First Commonwealth Financial Corp (FCF) 2008 Q4 法說會逐字稿

I would like to welcome everyone to the First Commonwealth fourth-quarter earnings conference. (Operator Instructions). Please note this conference is being recorded.

At this time, I will turn the call over to Rich Stimel, Communications Manager at First Commonwealth. Sir, please begin.

Thank you. As a reminder, a copy of today's earnings release can be accessed by logging on to fcbanking.com and clicking on the Investor Relations link at the top of the page.

Before we begin, I would like to caution listeners that this conference call will contain forward-looking statements about First Commonwealth, its business, strategies and prospects. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these forward-looking statements to reflect events or circumstances that occur after this call.

Please refer to our SEC filings, including our most recent Annual Report on Form 10-K, for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

Now I would like to introduce the President and CEO of First Commonwealth Financial Corporation, Mr. John Dolan.

Good afternoon, everybody, and thank you for joining us on today's call. I appreciate everyone's participation today, given that we found ourselves needing to reschedule this call last week.

Joining me today are Ed Lipkus, Executive Vice President and CFO for First Commonwealth Financial Corporation, and Mike Price, the President of First Commonwealth Bank.

In this morning's release of our fourth-quarter and year-end results, we can say without a doubt 2008 was a one-of-a-kind year. It was a year of difficult challenges, but encouraging successes. But more than anything, it was a year of ongoing progress for our Company, as illustrated by the growth in our core net income.

It goes without saying that the tough economic and volatile economic environment and volatile capital markets we found ourselves in had an effect on our performance in the fourth quarter. And I am disappointed in our performance for the first quarter -- fourth quarter, considering the additional loan loss provision.

But at the same time, we are fundamentally strong, with our core net income growing over 13% -- or nearly 13% year over year. This equates to core earnings per share of $0.69. That's more than an 11% increase in earnings per share over 2007.

The fourth-quarter core net income was up more than 7% versus the same period in 2007. The fourth-quarter net income was negatively affected by an additional loan loss provision, primarily related to three commercial real estate loans, and the overall growth of our loan portfolio.

We were able to maintain our lending momentum because of our successful fourth-quarter capital raise. On November 5, we raised $115 million of common stock through the public offering, which enhanced our well-capitalized position. We also chose not to participate in the government's TARP or Capital Purchase Program.

We are extremely pleased that the loan growth we've generated in both the fourth quarter and for the year was without sacrificing asset quality. Total loans increased 5.6% or $234 million over the third quarter in 2008, with commercial loans leading the way at nearly 10% growth.

In terms of asset quality, nonaccrual loans increased by $1.8 million from the year end 2007. Our provision for credit losses for the fourth quarter increased $8.3 million. And Ed will give you more details on these increases a bit later.

In general, the successes that we have had in our lines of business come down to the fundamentals. It's about effectively executing on our strategy that understands and respects the clients and communities we serve. And we have one of the best opportunities to tell the First Commonwealth story and to demonstrate what differentiates us in the marketplace, because right now there's a great deal of uncertainty and dislocation in our markets. And there's a lot of potential clients up for grabs.

As I've said before, I am very pleased with the loan growth that we've experienced, but we're also committed to deepening these client relationships, as increases in our DDA and our savings products reflects the early stages of this. With the dislocation that is occurring in our market area, there's a great deal of opportunity to develop new client relationships and grow our client households. We have already begun to seize this opportunity. As a matter of fact, in 2008, our new client households in the market has been growing in an area where the population has been declining.

We have also won the loyalty of our customers, as evidenced by our favorable household attrition rates. We've placed a particular emphasis on small business households. Our net new small business households grew nearly 6% in 2008. And we expect to see continued growth in this area with the change in the competitive landscape in our market.

We have also been very successful in the recent product promotions we have launched. Also encouraging is our net interest margin. In the fourth quarter, we saw improvements in the net interest margin as a result of our strong loan growth and our focus on aggressively managing our cost of funds and abnormally high levels of the LIBOR rates.

