Add
FCF to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| FCF > SEC Filings for FCF > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries ("First Commonwealth") for the nine months ended September 30, 2009 and 2008, and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in this Form 10-Q.
Forward-Looking Statements
This report contains forward-looking statements that describe our future plans, strategies and expectations. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They 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." All forward-looking statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control and which may cause our actual results, performance or achievements to differ materially from the results, performance or achievements contemplated by the forward-looking statements. These risks and uncertainties include, among other things:
• Competitive pressures among depository and other financial institutions nationally and in our market areas may increase significantly.
• Deepened or prolonged weakness in economic and business conditions, nationally and in our market areas, which could increase credit-related losses and expenses and/or limit growth.
• Further declines in the market value of investment securities that are considered to be other-than-temporary, which would negatively impact our earnings and capital levels.
• Increases in defaults by borrowers and other delinquencies could result in increases in our provision for credit losses and related expenses.
• Our inability to manage growth effectively, including the successful expansion of our customer support, administrative infrastructure and internal management systems, could adversely affect our results of operations and prospects.
• Fluctuations in interest rates and market prices could reduce our net interest margin and asset valuations and increase our expenses.
• Reduced wholesale funding capacity or higher borrowing costs due to capital constraints at the Federal Home Loan Bank, which would reduce our liquidity and negatively impact earnings and net interest margin.
• The consequences of continued bank acquisitions and mergers in our market areas, resulting in fewer but much larger and financially stronger competitors, could increase competition for financial services to our detriment.
• Changes in legislative or regulatory requirements applicable to us and our subsidiaries could increase costs, limit certain operations and adversely affect results of operations.
• Changes in tax requirements, including tax rate changes, new tax laws and revised tax law interpretations may increase our tax expense or adversely affect our customers' businesses.
• Other risks and uncertainties described in this report and the other reports that First Commonwealth files with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements in this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 2. Management's Discussion and Analysis of Financial Condition
Results of Operations
Summary of Results
First Commonwealth has experienced the following developments during the third quarter of 2009 compared to the third quarter of 2008.
• Net interest income increased 6.4%.
• Net interest margin, on a tax equivalent basis, improved 4 basis points.
• Total loans increased 11.1% and commercial loans increased 16.3%.
• Average demand and savings deposits increased 19.5%.
• Nonaccrual loans increased $83.5 million primarily due to deterioration in commercial real estate construction loans as a result of economic conditions.
• Provision for credit losses increased $19.1 million.
• Net impairment losses increased $3.3 million due to deterioration in our collateralized debt obligations.
• FDIC insurance costs increased $1.9 million driven by premium increases.
• Our total capital to risk weighted asset ratio improved by 50 basis points to 11.5%.
We recorded a net loss for the third quarter 2009 of $5.9 million or $0.07 per share, as compared to net income of $10.2 million or $0.14 per diluted share for the same period in 2008. The decrease in net income was primarily the result of a $19.1 million ($12.4 million after tax) increase in the provision for credit losses as well as an increase of $3.3 million ($2.1 million after tax) in other-than-temporary impairment charges. The higher provision was primarily related to commercial construction loans primarily outside of Pennsylvania in addition to two out of state commercial and industrial loans. The other-than-temporary impairment charges resulted from further credit deterioration of the company's pooled trust preferred collateralized debt obligations. FDIC insurance costs rose $1.9 million as a result of increased assessment rates. 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 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.
We recorded a net loss for the nine months ended September 30, 2009 of $22.8 million, or $0.27 per 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 $67.1 million ($43.6 million after tax) increase in the provision for credit losses and a $21.4 million ($13.9 million after tax) increase in other-than-temporary impairment losses related primarily to our trust preferred collateralized debt obligations. FDIC insurance costs rose $8.0 million primarily due to premium increases and the special assessment of $2.9 million.
