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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
For the Quarter ended September 30, 1994 Commission file number 0-11242
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1428528
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
22 NORTH SIXTH STREET INDIANA, PA 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 349-7220
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes XX No .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock.
CLASS OUTSTANDING AT November 1, 1994
Common Stock, $1 Par Value 22,436,587 Shares
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included in Part I of this report: PAGE
First Commonwealth Financial Corporation and
Subsidiaries Consolidated Balance Sheets . . . . . 3
Consolidated Statements of Income. . . . . . . . . 4
Consolidated Statements of Changes in
Shareholders' Equity . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows. . . . . . . 6
Notes to Consolidated Financial Statements . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 10
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
September 30, December 31,
1994 1993
ASSETS
Cash and due from banks.............. $ 66,156 $ 55,767
Interest-bearing bank deposits....... 9,352 20,534
Federal funds sold................... 4,750 1,600
Securities available for sale........ 468,041 465,224
Investment securities (Market Value
$364,531 in 1994 and
$451,421 in 1993).................. 380,603 443,942
Loans (all domestic)................. 1,377,060 1,248,934
Less unearned income............... 43,024 37,825
Less reserve for possible loan losses 17,324 16,483
Net loans....................... 1,316,712 1,194,626
Property and equipment............... 27,868 27,000
Other real estate owned.............. 2,903 5,590
Other assets......................... 48,931 38,553
TOTAL ASSETS.................... $2,325,316 $2,252,836
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (all domestic):
Noninterest-bearing................ $ 202,374 $ 181,024
Interest-bearing................... 1,691,841 1,641,061
Total deposits.................. 1,894,215 1,822,085
Short-term borrowings................ 176,405 176,184
Other liabilities.................... 20,426 18,294
Long-term debt....................... 7,368 7,363
Total liabilities............... 2,098,414 2,023,926
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value per
share, 3,000,000 shares authorized
and unissued....................... -0- -0-
Common stock $1 par value per share,
100,000,000 shares authorized and
22,436,586 and 22,516,705 shares
issued and outstanding in 1994 and
1993, respectively................. 22,437 22,517
Additional paid-in capital........... 78,015 79,094
Retained earnings.................... 140,927 131,380
Unrealized gain (loss) on securities
available for sale................. (10,013) 1,584
Treasury stock (98,208 shares at
December 31, 1993)................. -0- (1,216)
Deferred compensation................ (4,464) (4,449)
Total shareholders' equity......... 226,902 228,910
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $2,325,316 $2,252,836
The accompanying notes are an integral part of these consolidated financial
statements.
3 <PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands except per share data)
For the Quarter For the 9 Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
Interest Income
Interest and fees on loans........ $28,226 $26,058 $80,486 $79,391
Interest and dividends on investments:
Taxable interest................ 11,137 10,602 33,133 32,239
Interest exempt from federal
income taxes................... 835 1,070 2,644 2,707
Dividends....................... 255 219 787 624
Interest on federal funds sold.... 80 75 114 248
Interest on bank deposits......... 142 268 427 1,104
Total Interest Income.......... 40,675 38,292 117,591 116,313
Interest Expense
Interest on deposits.............. 15,473 15,652 45,021 47,712
Interest on short-term borrowings. 1,834 849 5,124 2,459
Interest on long-term debt........ 137 113 373 341
Total Interest Expense......... 17,444 16,614 50,518 50,512
Net interest income................. 23,231 21,678 67,073 65,801
Provision for possible loan losses 766 659 2,176 2,021
Net interest income after provision
for possible loan losses.......... 22,465 21,019 64,897 63,780
Other Income
Security gains (losses)........... (71) 666 1,728 2,417
Trust income...................... 537 589 1,725 1,821
Service charges on deposits....... 1,383 1,450 3,988 3,875
Other income...................... 763 573 2,454 2,437
Total Other Income............. 2,612 3,278 9,895 10,550
Other Expenses
Salaries and employee benefits.... 7,485 7,272 22,555 21,764
Net occupancy expense............. 1,034 1,039 3,255 3,181
Furniture and equipment expense... 951 888 2,910 2,734
FDIC expense...................... 1,046 1,014 3,105 3,029
Other operating expenses.......... 5,221 4,473 14,212 13,572
Total Other Expenses........... 15,737 14,686 46,037 44,280
Income before taxes and cumulative
effect of change in accounting
method............................ 9,340 9,611 28,755 30,050
Applicable income taxes........... 2,999 3,172 9,415 9,362
Net income before cumulative effect of
change of accounting method....... 6,341 6,439 19,340 20,688
Cumulative effect of change in
accounting method................. -0- -0- -0- 500
Net Income.......................... $ 6,341 $ 6,439 $19,340 $21,188
Per Share Data:
Net income before effect of change
in accounting method............ $0.28 $0.29 $0.86 $0.92
Cumulative effect of change in
accounting method............... 0.00 0.00 0.00 0.02
Net income........................ 0.28 0.29 0.86 0.94
Cash dividends per share.......... 0.140 0.125 0.420 0.375
The accompanying notes are an integral part of these consolidated financial
statements.