First Commonwealth, like any other financial services provider, is not immune to the storm that has hit our economy and our financial markets. We did take an impairment charge of $2.5 million on two equity securities issued by two Pennsylvania-based financial institutions. But our region and the markets we serve have been somewhat insulated from the most extreme effects of these economic times. And I believe the steps that we have taken and the philosophy that we've lived by has positioned us to succeed in these tough times, and more importantly, to flourish when the economy begins to return to normalcy.

The bottom line is our fundamentals are strong, and the results can be seen in our core performance. This is our sixth consecutive quarter of growth in net interest income. Total loans were up $721 million for the year. Households are up. Low-cost deposits continue to grow, as did core net income.

We've had our challenges to deal with, but 2008 was a year of continued progress. And I am confident that 2009 will be a year to build upon the foundation. So now, for a more detailed view of the fourth-quarter financials, I'd like to turn it over to Ed Lipkus, CFO -- Executive Vice President and CFO. Ed?

Thanks, John, and good afternoon, all. Today, I would like to cover four areas. We're going to go over our loan growth, our margin improvement, credit quality, and then we will finish with additional color around our other than temporary impairment on our investment portfolio.

So this is our fifth consecutive quarter of strong loan growth. Loans are up 5.6% for the fourth quarter and are up nearly 20% for the entire year. We've had a lot of opportunities here in 2008 to grow both our commercial and our consumer lines of business. And Mike, a little later on, will provide some additional commentary on how we were able to get some results and the momentum that we see in those areas.

Our loan growth in the fourth quarter was mainly due to increased commercial loan originations. Commercial loans increased $242 million or 9.8% on a linked-quarter basis. The C&I portfolio grew by $123 million, and that growth was spread across, I would say, all sectors.

Our construction loan portfolio grew $80 million, and all of the new commitments this quarter came from Pennsylvania projects. I would say half of that growth, or about $47 million, came from draws on current projects. These projects include multi-family, health care, office space, transportation and hospitality.

Our CRE portfolio also grew by about $38 million, and the top three areas of growth were office space, multifamily and rentals, and retail. We're putting multifamily and rentals in the same category here. Our CRE portfolio now represents nearly 38% of our total commercial loan portfolio.

Now, switching to the consumer side, home equity loans grew $17 million during the fourth quarter. Indirect installments were pretty much flat. And our mortgage loans decreased $21 million on our one-to-four family, and that's primarily due to the planned runoff in our portfolio.

And now, on to the margin, with strong loan growth, better spreads, an improved deposit mix and lower funding costs, these all added up and contributed to margin improvement of 29 basis points in the fourth quarter compared to the third. As John indicated, we had enjoyed the benefit of abnormally high LIBOR rates in October and November, which also contributed to the increase in the margin.

Our deposit mix continued to improve, with average savings in DDAs increasing $94 million, while at the same time higher-priced time deposits decreased by $71 million. I also want to point out that in the fourth quarter, we refinanced $190 million of higher-priced longer-term Federal Home Loan Bank advances that were scheduled to mature in the next eight months. We replaced those borrowings with lower-cost overnight funds. We do expect that this will have a favorable impact on our margin during the next two quarters as short-term rates are expected to remain at historically low levels.

Our provision for credit losses increased $6.7 million compared to the third quarter. This was mainly due to three commercial real estate shared national credits, as well as normal increases in the reserves for the loan growth. Two of these credits are in Florida and one is in Oregon. Of the two credits in Florida, one is a development loan for a larger planned-unit development, and other is an oceanfront property, which construction has not begun. These property values have weakened because of the lack of demand for residential and commercial real estate in this part of the country. I do want to emphasize that only about $63 million or 6% of our CRE portfolio is in the Florida market.

The other shared national credit, which is located in Oregon, is a mixed-use development loan that includes residential and commercial units. Development has been hampered by slow presales of units, which caused the borrower to be in default, and further funding was halted.

Nonaccrual loans increased $6.2 million on a linked-quarter basis, primarily to two large commercial real estate loans. One is the shared national credit in Florida for $4.3 million and the other is an in-market CRE loan for $1.5 million.

