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| FCF > SEC Filings for FCF > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
Results of Operation
Summary of Results
First Commonwealth has experienced the following developments during the second quarter of 2009 compared to the second quarter of 2008.
• Net interest income increased 9.7%.
• Net interest margin, on a tax equivalent basis, improved 19 basis points.
• Total loans increased 10.3% and commercial loans increased 15.4%.
• Average demand and savings deposits increased 15.2%.
• Nonaccrual loans increased 59.7% primarily due to deterioration during the second quarter of 2009 in commercial real estate construction loans as a result of economic conditions.
• Provision for credit losses increased $42.9 million.
• Impairment losses of $8.8 million were recorded on collateralized debt obligations and bank equity securities.
• FDIC insurance costs increased $4.7 million driven by premium increases and the special assessment of $2.9 million.
• First Commonwealth Bank relocated its Latrobe office to a more visible location.
We recorded a net loss for the second quarter 2009 of $(18.6) million or $(0.22) per diluted share, as compared to net income of $12.9 million or $0.18 per diluted share for the same period in 2008. The decrease in net income was primarily the result of a $42.9 million ($27.9 million after tax) increase in the provision for credit losses as well as an increase of $8.2 million ($5.3 million after tax) in other-than-temporary impairment charges. The higher provision was primarily related to deterioration in our out of state commercial real estate construction credits. The other-than-temporary impairment charges were primarily related to the credit deterioration of the company's pooled trust preferred collateralized debt obligations. FDIC insurance costs rose $4.7 million driven by premium increases and the special assessment of $2.9 million. Although we have experienced increased provision for loan loss and other-than-temporary impairment charges, we achieved growth in loans and deposits and remain well capitalized with significant liquidity.
Average diluted shares in the second quarter 2009 were 16.3% greater than the comparable quarter in 2008 primarily due to the issuance of 11.5 million shares of common stock in connection with the capital raising transaction completed on November 5, 2008. Second quarter 2009 annualized return on average equity and average assets was (11.34)% and (1.16)%, respectively, compared to 9.03% and 0.84% for the prior year period.
We recorded a net loss for the six months ended June 30, 2009 of $(16.9) million, or $(0.20) per diluted share compared to net income of $24.0 million, or $0.33 per diluted share in the same period last year. The decrease was due to the $48.0 million ($31.2 million after tax) increase in the provision for credit losses and an $18.1 million ($11.8 million after tax) increase in other-than-temporary impairment losses related to our trust preferred collateralized debt obligations and two equity securities. FDIC insurance costs rose $6.1 million mainly from premium increases and the special assessment of $2.9 million. Year-to-date June 30, 2009 annualized return on average equity and average assets was (5.17)% and (0.53)%, respectively, compared to 8.38% and 0.79% for the same period last year.
ITEM 2. Management's Discussion and Analysis of Financial Condition
Results of Operations (Continued)
Summary of Results (Continued)
The following table illustrates the impact on diluted earnings per share of changes in certain components of net income for the three and six months ending June 30, 2009 compared to the prior periods and after adjusting for the affect of the 11.5 million additional shares issued in November 2008. This adjustment reduced shares used in calculating the change for each component by 11.5 million in order to be comparable to the baseline from the prior year period.
Three Months Ended Six Months Ended
June 30, 2009 June 30, 2009
Net income per diluted share, prior
year period $ 0.18 $ 0.33
Increase (decrease) from changes in:
Net interest income 0.06 0.00
Provision for credit losses (0.59 ) (0.55 )
Net impairment losses on securities (0.11 ) (0.21 )
Net losses on securities
transactions 0.00 (0.01 )
Trust income 0.00 (0.02 )
Service charges on deposit accounts 0.00 (0.03 )
Insurance commissions 0.01 0.00
Income from bank owned life
insurance 0.00 (0.01 )
Other operating income 0.03 0.03
Salaries and employee benefits 0.00 0.04
Occupancy and equipment costs 0.00 0.03
Collection and repossession expenses (0.01 ) (0.01 )
FDIC insurance (0.06 ) (0.07 )
Other operating expenses 0.00 0.02
Tax benefit 0.27 0.26
Net loss per diluted share $ (0.22 ) $ (0.20 )
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Net Interest Income
Net interest income increased $4.6 million, or 9.7%, in the second quarter of 2009 from the second quarter of 2008 as a result of both growth in earning assets and a decline in the cost of interest-bearing liabilities. Interest income decreased $8.5 million, or 10.3%, as the contribution from loan growth was negatively offset by lower interest rates. Interest expense declined $13.1 million, or 37.0%, as a 109 basis point decline on rates paid for interest-bearing liabilities more than offset additional interest expense resulting from a $100.6 million, or 2.0%, increase in average interest-bearing liabilities.