4<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (loss)
Additional on Securities Total
Common Paid-in Retained Available Deferred Treasury Shareholders'
Stock Capital Earnings For Sale Compensation Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992....$22,517 $79,253 $114,277 $ -0- $(4,913) $ (447) $210,687
Net income.................... -0- -0- 21,188 -0- -0- -0- 21,188
Cash dividends declared....... -0- -0- (8,071) -0- -0- -0- (8,071)
Increase in unrealized loss on
equity securities........... -0- -0- -0- -0- -0- -0- -0-
Tax benefit on ESOP dividends. -0- -0- -0- -0- -0- -0- -0-
Decrease in deferred
compensation................ -0- -0- -0- -0- 535 -0- 535
Discount on dividend reinvestment
plan purchases.............. -0- (123) -0- -0- -0- -0- (123)
Treasury stock acquired....... -0- -0- -0- -0- -0- (973) (973)
Treasury stock reissued....... -0- -0- (91) -0- -0- 204 113
Balance at September 30, 1993...$22,517 $79,130 $127,303 $ -0- $(4,378) $(1,216) $223,356
Balance at December 31, 1993....$22,517 $79,094 $131,380 $1,584 $(4,449) $(1,216) $228,910
Net income.................... -0- -0- 19,340 -0- -0- -0- 19,340
Cash dividends declared....... -0- -0- (9,688) -0- -0- -0- (9,688)
Change in unrealized gain (loss)
on securities available for
sale, net of tax effect.... -0- -0- -0- (11,597) -0- -0- (11,597)
Tax benefit on ESOP dividends. -0- -0- -0- -0- -0- -0- -0-
Decrease in deferred
Compensation................ -0- -0- -0- -0- (15) -0- (15)
Discount on dividend reinvestment
plan purchases.............. -0- (161) -0- -0- -0- -0- (161)
Treasury stock reissued....... -0- -0- (105) -0- -0- 218 113
Treasury stock cancelled in
merger...................... (80) (918) -0- -0- -0- 998 -0-
Balance at September 30, 1994...$22,437 $78,015 $140,927 $(10,013) $(4,464) $ -0- $226,902
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 9 Months
Ended September 30,
1994 1993
Operating Activities
Net income....................................... $19,340 $21,188
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses............ 2,176 2,021
Depreciation and amortization................. 3,897 3,855
Net gains on sales of assets.................. (1,777) (2,386)
Increase in interest receivable............... (1,449) (529)
Increase (decrease) in interest payable....... 930 (369)
Increase in income taxes payable.............. 1,084 103
Provision for deferred taxes.................. (77) (739)
Other - net................................... (2,236) (1,111)
Net cash provided by operating activities... 21,888 22,033
Investing Activities
Investment securities transactions:
Proceeds from sales........................... 7,476 87,020
Proceeds from maturities and redemptions...... 88,917 254,080
Purchases..................................... (64,364) (489,738)
Transactions with securities available for sale:
Proceeds from sales........................... 46,962 -0-
Proceeds from maturities and redemptions...... 57,077 -0-
Purchases..................................... (91,701) -0-
Proceeds from sales of loans and other assets.... 8,342 16,822
Net decrease in time deposits with banks......... 11,182 30,812
Net increase in loans............................ (131,186) (49,030)
Purchase of premises and equipment............... (4,370) (3,137)
Net cash used by investing activities.......... (71,665) (153,171)
Financing Activities
Repayments of long-term debt..................... (11) -0-
Proceeds from issuance of long-term debt......... -0- 202
Discount on dividend reinvestment plan purchases. (161) (123)
Dividends paid................................... (7,736) (6,428)
Dividends paid by subsidiary prior to merger..... (1,328) (1,516)
Net increase in deposits......................... 72,218 33,548
Net increase (decrease) in federal funds
purchased...................................... (5,505) 24,610
Net increase in other short-term borrowings...... 5,726 37,859
Proceeds from sale of treasury stock............. 113 113
Purchase of treasury stock....................... -0- (973)
Net cash provided by financing activities... 63,316 87,292
Net increase decrease) in cash and cash
equivalents.............................. 13,539 (43,846)
Cash and cash equivalents at January 1............. 57,367 98,422
Cash and cash equivalents at September 30.......... $70,906 $ 54,576
The accompanying notes are an integral part of these consolidated financial
statements.