Our allowance for loan losses increased $7.3 million, primarily due to the increased provision for the quarter, and now represents 1.19% of total loans. Our net credit losses as a percentage of average loans remained at 31 basis points and did not change from the third quarter 2008.

Moving on to other than temporary impairment, we recorded a $1.3 million other than temporary impairment charge on PreTSL VII of our pooled trust-preferred securities. This charge was in addition to the $7.7 million charge that we took on this security in the third quarter of 2008. We had additional issuer-deferred payments, and that caused us to expect an additional principal shortfall at maturity.

And that concludes my remarks. And at this point, I would like to turn it over to our Bank President, Mike Price. Mike?

Thanks, Ed. We are proud of the strides we've made in the last year. 2008 operating results within our lines of business -- commercial banking, consumer banking and wealth management -- are strong, with very good fundamentals. We've had good year-over-year balance sheet growth, improving sales productivity and solid household growth in virtually every category.

2008 corporate banking loan growth of 36% and DDA and savings growth of 12.5% were particularly impressive. Branch consumer loans grew a healthy 9.2% and reversed several years of runoff. We feel that both commercial and consumer loan growth came without sacrificing credit quality.

Also important, our treasury and finance functions proactively navigated through a precipitous decline in interest rates and a volatile economic environment to lower funding costs and help improve the net interest margin.

Before I comment on the individual lines of business, I would share that the market disruption in Pittsburgh and the specter of even more disruption has helped propel our household growth across the board. Just one example -- through the first six months of 2008, we were enthusiastic about our annualized small business household growth. At the end of the year, that same number had virtually doubled, and John had mentioned that it averaged almost 6%.

Let me comment specifically now on each line of business. In commercial services, loans grew some $700 million to roughly $2.7 billion. We feel our focus on our Western PA base, coupled with the credit underwriting that has served us well for years at First Commonwealth, will allow us to weather the current economic environment relatively well. Additionally, the competitive landscape in 2008 allowed us to both get better credit quality by historical standards and more spread.

As an aside, I would mention that Moody's just ranked Pittsburgh commercial real estate as one of the strongest in the country. I think also worth noting in commercial, business deposits are growing nicely. We've increased our focus on cross-selling cash management services. And households are up approximately 7%.

You know, our commercial relationship managers are seasoned veterans with routinely 20-plus years of experience. Our backlog of high-quality credits priced right continues to remain strong. We continue to get looks every day, driven by the market disruption.

Secondly, in consumer services or retail banking, the growth in 2008 is partly a function of market disruption, but more importantly stems largely from improvements in our fundamentals, particularly our sales culture. We have implemented sales disciplines around profiling, scorecards for individuals, monthly blitzes, weekly call nights, coordinated campaigns for consumer checking and consumer lending, weekly accountability -- and these are just to name a few. This foundation will serve us well for years to come.

We have gained nice momentum. Year-over-year sales productivity is up some 10% in checking, 40% in consumer lending, 56% in small business lending and 70% in investment sales. In consumer and small business lending, I would reiterate again that we don't feel like we're taking on more credit risk. Our balance sheet is responding as branch loans are up some 9.2% year over year, and as mentioned before, savings are up some 12.5%.

We've let our larger single-service CDs or time deposits run off as the opportunity cost of renewing these was much higher than our wholesale funding costs. And those that have run off are 90%-plus single-service households. Also in consumer services, where I want to mention we include small business, we grew our small business loans in the fourth quarter for the first time in years. Our small business deposits are growing nicely as well. In both consumer and small business, we're building a solid sales and service infrastructure that really can create a sustainable competitive advantage for First Commonwealth.

Our third line of business is wealth management. And although not nearly as large as the other two, we feel we can grow this important business to these important customers. Net income in this line of business is relatively flat, but the story underneath is compelling. A portion of our wealth management business trust ran into third- and fourth-quarter headwinds that reduced the market value of our assets under management noticeably.

Consequently, that portion of the revenue was down. However, our investment advisors, aligned with retail, picked up the slack and grew our year-over-year sales productivity some 70%, although, along with better execution in our employee benefits discipline, these two areas propelled our plan to show a modest year-over-year revenue increase. That was a nice outcome.

