Oct. 22, 2009 (PR Newswire) -- INDIANA, Pa., Oct. 22 /PRNewswire-FirstCall/ -- First Commonwealth Financial Corporation (NYSE: FCF), the holding company for First Commonwealth Bank, announced today financial results for the third quarter ended September 30, 2009.
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Third Quarter Results
First Commonwealth reported a net loss for the third quarter 2009 of $3.0 million, or $(0.04) per diluted share compared to net income of $10.2 million, or $0.14 per diluted share in the third quarter of 2008 as a result of a $17.5 million ($11.4 million after tax) increase in the provision for credit losses as well as an increase of $1.3 million ($859 thousand after tax) in other-than-temporary impairment charges. The higher provision was related to commercial construction loans primarily outside of Pennsylvania in addition to two out of state commercial and industrial loans which are Shared National Credits (SNC). The other-than-temporary impairment charges resulted from further credit deterioration of the company's pooled trust preferred collateralized debt obligations.
Developments during the third quarter included:
-- Total loans increased $112.3 million and low cost (demand and savings)
deposits increased $88.6 million from June 30, 2009.
-- Non-accrual loans increased $51.9 million from June 30, 2009.
-- The provision for credit losses was $21.4 million ($13.9 million after
tax) in the third quarter 2009.
-- The company recorded impairment losses of $9.9 million ($6.5 million
after tax) relating to trust preferred collateralized debt obligations
in the third quarter 2009.
-- FDIC insurance costs increased $1.9 million ($1.2 million after tax)
from the third quarter of 2008.
-- Non-interest expense decreased $3.4 million from the quarter ended June
30, 2009.
Total nonperforming loans increased $51.9 million during the third quarter 2009 from June 30, 2009 to $133.8 million, or 2.88% of total loans, as of September 30, 2009. Significant additions to nonperforming loans included:
-- A $38.8 million real estate construction loan in Southeastern Florida
for land to be used in a condominium development.
-- A $10.8 million real estate loan for a landfill in Western Pennsylvania.
-- An $8.2 million real estate construction loan in Lake Tahoe, Nevada for
the acquisition of land, which was 90 days delinquent at quarter end.
-- A $4.9 million commercial loan to a manufacturer of semiconductors in
Texas.
-- A $4.5 million real estate construction loan for residential lot
development in Western Pennsylvania.
The increase in nonperforming loans was partially offset by $14.2 million in charge offs taken on existing nonperforming loans in the third quarter.
"Although our provision for credit losses remains high, our third quarter provision of $21.4 million was down significantly from the previous quarter," said John J. Dolan, President and CEO. "We continue to be disciplined in providing for credit loss provisions as economic conditions affecting the credit quality of commercial construction loans out-of-state have not subsided. We believe these actions are prudent during this distressed economic period. At the same time, our capital ratios are strong, allowing us to work through this difficult environment."
Dolan noted, "Commercial construction loans represent nearly 75% of our total non-performing loans as of September 30, 2009, but represent only 7.5% of our total loan portfolio. Despite these credit quality issues, we are pleased with the strong annualized growth we are experiencing in low cost transaction and savings deposits and commercial, consumer, and small business loans. We continue to fulfill the credit needs of our community."
Average diluted shares in the third quarter 2009 were 16.2% greater than the comparable quarter in 2008 primarily due to the issuance of 11.5 million shares of common stock in connection with a capital raise completed on November 5, 2008.
Net Interest Income and Margin
Net interest income increased $3.1 million, or 6.4%, in the third quarter of 2009 from the third quarter of 2008, despite the negative impact of loans transferred to non-accrual status. The increase was a result of both growth in earning assets and an increase in the net interest margin.
The net interest margin on a tax equivalent basis for the third quarter 2009 increased four basis points to 3.62% compared with 3.58% in the corresponding period last year. The increase in our net interest margin can be attributed to increased loan volume and declines in the cost of interest-bearing liabilities exceeding the declines in yields on total interest-earning assets. The decrease in the cost of interest-bearing liabilities can be attributed to lower interest rates, combined with a shift in the mix of our liabilities to low cost deposits and short-term borrowings from time deposits and long-term debt. The net interest margin for the third quarter 2009 was negatively impacted $1.9 million, or 12 basis points (0.12%), due to reversal of previously recorded income on loans transferred to non-accrual status during the third quarter of 2009.