6<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
(Unaudited)
NOTE 1 Management Representation
In the opinion of management, the unaudited interim consolidated
financial statements include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair statement of
financial position as of September 30, 1994 and the results of
operations for the three and nine month periods ended
September 30, 1994 and 1993, and statements of cash flows and
changes in shareholders' equity for the three and nine month
periods ended September 30, 1994 and 1993. The results of the
three and nine months ended September 30, 1994 and 1993 are not
necessarily indicative of the results to be expected for the
entire year. The interim consolidated financial statements
should be read in conjunction with the annual consolidated
financial statements of First Commonwealth Financial Corporation
and Subsidiaries, including the notes thereto.
NOTE 2 Reserve For Possible Loan Losses (in thousands)
1994 1993
Reserve balance January 1.................. $16,483 $15,828
Additions:
Provision charged to operating expenses 2,176 2,021
Recoveries of previously charged off
loans................................ 863 1,283
Deductions:
Loans charged off...................... 2,198 2,628
Reserve balance September 30............... $17,324 $16,504
NOTE 3 Cash Flow Disclosures (dollar amounts in thousands)
Cash paid during the first nine months of the year for interest
and income taxes were as follows:
1994 1993
Interest $49,587 $50,881
Income Taxes $14,295 $ 9,998
During 1994 the Corporation borrowed $730 and concurrently loaned
this amount to the ESOP Trust on identical terms. ESOP loan
payments of $714 and $535 were made by the ESOP Trust during the
respective 1994 and 1993 periods, thereby resulting in
outstanding amounts related to deferred compensation of $4,464 at
September 30, 1994 and $4,378 at September 30, 1993.
7<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1994
(Unaudited)
NOTE 4 Change of Accounting Method
The Corporation adopted Statement of Financial Accounting
Standards No. 109 ("FAS No. 109"), "Accounting for Income Taxes",
effective January 1, 1993. FAS No. 109 is an asset and liability
approach for financial accounting and reporting for income taxes.
The effect of adopting FAS No. 109 resulted in a cumulative
benefit of $500 thousand in the first quarter of 1993.
NOTE 5 Business Combinations
On September 27, 1994, the registrant acquired United National
Bancorporation ("United") and its wholly-owned subsidiaries
Unitas National Bank ("Unitas Bank") and Unitas Mortgage
Corporation ("Unitas Mortgage"). United was a Pennsylvania-
chartered bank holding company headquartered in Chambersburg,
Pennsylvania. Unitas Bank is a nationally chartered, federally
insured commercial bank also headquartered in Chambersburg,
Pennsylvania. Unitas Mortgage, headquartered in Carlisle,
Pennsylvania engages in the origination of mortgages for sale in
the secondary mortgage market.
The merger was consummated pursuant to the Agreement and Plan of
Reorganization dated March 25, 1994 between the registrant and
United, which was approved by the shareholders of Reliable at a
special meeting held September 29, 1994. Each issued and
outstanding share of United common stock was converted into 2
shares of the registrant's common stock. The aggregate number of
shares of the registrant's common stock issued in the merger was
1,538,294.
On September 29, 1994 the registrant acquired Reliable Financial
Corporation ("Reliable") and its wholly-owned subsidiary Reliable
Savings Bank, PaSA ("Reliable Savings Bank"). Reliable was a
savings and loan holding company with its principal office in
Bridgeville, Pennsylvania. Reliable Savings Bank is a
Pennsylvania-chartered, federally insured savings association.
