First Commonwealth Announces First Quarter 2010 Financial Results

INDIANA, Pa., April 21 /PRNewswire-FirstCall/ -- First Commonwealth Financial Corporation (NYSE: FCF) today reported a net loss for the first quarter ended March 31, 2010 of $13.2 million, or $0.15 per share, compared to net income of $1.7 million, or $0.02 per diluted share, in the first quarter of 2009. The net loss was primarily the result of a $45.0 million provision for credit losses in the quarter. The higher provision primarily resulted from updated collateral valuations for a commercial real estate loan in Florida that was placed in nonaccrual status during the third quarter of 2009, an out-of-market commercial loan that migrated to nonaccrual status during the first quarter of 2010 and continued deterioration in a western Pennsylvania commercial loan that was placed in nonaccrual status in the fourth quarter of 2009.  

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"We are extremely disappointed by our financial results for the first quarter. Our credit quality issues are driven primarily by a relatively small number of out-of-state credits that are concentrated in the real estate sector. These loans have been adversely affected by staggering declines in collateral values of real estate, particularly in markets outside of Pennsylvania," said John J. Dolan, President and CEO. "Although these problem credits represent a small portion of our total assets, they are having a disproportionate effect on earnings and have obscured otherwise very favorable trends in substantially all other areas of our community banking operations. I couldn’t be more proud of how well First Commonwealth employees are performing during this unprecedented economic period as we continue to move the organization forward. We remain well capitalized, which provides us the flexibility to work through this difficult economic environment."

Net Interest Income and Margin

During the first quarter of 2010 net interest income, on a fully taxable equivalent basis, increased $2.1 million, or 4%, from the first quarter of 2009. The increase was a result of a 15 basis point increase in the net interest margin, partially offset by a decline in average earning assets. Net interest margin was 3.87%, 3.78% and 3.72% for the three-month periods ended March 31, 2010, December 31, 2009 and March 31, 2009, respectively. The improved net interest margin is the result of a more favorable deposit mix, improved loan pricing and reduced balance sheet leveraging. During the twelve-month period ending March 31, 2010, average deposits increased $295.5 million, including $482.6 million of lower costing transaction and savings deposits which has been an ongoing strategic initiative, offset by a $187.1 million decrease in time deposits. Average loans increased $175.4 million during the same twelve-month period primarily in the commercial real estate, home equity and indirect auto lending categories, which offset the planned decrease in residential real estate loans. Average investment securities decreased $232.5 million as proceeds from maturing securities contributed to a $267.9 million decrease in average borrowings as the risk/reward for balance sheet leveraging activities has become less attractive in the current rate environment.

Non-Interest Income

Net security losses recognized in earnings for the three-month period ending March 31, 2010 were $2.3 million compared to $9.8 million of losses during the first quarter of 2009. These losses resulted primarily from other-than-temporary impairment charges on investments in pooled trust preferred collateralized debt obligations.

The company’s pooled trust preferred collateralized debt obligations consist of 14 securities comprised of 372 banks and other financial institutions. Two pooled securities are senior tranches and the remaining 12 are mezzanine tranches. As of March 31, 2010, the book value of pooled securities totaled $66.6 million with an estimated fair value of $28.2 million. In the first quarter of 2010, a $2.8 million other-than-temporary impairment charge was recorded in earnings on six 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.

Non-interest income, excluding net security losses, increased $1.2 million in the 2010 first quarter compared to the same period last year, primarily due to improvement in deposit services, wealth and insurance products.

Service charges on deposit accounts increased $0.3 million, or 8%, due to increased overdraft and business account analysis revenue. Card-related interchange income increased $0.4 million, or 22%, due to growth in usage of debit cards, increased demand deposit accounts and larger dollar transactions. Trust income increased $0.4 million, or 37%, as a result of increased market values of assets under management. Insurance revenues increased $0.2 million, or 15%, as additional producers and an enhanced calling program yielded higher sales.

Mr. Dolan commented, "Our strategic focus on transaction deposit growth, in addition to better integration of our wealth management and insurance capabilities within the commercial and retail areas of the bank, are providing encouraging results in a difficult economic and competitive environment."

Non-Interest Expense

Non-interest expense remained essentially flat, decreasing $0.1 million for the first quarter of 2010 from the first quarter of 2009 due to cost containment efforts. Total staff expense decreased $0.2 million to $22.3 million for the first quarter of 2010 as compared to the same period of 2009. The decrease is primarily attributable to a reduction in staffing levels, incentives and benefit plans. Full time equivalent staff decreased by 22 to 1,626 as compared to 1,648 at March 31, 2009.  FDIC insurance premiums increased $0.4 million as higher premiums were imposed on all banks as that agency addresses and resolves problem banks across the country and implemented new depositor protection programs. Data processing and furniture and equipment expense increased $0.5 million as a result of higher investments in technology solutions. These increases were offset by successful expense initiatives throughout the organization that resulted in significant reductions in other operating expenses that included occupancy, advertising, travel and entertainment and director fees.

Dolan added, "Continuous improvement to operating efficiency will be an ongoing strategic initiative. We believe tremendous opportunities to improve efficiencies are still available while continuing to recognize and reward the achievements and efforts of our high performing employees."