In short, we have solid traction in each of our lines of business, and we are winning because our fundamentals are improving. And we also have an unprecedented disruption in our market. John?

Thanks, Mike. I guess just to summarize again, Mike said that our fundamentals are strong. And as a result, we continue to show strong performance in our core business. We recognize that the challenges -- what the challenges are that are presented to us. And we will remain vigilant in our positioning First Commonwealth to navigate these obstacles and to take full advantage of the opportunities they produce within our market. We believe that our focusing on the fundamentals, particularly in an environment like this that we are currently in, will result in sustainable earnings growth for First Commonwealth and our shareholders.

Thank you all, and now we will be happy to take your questions.

(Operator Instructions). Damon DelMonte, KBW.

I was just wondering if you could provide a little insight into the way you guys go about valuing your trust preferreds. I know in the press release, you made the comment of how a large portion of the pooled issuances were downgraded to below investment grade, yet the impairments taken this quarter amounted to only $1.3 million.

I'll let Ed give you a little more of those details.

Damon, first of all, I want to say that we have, as we indicated last quarter, we hired an outside valuation expert to value the securities. And as they were valuing them last quarter, they were valuing them with current information prior to the downgrade. So we feel that the pricing as of the third quarter pretty much reflected the downgrade at that point.

So the methodology that's used is a rather rigorous one, where each one of the banks in the pools are examined by this firm. They look at their financial condition and they simply assign -- they assign certain probabilities of default based on the strength of each bank. And then we determine the expected cash flows and then model out whether or not we feel there is going to be any shortfalls in the cash flows. And if there are shortfalls, then we feel that, under the current accounting guidance, we have to take an other than temporary impairment charge, because just obviously, if the cash flows are short, we wouldn't expect to get our contractual payments back. And we recorded it on PreTSL VII last quarter to reflect that breakage. And we recorded an additional impairment charge this quarter because of the additional price deterioration due to that PreTSL.

Okay. And as far as the amount of deferrals or defaults by the underlying issuers, are you guys just high enough up in the structure of the security that your cash flow testing is not showing future impairment?

You know, Damon, on PreTSL VII, because there's no junior tranche left, we had one deferral, and that resulted in the $1.3 million. But as of 12/31, we had enough subordination in all the other PreTSLs to absorb any potential expected -- well, let's say expected losses, according to our model.

So to answer your question, according to our modeling, we are high enough in -- we have mezzanine -- most of our tranches are mezzanine, and two of our tranches are senior. I do want to point out that these pools are seasoned in that they are four or five years old and that they've built subordination over the years. So that has given us some additional cushion here to withstand losses.

That's not to say that if there's further deterioration at those banks that we're not going to experience some losses down the line. It's just as of 12/31/08, with the information that we have, we don't expect that the losses, the expected losses will be large enough to cause breakage where we won't get back our contractual cash flows.

I would just like to clarify that, Damon, is that we're using current information, but we're evaluating as of December 31. So if anything has happened since then, that's factored into our analysis as well.

Okay, great. And then just to try to frame out the margin here, you mentioned the refinancing of the FHLB borrowings, and you put that into short-term, or -- yes, you [used] that into short-term borrowings. What was the rate at the FHLB and what is the rate for the short-term borrowings?

I would say that the average rate on the Federal Home Loan Bank advances is probably in the 3% to 3.5% rate. And current overnight borrowings, you can see what the targeting Fed funds rate is.

Great. And then just lastly, with respect to the dividend, a lot of banks out there are reducing their dividends, trying to preserve and build tangible capital levels. I know you guys just did the equity rate, but what are your thoughts here about going forward, being able to work towards that goal of 65% payout ratio and maintaining the current dividend where it's at?

That's a good question, Damon, because I think that -- you know, it's a Board decision. And while we can't read their minds, I think that the concept is that if we continue to perform, showing that our core -- the foundation that we're building here is going to get us to that level of the 60% to 65% of earnings in the payout ratio, within a reasonable time period, I believe that they will hold the dividend. I think that everybody looks at it as -- I wouldn't say it's quite the same as what Jamie Dimon said at JPMorgan as a covenant with the shareholders, but it's a pretty good component of our value.