Average interest-earning assets increased $180.4 million, or 3.2%, in the second quarter of 2009 compared to the second quarter of 2008 primarily due to a $463.7 million, or 11.5%, increase in average loans. This loan growth was partially funded by investment run-off and short-term borrowings. Average investment securities decreased $283.4 million, or 17.3%, while average short-term borrowings increased $293.0 million. We refinanced $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.
In the second quarter of 2009, average interest-bearing liabilities increased $100.6 million when compared to the second quarter of 2008. Management continued to supplement deposit growth with wholesale borrowings due to
ITEM 2. Management's Discussion and Analysis of Financial Condition
Results of Operations (Continued)
Net Interest Income (Continued)
the significant spread between wholesale borrowing costs and rates paid on time deposits. In the second quarter of 2009 compared to the second quarter of 2008, average time deposits decreased $261.3 million, or 12.9%, which were offset with increases in lower costing transaction and savings deposits. Average noninterest-bearing demand deposits increased $46.5 million, or 8.6%, while average interest-bearing demand and savings deposits increased $301.4 million, or 17.3%.
The net interest margin on a tax equivalent basis for the second quarter 2009 increased 19 basis points to 3.73% compared with 3.54% in the corresponding period last year. The increase in 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. First Commonwealth uses simulation models to help manage exposure to changes in interest rates. A discussion of the effects of changing interest rates is included in the "Market Risk" section of this discussion.
Net interest income increased $14.1million, or 16.0%, for the six months ended June 30, 2009 from the corresponding period in 2008 as a result of both growth in earning assets and a decline in the cost of interest-bearing liabilities. Interest income decreased $15.4 million, or 9.4%, as the contribution from loan growth was negatively offset by lower interest rates. Interest expense declined $29.4 million, or 38.7%, as a 126 basis point decline on rates paid for interest-bearing liabilities more than offset additional interest expense resulting from a $191.0 million, or 3.8%, increase in average interest-bearing liabilities.
Average interest-earning assets increased $286.3 million, or 5.1%, in the first six months of 2009 compared to the comparable period in 2008 driven primarily by a $544.4 million, or 13.8%, increase in average loans. This loan growth was partially funded by investment run-off and short-term borrowings. Average investment securities decreased $258.3 million, or 15.8%, and a portion of the increase of $466.2 million 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.
In the six months ended June 30, 2009, average interest-bearing liabilities increased $191.0 million when compared to the corresponding period in 2008. Management continued to supplement deposit growth with wholesale borrowings due to the significant spread between wholesale borrowing costs and rates paid on time deposits. In the first six months of 2009 compared to the first six months of 2008, average time deposits decreased $299.7 million, or 14.3%, which were offset with increases in lower costing transaction and savings deposits. Average noninterest-bearing demand deposits increased $48.5 million, or 9.2%, and average interest-bearing demand and savings deposits increased $270.3 million, or 15.9%.
