Fitch Affirms First Commonwealth Financial's IDR at 'BBB-'; Outlook Remains Stable

NEW YORK--()--Fitch Ratings has affirmed the long-term and short-term Issuer Default Ratings (IDRs) of First Commonwealth Financial (FCF) and its subsidiary, First Commonwealth Bank, at 'BBB-' and 'F3', respectively. The Rating Outlook is Stable. FCF's ratings affirmation reflects the company's solid capital position and improving asset quality. Ratings are constrained by the bank's weak profitability and liquidity relative to community banking peers and legacy credit concentrations.

KEY RATING DRIVERS - IDRs, VRs AND SENIOR DEBT

FCF's asset quality metrics continued to improve since the last review. Nonperforming assets continued to fall to 0.87% of total assets as of second quarter 2014 (2Q'14) from 1.15% at year-end 2013 and 1.99% at year-end 2012. Net charge-offs also fell to 0.40% of average loans for the last 12 months.

Following the financial crisis, FCF has been actively de-risking its loan portfolio through running off and selectively disposing of large legacy loan concentrations. As a result, credit losses have historically exhibited some volatility. Although elevated charge-offs are expected to persist while the bank works through legacy issues, Fitch's current ratings reflect the expectation that credit quality has largely stabilized.

FCF has implemented a number of capital management initiatives over the past year including increasing its dividend, repurchasing common shares, and redeeming trust preferred debt. Despite these actions, FCF maintains solid levels of capital with a tangible common equity ratio totaling 9.19% as of 2Q'14.

Regulatory capital ratios are also above well-capitalized standards with Tier 1 leverage and total risk based capital (RBC) totaling 10.19% and 13.46%, respectively. FCF's ratings reflect Fitch's expectation that capital will continue to be managed down at a measured pace commensurate with the bank's risk profile as the bank resolves legacy asset quality issues.

FCF's earnings continue to be pressured by the prolonged low interest rate environment and elevated noninterest expenses. FCF's net interest margin (NIM) ranks among the lowest compared to community banking peers at 3.26% for 2Q'14, down from 3.39% at year-end 2013. Return on average assets (ROAA) and return on average equity (ROAE) were also below industry and community banking peers at 0.79% and 6.89% for the last 12 months. Yields on loans fell during the most recent quarter to 4.01% from 4.23% at year-end as higher yielding loans continued to run off the balance sheet and are replaced by lower yielding assets.

FCF's has reported elevated noninterest expenses in recent periods due to higher operating expenses related to a project to overhaul the bank's IT systems. Fitch expects FCF's earnings to improve in the near term as the bank recognizes cost savings related to the project.

RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT

FCF's ratings are highly sensitive to the bank's credit quality performance and capitalization. Should asset quality trends reverse or capital levels become challenged due to aggressive capital management or increased credit losses from newly formed impaired assets, negative rating actions could ensue.

Conversely, positive rating action may occur if the bank successfully improves earnings to levels more in line with higher rated peers while improving its funding and liquidity profile.

SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS

First Commonwealth Bank is a wholly owned subsidiary of FCF whose debt ratings are aligned with FCF's reflecting Fitch's view that the bank subsidiary is core to the franchise.

SUBSIDIARY AND AFFILIATED COMPANY RATING SENSITIVITIES

First Commonwealth Bank's ratings are sensitive to changes to FCF's VR or any changes to Fitch's view of structural subordination between bank subsidiary and holding company. Rating sensitivities for the VR are listed above.

Fitch has affirmed the following ratings with a Stable outlook:

First Commonwealth Financial Corp.

--Long-Term IDR at 'BBB-';

--Short-Term IDR at 'F3';

--Viability Rating at 'bbb-';

--Support Floor at 'NF'

--Support at '5'.

First Commonwealth Bank

--Long-Term IDR at 'BBB-';

--Long-Term deposit at 'BBB'';

--Short-Term IDR at 'F3';

--Viability Rating at 'bbb-';

--Short-Term deposit at 'F2';

--Support Floor at 'NF';

--Support at '5'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria (Jan. 31, 2014');

--'Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012)';

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria (Jan. 31, 2014)';

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles (March 27, 2014)';

--'U.S. Banking Quarterly Comment: 2Q14 (July 2014');

--'U.S. Banks: Liquidity and Deposit Funding (Diminishing QE Effectiveness and its Impact on Systemic Liquidity and Funding)' (Aug. 8, 2013);

--'U.S. Bank Mergers and Acquisitions' -- When Will The Catalysts Kick In? (July 11, 2013)

--'U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)' (June 18, 2013)

--'U.S. Banks: Home Equity Reset Risk Hitting the Reset Button in 2014' (April 29, 2013)

--'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)' (Sept. 17, 2012);

--'Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)' (Aug. 7, 2012);

--'Risk Radar' (April 2014).

Applicable Criteria and Related Research:

Risk Radar Global 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742560

Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685638

U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688330

U.S. Banks -- Home Equity Reset Risk Hitting the Reset Button in 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706915

U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875

U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

U.S. Banks: Liquidity and Deposit Funding

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714196

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=878935

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Ryan Doyle, +1-212-908-9162
Director
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Jaymin Berg, CPA, +1-212-908-0368
Director
or
Committee Chairperson
Christopher Wolfe, +1-212-908-0771
Managing Director
or
Media Relations
Brian Bertsch, New York
+1-212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Ryan Doyle, +1-212-908-9162
Director
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Jaymin Berg, CPA, +1-212-908-0368
Director
or
Committee Chairperson
Christopher Wolfe, +1-212-908-0771
Managing Director
or
Media Relations
Brian Bertsch, New York
+1-212-908-0549
brian.bertsch@fitchratings.com