Mac Hodgson, SunTrust Robinson Humphrey.

I had a question on the loan growth in the quarter. I know, I think, Ed, you mentioned that some of the growth was due to draws on existing commitments. So when I look specifically at the construction portfolio going from $338 million to $418 million, how much of that was actually new commitments during the quarter that were drawn upon versus drawdowns on existing commitments?

On new project, new commitments, I would say that -- or draws on new commitments would have been $33 million. Or -- yes. I'm showing about $33 million out of the $80 million. And $47 million came from draws on current projects.

Okay, got you. And was that primarily Western PA stuff, or was that more from the out-of-market to your Shared National Credit portfolio?

11.3% of the draws on current projects were out-of-market, or outside of PA.

Okay. And then just another question on the Shared National Credit portfolio. How much growth occurred in -- on the aggregate portfolio occurred in the quarter, loan growth occurred in that SNC portfolio during the quarter?

Well, I would say that on our syndication loans for the quarter -- now, they may not be all Shared National Credits. I could just say -- I'll lump them all into syndication loans.

Do we have the number on just the Shared National Credit?

Yes, I think we do know what that growth is. Just give us one moment (multiple speakers)

Or you can speak on the syndications. That's fine.

I think it was, out of the $242 million, about $100 million was in syndication growth.

And how much of that is in market?

We have -- how much? Hold on; we're getting the answer to that. How much of the syndication growth was in market?

97%.

97%? Okay. And then maybe -- a couple of those nonaccruals in the Shared National Credit portfolio, I think $11.8 million according to the chart -- and I do appreciate that detail -- looks like you had pretty high reserves on those. I was curious when those loans were originated.

I don't have that information. I can tell you that they weren't originated in 2008, and I think the approvals were made sometime in 2006.

2006. Okay, got you. And I guess maybe lastly, a question just to loan to deposit ratio. I know you guys are around 100%. Do you have a target there? Would you see it going higher than 100% going forward? I know you have pretty strong loan growth still.

We don't really have a target for that, Mac. But I think that we want to continue growing our foundation with deposits here. In particular because of what's going on in the marketplace, we think that there is a great opportunity to do that. So I think you're going to see continued loan growth and deposit growth, and it could get above the 100%.

Hey, Mac, what we really like is this shift in the deposit mix here. As Mike and John indicated, we've made a conscious effort to let some of the hot money go. And we've got lots of great opportunities here with the market disruption to grow the noninterest-bearing DDA and the low-interest-bearing savings accounts. If you look at our peers, where we have been in comparison to our peers, we see that there's lots of opportunities for us to grow those portfolios and continue to improve that mix going forward.

And this is Mike. I would just add that we've really created nice alignment with our commercial sales force, both small business and our corporate banking group, and really nice incentives and focus on core deposit growth as a key part of our fundamentals that I alluded to earlier. That bore good dividends for us in 2008.

Rick Weiss, Janney Montgomery Scott.

Let me just fall back with, I guess, a Damon question. With regard to the OTTI and the trust preferreds, the first charges -- was that in the third quarter, the first time you took OTTI?

It's Ed Lipkus. Rick, the first charge was in the third quarter.

Okay. And we have --it looks like, cost basis, I guess, of the entire pool was about $106 million?

That's correct.

Okay. If we could switch over just to the net interest margin, because you're using the overnights as a good source of borrowings, when do you decide enough is enough in terms of low interest rates and it's time to lock in longer-term funding?

When they start to rise.

Is it that it, John? As soon as you see it start to rise, that's pretty much it? You don't go too long? It's a tough decision, I think.

It is. It's a balancing thing that we constantly struggle with. But I think that we're also monitoring our interest rate risk at the same time. So there was an opportunity to do what we have done without jeopardizing our interest rate position because of the capital that we had while it was being deployed. So I think that gave us a little bit more of an opportunity than we may have had without having raised that extra $100 million in capital.