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 nine months ending September 30, 2009 compared to the prior periods and after adjusting for the effect 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 Nine Months Ended
September 30, 2009 September 30, 2009
Net income per diluted share,
prior year period $ 0.14 $ 0.47
Increase (decrease) from change in
shares outstanding 0.01 0.04
Increase (decrease) from changes
in:
Net interest income 0.04 0.24
Provision for credit losses (0.26 ) (0.92 )
Net impairment losses (0.05 ) (0.29 )
Net securities gains (0.01 ) (0.02 )
Trust income 0.00 (0.01 )
Service charges on deposit
accounts 0.00 (0.02 )
Insurance commissions 0.01 0.02
Income from bank owned life
insurance 0.00 (0.02 )
Other operating income (0.02 ) 0.02
Salaries and employee benefits 0.00 (0.04 )
Collection and repossession
expenses (0.01 ) (0.03 )
FDIC insurance (0.03 ) (0.11 )
Provision for income taxes 0.11 0.40
Net loss per share $ (0.07 ) $ (0.27 )
|
Net Interest Income
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 an increased level of nonaccrual loans. The increase was a result of both growth in earning assets and an increase in the net interest margin. Interest income decreased $9.1 million, or 11.2%, as the contribution from loan growth was negatively offset by lower interest rates and lost income from nonaccrual loans. Interest income was negatively impacted $1.9 million, or 12 basis points, due to the reversal of previously recorded income on loans transferred to nonaccrual. Interest expense declined $12.1 million, or 36.5%, primarily due to a 99 basis point decline on rates paid for interest-bearing liabilities.
Average interest-earning assets increased $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, or 13.1%, average deposits increased $226.8 million, or 5.3%, while average short-term borrowings, or wholesale borrowings, increased $138.3 million. We refinanced $190.0 million of longer term Federal Home
ITEM 2. Management's Discussion and Analysis of Financial Condition
Results of Operations (Continued)
Net Interest Income (Continued)
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 third quarter of 2009, average interest-bearing liabilities increased $115.1 million when compared to the third quarter of 2008. Management continued to supplement deposit growth with wholesale borrowings due to the significant spread between wholesale borrowing costs and rates paid on interest-bearing deposits. In the third quarter of 2009 compared to the third quarter of 2008, average time deposits decreased $230.9 million, or 11.9%, which were offset with increases in lower costing transaction and savings deposits. Average noninterest-bearing demand deposits increased $41.2 million, or 7.4%, while average interest-bearing demand and savings deposits increased $416.5 million, or 23.3%.
The net interest margin on a tax equivalent basis for the third quarter 2009 increased 4 basis points to 3.62% compared with 3.58% 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 $17.1 million, or 12.6%, for the nine months ended September 30, 2009 from the corresponding period in 2008 despite the negative impact of loans transferred to nonaccrual status. The increase was a result of both growth in earning assets and an increase in the net interest margin. Interest income decreased $24.4 million, or 10.0%, as the contribution from loan growth was negatively offset by lower interest rates and interest lost on nonaccrual loans. Interest expense declined $41.6 million, or 38.1%, as a 116 basis point decline on rates paid for interest-bearing liabilities.
Average interest-earning assets increased $274.5 million, or 4.9%, in the first nine months of 2009 compared to the comparable period in 2008 driven primarily by a $513.1 million, or 12.8%, increase in average loans. This loan growth was partially funded by investment run-off, deposit growth and short-term borrowings. Average investment securities decreased $238.7 million, or 14.9%, and a portion of the increase of $355.9 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 nine months ended September 30, 2009, average interest-bearing liabilities increased $165.6 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 interest-bearing deposits. In the first nine months of 2009 compared to the first nine months of 2008, average time deposits decreased $276.7 million, or 13.5%, which were offset with increases in lower costing transaction and savings deposits. Average noninterest-bearing demand deposits increased $46.1 million, or 8.6%, and average interest-bearing demand and savings deposits increased $319.7 million, or 18.5%.