Average interest-earning assets increased by $251.1 million, or 4.4%, in the third quarter of 2009 compared to the third quarter of 2008, driven by an increase in average loans of $450.8 million, or 10.9%, due primarily from loan growth experienced in the fourth quarter of 2008. This quarter-to-quarter loan growth was funded by investment run-off, deposit growth and short-term borrowings. Average investment securities decreased $199.7 million, average deposits increased $226.8 million and average short-term borrowings, or wholesale borrowings, increased $138.3 million. A portion of the increase in average short-term borrowings was also due to refinancing $190.0 million of longer term Federal Home Loan Bank advances in the fourth quarter of 2008. These advances were due to mature in the first seven months of 2009 and were replaced with lower costing overnight borrowings.
The mix of deposits continued to improve during the third quarter of 2009, as management continued to supplement deposit growth with wholesale borrowing due to the significant spread between wholesale borrowing costs and rates paid on interest-bearing deposits. Average time deposits decreased $230.9 million or 11.9% from September 30, 2008 to September 30, 2009. This run-off was offset with increased levels of lower costing transaction and savings deposits. Average noninterest-bearing demand deposits increased $41.2 million, or 7.4%, and average interest-bearing demand deposits and savings deposits increased $416.5 million, or 23.3%, from the third quarter of 2008 to the third quarter of 2009.
Non-Interest Income
Non-interest income decreased $2.5 million, or 40.5%, in the third quarter of 2009 compared to the same period last year. This decrease was primarily due to higher credit related other-than-temporary impairment losses of $1.3 million and a decline of $866 thousand in net security gains.
Insurance and retail brokerage commissions rose $678 thousand, or 48.8%, as a result of higher sales resulting from additional producers and an enhanced calling program. Card related interchange income increased $274 thousand as a result of growth in usage of debit cards and larger dollar transactions. These were offset by a decline of $357 thousand in income from bank owned life insurance as a result of lower crediting rates.
Non-Interest Expense
Non-interest expense increased $2.9 million, or 7.6%, for the third quarter of 2009 from the third quarter of 2008 primarily due to higher FDIC insurance costs and other operating expenses. FDIC insurance costs rose $1.9 million driven by premium increases. Other operating expenses increased $1.1 million primarily due to collection and repossession costs related to the nonperforming loans.
Credit Quality and Provision for Credit Losses
For the quarter ending September 30, 2009, nonperforming loans increased $51.9 million to $133.8 million from June 30, 2009. Net charge-offs were $15.6 million in the third quarter 2009 compared to $2.9 million in the same period in 2008. $11.1 million of the increase in quarterly net charge-offs was related to one commercial construction loan and one commercial and industrial loan, both of which are SNCs. These charge-offs are a result of management's internal review of these credits and were substantiated by the SNC 2009 annual review. Nonperforming loans as a percentage of total loans increased from 1.81% at June 30, 2009 to 2.88% at September 30, 2009.
Loans past due in excess of 90 days and still accruing at September 30, 2009 decreased $609 thousand to $14.4 million compared to June 30, 2009. The majority of these loans are consumer loans secured by residential real estate.
The provision for credit losses for the third quarter of 2009 was $21.4 million, an increase of $17.5 million compared to the third quarter of 2008. The provision exceeded the net charge-offs in the third quarter of 2009 by $5.8 million. The allowance for credit losses as a percentage of average loans at September 30, 2009 increased to 1.96%, compared to 1.85% at June 30, 2009.
Income Tax
The provision for income taxes for the third quarter of 2009 decreased $6.7 million from the same period in 2008 primarily due to the decrease in income before taxes partly offset by a decline in nontaxable income and tax credits. First Commonwealth's effective tax rate was 64.8% for the tax benefit in the third quarter of 2009 compared to 10.0% for the tax expense in the comparable quarter in 2008. The effective tax rate in the third quarter 2009 reflects the loss before taxes, permanent differences and tax credits. Nontaxable income and tax credits had a greater impact on the effective tax rate during the third quarter of 2009 due to the third quarter 2009 pretax loss compared to pretax income in the third quarter of 2008.
Single Issue Trust Preferred Securities, Subordinated Debentures and Trust Preferred Collateralized Debt Obligations
First Commonwealth's investment portfolio includes single issue trust preferred securities, subordinated debentures and trust preferred collateralized debt obligations.
As of September 30, 2009, our single issue portfolio consists of 18 issues with a book value of $22.5 million and an estimated fair value of $19.0 million, while the book value and estimated fair value of the three subordinated debentures totaled $1.2 million. The single issues and subordinated debentures are issued primarily from money center and large regional banks.
Our pooled trust preferred collateralized debt obligations consist of 14 securities comprised of 376 banks and other financial institutions. Two of our pooled securities are senior tranches and the remainder are mezzanine tranches. As of September 30, 2009, the book value of our pooled securities totaled $77.2 million with an estimated fair value of $34.4 million. In the third quarter of 2009, a $9.9 million other-than-temporary impairment charge was recorded on ten trust preferred collateralized debt obligations that are expected to experience a principal shortfall. The amount of impairment charge recognized represents the expected credit loss on these securities. Additional detail related to our pooled trust preferred securities is provided in the Consolidated Selected Financial Data portion of this press release.