The net interest margin on a tax equivalent basis for the six months ended June 30, 2009 increased 31 basis points to 3.72% compared with 3.41% in the corresponding period last year. The increase in 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 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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Results of Operations (Continued)
Net Interest Income (Continued)
The following is an analysis of the average balance sheets and net interest
income for the three months ended June 30:
Average Balance Sheets and Net Interest Income Analysis
2009 2008
(dollars in thousands)
Yield Yield
Average Income/ or Average Income/ or
Balance Expense Rate (a) Balance Expense Rate (a)
Assets
Interest-earning assets:
Interest-bearing deposits with banks $ 767 $ 1 0.43 % $ 349 $ 2 2.05 %
Tax-free investment securities 238,958 2,660 6.87 300,631 3,347 6.89
Taxable investment securities 1,112,350 13,266 4.78 1,334,118 16,256 4.90
Federal funds sold -0- -0- 0.00 286 2 2.53
Loans, net of unearned income (b)(c) 4,511,811 57,793 5.29 4,048,141 62,614 6.35
Total interest-earning assets 5,863,886 73,720 5.25 5,683,525 82,221 6.04
Noninterest-earning assets:
Cash 75,318 74,860
Allowance for credit losses (43,039 ) (42,011 )
Other assets 555,202 498,205
Total noninterest-earning assets 587,481 531,054
Total Assets $ 6,451,367 $ 6,214,579
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d) $ 611,384 $ 431 0.28 % $ 609,977 $ 1,241 0.82 %
Savings deposits (d) 1,430,613 3,883 1.09 1,130,583 4,149 1.48
Time deposits 1,766,035 13,560 3.08 2,027,373 19,980 3.96
Short-term borrowings 1,068,183 1,133 0.43 775,183 4,251 2.21
Long-term debt 288,263 3,225 4.49 520,733 5,669 4.38
Total interest-bearing liabilities 5,164,478 22,232 1.73 5,063,849 35,290 2.80
Noninterest-bearing liabilities and
capital:
Noninterest-bearing demand deposits
(d) 588,246 541,752
Other liabilities 39,823 34,017
Shareholders' equity 658,820 574,961
Total noninterest-bearing funding
sources 1,286,889 1,150,730
Total Liabilities and Shareholders'
Equity $ 6,451,367 $ 6,214,579
Net Interest Income and Net Yield on
Interest-Earning Assets $ 51,488 3.73 % $ 46,931 3.54 %
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(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes loan fees earned.
(d) 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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Results of Operations (Continued)
Net Interest Income (Continued)
The following is an analysis of the average balance sheets and net interest
income for the six months ended June 30:
Average Balance Sheets and Net Interest Income Analysis
2009 2008
(dollars in thousands)
Yield Yield
Average Income/ or Average Income/ or
Balance Expense Rate (a) Balance Expense Rate (a)
Assets
Interest-earning assets:
Interest-bearing deposits with banks $ $790 $ 2 0.47 % $ 448 $ 7 3.06 %
Tax-free investment securities 248,540 5,554 6.93 310,411 6,942 6.92
Taxable investment securities 1,131,230 27,037 4.82 1,327,618 32,396 4.91
Federal funds sold 0 -0- 0.00 164 2 2.57
Loans, net of unearned income (b)(c) 4,486,216 116,068 5.37 3,941,864 124,681 6.51
Total interest-earning assets 5,866,776 148,661 5.33 5,580,505 164,028 6.15
Noninterest-earning assets:
Cash 74,721 74,360
Allowance for credit losses (48,187 ) (42,185 )
Other assets 541,810 492,876
Total noninterest-earning assets 568,344 525,051
Total Assets $ 6,435,120 $ 6,105,556
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d) $ 598,399 $ 980 0.33 $ 591,549 $ 2,988 1.02 %
Savings deposits (d) 1,373,299 8,294 1.22 1,109,822 9,497 1.72
Time deposits 1,796,155 28,176 3.16 2,095,883 43,918 4.21
Short-term borrowings 1,100,660 2,480 0.45 634,479 7,956 2.52
Long-term debt 289,133 6,644 4.63 534,874 11,654 4.38
Total interest-bearing liabilities 5,157,646 46,574 1.82 4,966,607 76,013 3.08
Noninterest-bearing liabilities and
capital:
Noninterest-bearing demand deposits
(d) 574,488 525,951
Other liabilities 42,587 36,037
Shareholders' equity 660,399 576,961
Total noninterest-bearing funding
sources 1,277,474 1,138,949
Total Liabilities and Shareholders'
Equity $ 6,435,120 $ 6,105,556
Net Interest Income and Net Yield on
Interest-Earning Assets $ 102,087 3.72 % $ 88,015 3.41 %
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(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes loan fees earned.
