforming loan ratio and the specific concentration of out-of-state construction loans.
- Investment Valuation: Review the specific details of the $36.2 million OTTI charge and the remaining $43.4 million unrealized loss on trust preferred securities to assess the risk of future write-downs.
- Dividend Sustainability: Confirm the company's ability to maintain even the reduced dividend given the net loss and capital preservation strategy.
- Debt Covenants: Note that the parent company is currently not meeting certain debt covenants (Return on Average Assets, Nonperforming Loans to Total Loans) on its ESOP loan and a $15 million line of credit; verify the status of waivers or modifications.
- Out-of-State Exposure: Assess the specific geographic and sector risks associated with the out-of-state Shared National Credit (SNC) portfolio, which accounted for over 38% of the provision for credit losses.