Right. I guess it's hard to decide, because usually when I'm going through your Qs here, asset sensitive, but clearly this time it certainly helped it when interest rates came down to do that. And also, in terms of the loan growth, which is certainly this year much higher than your historical norms, has there been any changes to your underwriting or pricing standards?

Well, I'll just start out, and then I'll let either Mike or Ed comment. But there have been changes. The underwriting standards are still pretty strict. And I think that what we found was that staying strict with our underwriting standards has kept us out of the market pretty much in the last few years.

This year, I think that not only have we been able to keep the underwriting standards strong, but I think we've improved our spreads, improved our yields, because there's a lot of -- it's the last-man-standing kind of thing. There's less competition for the deals, and we've been able to turn down enough and keep enough that the ones we're keeping, we're able to price them effectively. And we've actually improve our scores, our pricing and our credit scores.

Anything you two would like to add on that?

I would just say -- this is Mike -- on the commercial banking side, we risk-weight each credit we approve. And we feel like the risk rating there has strengthened on the credits that we've approved over the last year. And I would say the same thing on the consumer lending side. We feel like, whether it's FICO scores or other lead indicators, actually the deals that we've put on the books and the loans look more promising even than the loans historically.

And are you hiring more commercial loan officers, or have you in the past year?

We did in the last year, but we're going to be opportunistic on that.

Okay. So it's mostly the same people are just doing a greater amount of business?

It's partly doing a greater amount of business. I think we did a little bit of restructuring the group to allow focuses on commercial real estate, regional lending and the participations or the corp finance, as we call it. So that allowed them to specialize a little bit better and get a little bit more traction in each one of those three areas. We do have some LPOs that have opened up in the last two years that are starting to show some growth. We had one down in Pittsburgh for a while, but we opened a State College operation, and that really -- we got some good traction there.

Tom Alonso, Fox-Pitt, Kelton.

On the LIBOR benefit for the margin in the quarter, would you guys -- can you quantify that in any way? Can you give us a sense of how much that helped?

It wasn't significant, but -- I had to say -- I have to be careful here because we have been very disciplined in not trying -- we try not to give any kind of forward-looking guidance. And it was for two months. I don't have that information in front of me, Tom. So, sorry about that.

No, that's okay. That's all right. It's fair to say that it's not -- if you say it's not significant, then I would assume that it's not going to move the needle as it rolls off here in the first quarter.

Well, let's just -- I would say that the spreads were higher at the end of the third quarter. And we may have had one-month benefit from some of that, which would have been in the fourth quarter. But it's more in a normal range today than it was back then in September.

Okay, I got you. Fair enough. What else? The securities book, just to get a sense, kind of flat this quarter, actually, on an average basis, if I remember correctly. Actually, down a little bit. Is that a trend that we should expect to continue or you think it's going to sort of flatten out here if you guys are more focused on loan growth? Are you still going to use those securities, the runoff in that portfolio, to fund the loan growth?

We're going to continue using that portfolio to fund loan growth. I think that the concept is that that's a better place for it to be. We'll evaluate. As the markets change and go back to a little more normal, I think we can reevaluate our investment position at that time.

Okay. That's fair enough. And then on the reserve, obviously, part of the -- on the provision, I should say, the expense this quarter, part of that was related to the credits that you mentioned and part of it was for loan growth. Is that the way we should look at it going forward, focus more on the loan growth, and then if -- as things pop up you're going to -- you will reserve for them as required? Or are you guys going to maybe try to get ahead of some stuff here as we -- as the economy continues to get weaker?

Yes, I think that you probably would expect a normal amount going in for loan growth. But we believe that it's inappropriate to be doing the kitchen-sink approach.

Matt Schultheis, Boenning & Scattergood.

You mentioned that the nonperformers out of your SNCs portfolio were approved, quote/unquote, at 2006. When did they hit your balance sheet?

I don't have the exact information in front of me, Matt, but I know that most of them hit the balance sheet either in 2006 or prior. There was probably some of them that hit in early 2007 that were funded in early 2007.