(d) 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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Results of Operations (Continued)
Net Interest Income (Continued)
The following table shows the effect of changes in volumes and rates on interest
income and interest expense for the three and six months ended June 30:
Analysis of Changes in Net Interest Income
(dollars in thousands)
Three Months Ended June 30, 2009 Six Months Ended June 30, 2009
Compared with June 30, 2008 Compared with June 30, 2008
Change Change Change Change
Total Due to Due to Total Due to Due to
Change Volume Rate (a) Change Volume Rate (a)
Interest-earning assets:
Interest-bearing deposits
with banks $ (1 ) $ 2 $ (3 ) $ (5 ) $ 5 $ (10 )
Tax-free investment
securities (687 ) (1,057 ) 370 (1,388 ) (2,129 ) 741
Taxable investment securities (2,990 ) (2,702 ) (288 ) (5,359 ) (4,795 ) (564 )
Federal funds sold (2 ) (2 ) -0- (2 ) (2 ) -0-
Loans (4,821 ) 7,321 (12,142 ) (8,613 ) 17,622 (26,235 )
Total interest income (8,501 ) 3,562 (12,063 ) (15,367 ) 10,701 (26,068 )
Interest-bearing liabilities:
Interest-bearing demand
deposits (810 ) 3 (813 ) (2,008 ) 35 (2,043 )
Savings deposits (266 ) 1,101 (1,367 ) (1,203 ) 2,255 (3,458 )
Time deposits (6,420 ) (2,576 ) (3,844 ) (15,742 ) (6,281 ) (9,461 )
Short-term borrowings (3,118 ) 1,610 (4,728 ) (5,476 ) 5,846 (11,322 )
Long-term debt (2,444 ) (2,531 ) 87 (5,010 ) (5,354 ) 344
Total interest expense (13,058 ) (2,393 ) (10,665 ) (29,439 ) (3,499 ) (25,940 )
Net interest income $ 4,557 $ 5,955 $ (1,398 ) $ 14,072 $ 14,200 $ (128 )
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(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.
Provision for Credit Losses
The provision for credit losses is determined based on management's estimates of the appropriate level of allowance for credit losses needed to absorb probable losses inherent in the loan portfolio, after giving consideration to charge-offs and recoveries for the period. The provision for credit losses is an amount added to the allowance against which credit losses are charged.
The provision for credit losses for the second quarter of 2009 increased $42.9 million compared to the second quarter of 2008 as a result of increased allocations for new nonperforming loans, loan growth and trends in losses.
The significant increase primarily reflects deterioration in our out of state commercial real estate and commercial construction portfolios. In the second quarter of 2009, $36.1 million or 74.8% of the provision for credit losses related to out of market loans.
ITEM 2. Management's Discussion and Analysis of Financial Condition
Results of Operations (Continued)
Provision for Credit Losses (Continued)
Significant provisions for loan losses were recorded in the second quarter on the following credits;
• A $38.7 million land loan in Florida which was originated in the first quarter of 2008. Due to weakness in the Florida market and the borrowers failure to fund interest reserves the credit was classified as substandard in June 2009. In the second quarter of 2009, a $9.7 million specific reserve has been allocated to the allowance for this credit.
• A $20.8 million real estate construction loan in Florida for condominiums. This loan was originated in August 2006 and was placed on nonaccrual in June 2009. The project was 100% pre-sold with a 30% down payment on each unit and is approximately 60% complete. In May 2009, the bank group received notice that closings on the first phase of the project may not be completed in time to provide cash flow needed to finish the next two phases of the project. A Shared National Credit review in June 2009 graded the loan 100% doubtful and nonaccrual. In the second quarter of 2009, a $10.8 million specific reserve has been allocated to the allowance for this credit.
• A $9.2 million commercial and industrial loan in Maryland to a business that develops and manages retirement centers. This loan was originated in July 2007 and was placed on nonaccrual in June 2009. Underlying collateral for the loan is a pledge on all deposit accounts and financial assets of the borrower. Weakened real estate markets created cash flow and financial issues for the borrower. In April 2009, a Forbearance Agreement was signed adjusting covenants. The last indication of value, a liquidation analysis, was obtained in June 2009. In the second quarter of 2009, a $6.7 million specific reserve has been allocated to the allowance.
• A $6.2 million real estate construction loan in Ohio for senior housing/independent living facilities. This loan was originated in June 2008 and placed on nonaccrual in June 2009. The project is approximately 80% complete. Declines in real estate prices have caused financial issues for the borrower. In April 2009, the bank group suspended construction advances on the project due to a combination of insufficient absorption, a default on related debt and the guarantor's inability to provide financial support. The last appraisal was completed in April 2009. A Shared National Credit review . . .
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