ITEM 2. Management's Discussion and Analysis of Financial Condition
Results of Operations (Continued)
Net Interest Income (Continued)
The net interest margin on a tax equivalent basis 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 net interest margin increased despite a negative impact of $2.3 million, or five basis points, due to the reversal of previously recorded income on loans transferred to nonaccrual during 2009. 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 September 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 $ 461 $ 1 1.04 % $ 355 $ 2 1.94 %
Tax-free investment securities 228,271 2,540 6.79 279,792 3,176 6.95
Taxable investment securities 1,097,915 12,437 4.49 1,246,144 15,676 5.01
Federal funds sold -0- -0- 0.00 48 -0- 1.90
Loans, net of unearned income (b)(c) 4,600,016 57,085 5.07 4,149,186 62,285 6.11
Total interest-earning assets 5,926,663 72,063 5.03 5,675,525 81,139 5.91
Noninterest-earning assets:
Cash 78,497 80,393
Allowance for credit losses (82,698 ) (44,621 )
Other assets 562,452 512,996
Total noninterest-earning assets 558,251 548,768
Total Assets $ 6,484,914 $ 6,224,293
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d) $ 603,830 $ 388 0.25 % $ 623,686 $ 1,225 0.78 %
Savings deposits (d) 1,601,898 4,421 1.10 1,165,568 4,348 1.48
Time deposits 1,707,787 12,205 2.84 1,938,709 17,496 3.59
Short-term borrowings 996,416 947 0.38 858,165 4,634 2.15
Long-term debt 286,427 3,119 4.32 495,170 5,509 4.43
Total interest-bearing liabilities 5,196,358 21,080 1.61 5,081,298 33,212 2.60
Noninterest-bearing liabilities and
capital:
Noninterest-bearing demand deposits
(d) 599,606 558,373
Other liabilities 40,149 36,527
Shareholders' equity 648,801 548,095
Total noninterest-bearing funding
sources 1,288,556 1,142,995
Total Liabilities and Shareholders'
Equity $ 6,484,914 $ 6,224,293
Net Interest Income and Net Yield on
Interest-Earning Assets $ 50,983 3.62 % $ 47,927 3.58 %
|
(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 nine months ended September 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 $ 679 $ 3 0.60 % $ 416 $ 9 2.74 %
Tax-free investment securities 241,709 8,094 6.89 300,125 10,118 6.93
Taxable investment securities 1,120,002 39,474 4.71 1,300,267 48,072 4.94
Federal funds sold -0- -0- 0.00 125 2 2.49
Loans, net of unearned income (b)(c) 4,524,567 173,153 5.26 4,011,476 186,966 6.37
Total interest-earning assets 5,886,957 220,724 5.22 5,612,409 245,167 6.07
Noninterest-earning assets:
Cash 75,994 76,386
Allowance for credit losses (59,817 ) (43,003 )
Other assets 548,766 499,632
Total noninterest-earning assets 564,943 533,015
Total Assets $ 6,451,900 $ 6,145,424
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits (d) $ 600,229 $ 1,367 0.30 % $ 602,340 $ 4,213 0.93 %
Savings deposits (d) 1,450,336 12,715 1.17 1,128,539 13,845 1.64
Time deposits 1,766,375 40,382 3.06 2,043,109 61,414 4.02
Short-term borrowings 1,065,530 3,427 0.43 709,586 12,590 2.37
Long-term debt 288,221 9,763 4.53 521,543 17,163 4.40
Total interest-bearing liabilities 5,170,691 67,654 1.75 5,005,117 109,225 2.91
Noninterest-bearing liabilities and
capital:
Noninterest-bearing demand deposits
(d) 582,952 536,837
Other liabilities 41,766 36,201
Shareholders' equity 656,491 567,269
Total noninterest-bearing funding
sources 1,281,209 1,140,307
Total Liabilities and Shareholders'
Equity $ 6,451,900 $ 6,145,424
Net Interest Income and Net Yield on
Interest-Earning Assets $ 153,070 3.69 % $ 135,942 3.47 %
|
(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 nine months ended September 30:
Analysis of Changes in Net Interest Income
(dollars in thousands)
Three Months Ended Nine Months Ended
September 30, 2009 September 30, 2009
Compared with September 30, 2008 Compared with September 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 ) $ 1 $ (2 ) $ (6 ) $ 5 $ (11 )
Tax-free investment securities (636 ) (900 ) 264 (2,024 ) (3,031 ) 1,007
Taxable investment securities (3,239 ) (1,867 ) (1,372 ) (8,598 ) (6,667 ) (1,931 )
Federal funds sold -0- -0- -0- (2 ) (2 ) -0-
Loans (5,200 ) 6,924 (12,124 ) (13,813 ) 24,468 (38,281 )
Total interest income (9,076 ) 4,158 (13,234 ) (24,443 ) 14,773 (39,216 )
. . .
|
|
|