Okay. And I just want to verify this. Basically, the trust preferred portfolio, and you talked about how you guys went through the valuation on that, but that's basically all Level 3 assets, right?

Yes, it is. It's all -- it's actually the required approach under current accounting guidance, that you use Level 3 when observable market data is not available, as you know.

Now, if you were to go, though, and find similar securities to these, you'd probably be getting, what, $0.45 on the dollar in the market right now?

Right now, we don't see any active market in these securities from what we have observed. Any trading was done at distressed levels. That's kind of why the guidance came out, to address the lack of a market. And so we are pricing in accordance with the guidance, with a pretty strong empirical model that we think is certainly appropriate under a Level 3 environment.

Okay. Most people are kind of shrinking their construction portfolio, both commercial and particularly residential, obviously, but even a lot of the commercial out of concerns that office buildings will have high vacancy rates. Even multifamily may have been a little overly optimistic on some of the cap rate assumptions when those projects were initially analyzed. What are you guys seeing in construction that keeps you going back and then making construction loans that everybody else seems to be asleep with?

Well, primarily they're in our Western PA footprint. We know the borrowers. They're high-quality borrowers and people that we've been doing business with for years. And one I can think about in particular is -- you know, it's their corporate headquarters. So it's just -- it's line of sight. It's not much of a stretch. That one in particular I'm thinking of, our largest construction loan is owner-occupied. And I just think we're playing it close to the vest, and we know the borrowers, and we feel good about the individual transactions, one by one.

Matt, if I could just add to that, because I think there's a concern about the residential marketplace here, construction marketplace, in the quarter, out of the $80 million in growth here, only $1.1 million of that came from financing one-to-four-family residential construction.

Okay. And one last question, and this may be more theoretical than anything else. Obviously, with the Federal Home Loan Bank of both Seattle and Pittsburgh implying that they were going to be undercapitalized at the end of the year and cutting their dividend and not repurchasing excess stock that you guys may have, have they come to you and said they're going to have to recapitalize the -- that they want you to put up more money to recapitalize the Federal Home Loan Bank of Pittsburgh? What do you think this does as far as the possibility of impairments on the stock for the Federal Home Loan Bank, understanding that the accounting behind it is open to a tremendous amount of interpretation? And lastly, how much of that stock do you have?

Well, I'll answer the last one first -- $51 million, because that's a -- that's the only given. And the rest of it is all speculation. First of all, I know they have -- I guess we probably can't disclose, other than I just already did -- they haven't come to us and asked us about increasing our capital -- or our investment in them. So I don't know what they're doing out there. And as far as the accounting for it, that's a fluid situation. And we are monitoring that closely as we go. Ed, do you want to add anything on that?

You know, Matt, my experience with the Federal Home Loan Bank is that they have always been very conservative, and the first sign of trouble, they cut their dividend. And it could be three, six, nine months or more before they start paying that back. And they're going to try and recapitalize themselves before they go out and ask. As John said, we have not had any communications, and it would be highly speculative and probably not even valuable to talk more about it, because we just don't know.

Okay. And one of the things that they're doing to recapitalize, in my understanding, is that they are charging borrowers more to borrow from them. That's the best way to become profitable if you're a bank, huh? And --

What a concept.

Yes, and there you go. So are you guys seeing any pressure on your wholesale rates for that, or are you not really worried about that right now?

Well, I would say that it hasn't dropped to the same extent that the target -- Fed funds target rate has. So it was riding a lower rate prior to that. And that slowed down; that reduction slowed down. But, Ed, do you want to comment?

Yes. You know, Matt, we might be seeing some -- something maybe from a zero to 10 basis point effect here from that. And then the other thing I want to point out is that there are other opportunities that we're having here in terms of borrowing and replacing Federal Home Loan Bank as a source. And so you know they're publicly -- they have been publicly announced through Federal Reserve Bank, and so there will be other opportunities to get short-term funding here in 2009.

We show no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

Okay, well, thank you all for participating on the call. It's been -- I think we're at a time where we have been focused on laying the foundation for the future, and we appreciate your commitment to being with us today. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.