Based on management's valuation analysis as of September 30, 2009, all of the single issues and subordinated debentures and the remainder of the trust preferred collateralized debt obligations are expected to return 100% of their principal and interest. However, additional bank failures or interest deferrals and defaults could result in additional other-than-temporary impairment charges.
We previously disclosed our evaluation of the impact of subsequent events relating to two banks with securities in our pooled trust preferred securities on our impairment analysis of those pools as of December 31, 2008. This evaluation was conducted in response to comments raised by the staff of the Securities and Exchange Commission (SEC) in connection with its review of our Annual Report on Form 10-K for the year ended December 31, 2008 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009. Based upon this evaluation, we determined that the impact of those events on our impairment analysis at December 31, 2008 was not material and provided our conclusion and supporting analysis to the SEC staff. The staff has subsequently advised us that it has completed its review of our filings and has no further comments at this time.
Year-to-Date Results
Net loss for the nine months ended September 30, 2009 was $20.0 million, or $(0.24) per diluted share compared to net income of $34.2 million, or $0.47 per diluted share in the same period last year. The decrease was due to the $65.5 million ($42.5 million after tax) increase in the provision for credit losses and a $19.4 million ($12.6 million after tax) increase in other-than-temporary impairment losses related primarily to our trust preferred collateralized debt obligations.
Net Interest Income and Margin
Net interest income for the nine months ended September 30, 2009 increased $17.1 million, or 12.6%, from the comparable period in 2008 despite the negative impact of loans transferred to non-accrual status. The increase was a result of both growth in earning assets and an increase in the net interest margin.
The net interest margin for the nine months ended September 30, 2009 increased 22 basis points to 3.69% compared with 3.47% in the corresponding period last year. The increase in net interest margin is attributable to increased loan volume and decreases in the cost of interest-bearing liabilities exceeding the declines in yields on total interest-earning assets. The decrease in the cost of interest-bearing liabilities is the result of lower interest rates, combined with a shift in the mix of our liabilities to low cost deposits and short-term borrowings from time deposits and long-term debt. In the first nine months of 2009 compared to the corresponding period in 2008, average time deposits declined $276.7 million, or 13.5%, which were offset with increases in lower costing transaction and savings accounts. Average noninterest-bearing demand deposits increased $46.1 million, or 8.6%, and average interest-bearing demand deposits and savings deposits increased $319.7 million, or 18.5%. The net interest margin for the nine months ended September 30, 2009 was negatively impacted $2.3 million, or five basis points (0.05%) due to reversal of previously recorded income on loans transferred to non-accrual status during 2009.
Average interest-earning assets were $274.6 million, or 4.9%, higher in the nine months ended September 30, 2009 compared to the same period in 2008, primarily from an increase in average loans of $513.1 million, or 12.8%. The increase in loans was funded by investment run-off, and deposit and short-term borrowings growth. Average investment securities declined $238.7 million while average deposits increased $89.1 million and average short-term borrowings rose $355.9 million.
Non-Interest Income
Non-interest income decreased $19.6 million in the nine months ended September 30, 2009 compared to the same period in 2008. The decline was primarily due to increased credit related other-than-temporary impairment losses of $18.3 million on trust preferred collateralized debt obligations and $1.1 million on bank equity securities in addition to the $1.4 million decline in net securities gains.
Other operating income increased $2.4 million due to a $2.1 million gain on a favorable legal settlement. Also, insurance and retail brokerage commissions increased $1.4 million as a result of higher sales due to additional producers and an enhanced calling program. These increases were partially offset by decreases in service charges on deposit accounts of $1.2 million, income from bank owned life insurance of $1.1 million and trust income of $910 thousand. The decline in service charges on deposit accounts was due to lower overdraft activity. Income from bank owned life insurance decreased due to lower crediting rates and trust income decreased as a result of lower market values of assets under management.
During the first quarter of 2009, First Commonwealth early adopted FASB Accounting Standards Codification 320-10-65, Transition Related to FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-than-Temporary Impairments which requires that credit related other-than-temporary impairment be recognized in earnings while noncredit-related other-than-temporary impairment on securities not expected to be sold be recognized in other comprehensive income ("OCI").
In accordance with the new accounting guidance, the noncredit-related portion of other-than-temporary impairment losses previously recognized in earnings during 2008 was reclassified as a cumulative effect adjustment that increased retained earnings and decreased accumulated OCI. Of the $13.0 million in other-than-temporary impairment charges recognized in 2008, $6.5 million related to noncredit-related impairment.