Credit Quality

For the quarter ending March 31, 2010, nonperforming loans increased $18.8 million to $167.4 million from December 31, 2009. Nonperforming loans as a percentage of total loans were 3.64%, 3.20% and 0.65% for the periods ending March 31, 2010, December 31, 2009 and March 31, 2009, respectively. The two significant relationships that were placed into nonperforming status were:

• A $13.0 million participation loan secured by a condominium development in Missouri and personal guarantees. The borrower has experienced significant cash flow problems due to the economic downturn and ability to complete the project according to agreed upon terms is questionable. The company is in process of developing a satisfactory work-out plan and is awaiting updated appraisals.
• A $7.2 million participation loan on a recently completed condominium project in North Carolina. Market conditions have slowed unit sales.

Net charge-offs were $7.9 million in the 2010 first quarter, compared to $19.5 million in the prior-year period and included:

• $2.1 million for a participation loan secured by real estate in Illinois. The original loan was for $5.0 million and currently has an outstanding balance of $2.9 million. The loan was placed in nonaccrual status in the second quarter 2009.
• $1.0 million for a participation loan secured by real estate in Ohio. The original loan was $6.2 million and was moved to nonaccrual status in the second quarter of 2009. After charge-offs of $2.9 million in the second quarter 2009 and $0.7 million in the fourth quarter 2009, combined with a principal payment, the outstanding balance is currently $1.3 million.

The remaining $4.8 million of net charge-offs related to $2.5 million for consumer loans and $2.3 million for commercial loans, none of which were significant individually.

Loans past due in excess of 90 days and still accruing at March 31, 2010, decreased $1.8 million to $13.4 million compared to December 31, 2009. The majority of these loans are consumer loans secured by residential real estate.

The 2010 first quarter provision for credit losses was $45.0 million, an increase of $36.8 million compared to the first quarter of 2009. The allowance for credit losses as a percentage of end-of-period loans was 2.58%, 1.76% and 0.93% for the periods ending March 31, 2010, December 31, 2009 and March 31, 2009, respectively.

Increases to the provision for credit losses during the first quarter 2010 included:

• $22.5 million for a $39.4 million construction loan for a Florida condominium project that was placed into nonaccrual status in the third quarter 2009. Continued market deterioration, and questions concerning the developer's willingness and capacity to complete the project, resulted in a change in the estimated collateral value to an "as is" raw land valuation, not including any potential values assigned to personal guarantees.
• $10.9 million for the aforementioned Missouri real estate development project.
• $3.6 million for a $46.1 million line of credit to a western Pennsylvania real estate developer. A work-out plan involving multiple financial institutions is still incomplete.
• $3.3 million for an $8.6 million participation, construction loan for a Nevada resort development. Developers are abandoning upgrade and expansion plans for the currently operating resort due to economic conditions.

Dolan commented, "We will continue to be aggressive in addressing problem credits and the dramatic deterioration in collateral values, particularly in markets outside of Pennsylvania that are experiencing significantly higher stress. These are large, complex loans that by their nature require time to work through, especially in the current economic period. They also represent hard lessons for local community banks about the risks of reaching outside of their markets for growth."

Conference Call

First Commonwealth will host its quarterly conference call to discuss its financial results for the first quarter of 2010 on Thursday, April 22, 2010 at 2:00 PM (ET). The call can be accessed by dialing (toll free) 1-800-860-2442. A replay of the call will be available one hour after the end of the conference. The replay can be accessed through our web page, http://www.fcbanking.com at our "Investor Relations" link.

About First Commonwealth Financial Corporation

First Commonwealth Financial Corporation is a $6.3 billion financial holding company headquartered in Indiana, Pennsylvania.  It operates 115 retail branch offices in 15 counties in western and central Pennsylvania through First Commonwealth Bank, a Pennsylvania chartered bank and trust company.  Financial services and insurance products are also provided through First Commonwealth Insurance Agency and First Commonwealth Financial Advisors, Inc.

Forward-Looking Statements

This release contains forward-looking statements about First Commonwealth’s future plans, strategies and financial performance.  These statements can be identified by the fact that they do not relate strictly to historical or current facts and 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."  Such statements are based on assumptions and involve risks and uncertainties, many of which are beyond our control and which may cause 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, the following: (1) continued deterioration in general business and economic conditions; (2) changes in interest rates; (3) deterioration in the credit quality of our loan portfolios or in the value of the collateral securing those loans; (4) deterioration in the value of securities held in our investment securities portfolio; (5) legal and regulatory developments; (6) increased competition from both banks and non-banks; (7) changes in customer behavior and preferences; (8) effects of mergers and acquisitions and related integration; (9) effects of critical accounting policies and judgments; (10) management’s ability to effectively manage credit risk, market risk, operational risk, legal risk, and regulatory and compliance risk; and (11) other risks and uncertainties described in our reports filed with the Securities and Exchange Commission, our most recent Annual Report on Form 10-K.  Forward-looking statements speak only as of the date on which they are made. First Commonwealth undertakes no obligation to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

SOURCE First Commonwealth Financial Corporation