The merger was consummated pursuant to the Agreement and Plan of
Reorganization dated April 21, 1994 between the registrant and
Reliable, which was approved by the shareholders of Reliable at a
special meeting held September 29, 1994. Each issued and
outstanding share of Reliable common stock was converted into 1.6
shares of the registrant's common stock. The aggregate number of
shares of the registrant's common stock issued in the merger was
approximately 2,256,269.
Both transactions were accounted for as poolings of interests and
accordingly, all financial statements were restated as though the
companies had been combined as of the beginning of the beginning
of each period presented.
8<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 1994
(Unaudited)
NOTE 6 Earnings per Common Share
Earnings per share have been calculated on the weighted average
number of common shares outstanding during each period, restated
to reflect pooling of interests. Additionally, average number of
shares has been restated to reflect the two-for-one stock split
effected in the form of a 100% stock distribution on the
corporation's common stock declared on January 18, 1994. The
weighted average number of shares outstanding for each period
presented was 22,430,784 and 22,418,497 for the nine months ended
September 30, 1994 and 1993, respectively, and 22,436,628 and
22,418,497 for the three months ended September 30, 1994 and 1993
respectively.
NOTE 7 Reclassifications
Certain items of the Consolidated Statements of Income for the
three and nine months ended September 30, 1993 have been
reclassified to conform with the September 30, 1994
presentations. None of these reclassifications affected net
income.
9<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Effective December 31, 1993, the Corporation acquired Peoples
Bank of Western Pennsylvania ("PBWPA"). The Corporation acquired
United National Bancorporation and its subsidiaries ("United")
and Reliable Financial Corporation and its subsidiaries
("Reliable") effective September 27, 1994 and September 29, 1994,
respectively. The mergers were accounted for as poolings of
interests and accordingly, all financial statements have been
restated as though the mergers had occurred at the beginning of
the earliest period presented.
Average number of shares has been restated for the 1993 periods
to reflect the two-for-one stock split effected in the form of a
100% stock dividend declared on January 18, 1994.
First Nine Months of 1994 as Compared to the First Nine Months of
1993
Net income in the nine months of 1994 was $19.3 million, a
decrease of $1.3 million from the 1993 period before the change
in the method of accounting for income taxes. The cumulative
effect of the change in the method of accounting for income taxes
added $500 thousand to the 1993 amount. Merger related costs
reduced earnings in 1994 by $1.2 million. Earnings per share was
$0.86 during the nine months of 1994 compared to $0.94 during the
1993 period. Earnings per share during the 1993 period was $0.92
before the effect of change in the method of accounting for
income taxes. Return on average assets was 1.14% and return on
average equity was 11.29% during the 1994 period, compared to
1.33% and 12.94%, respectively during the same period of 1993.
The change in accounting method during 1993 added 2 basis points
(0.02%) to the return on average assets and 29 basis points
(0.29%) to the return on average equity for the 1993 period.
Net interest income, the most significant component of earnings,
is the amount by which interest generated from earning assets
exceeds interest expense on liabilities. Net interest income for
the 1994 period was $67.1 million compared to $65.8 million
during the same time period of 1993. Interest income, on a tax-
equivalent basis, decreased 42 basis points (0.42%) as a
percentage of average earning assets to 7.40% in 1994, from 7.82%
in the 1993 period. Although yields have improved each quarter
of 1994, they have declined when compared to the nine months of
1993, reflecting interest rates rising during 1994 following
declines throughout 1993. Mortgage borrowers refinanced loans
during the lower rate environment during the year in 1993
resulting in a decline in yields that carried forward into 1994.
Mortgage loan refinancings on a national scale had accelerated
the repayments of mortgage backed securities. As proceeds were
reinvested in securities yielding lower rates, portfolio yields
declined. The recent rise in interest rates has stabilized
prepayments of the portfolio and portfolio yields. The cost of
funds was 3.66% and 3.90% in the nine months of 1994 and 1993,
respectively, as deposit costs, the predominant category,
decreased only 28 basis points (0.28%) to 3.25%. This was
10<PAGE>
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
First Nine Months of 1994 as Compared to the First Nine Months of
1993 (Continued)
expected as deposit customers tended to extend maturities over
the previous two years as interest rates declined, thereby
preventing the cost of funds from declining as fast as asset
yields. Although interest yields and costs of funds
were lower during the first nine months of 1994 when compared to
the first nine months of 1993, the cost of funds has remained
stable during the 1994 period. Net interest margin (net interest
income, on a tax-equivalent basis as a percentage of average
earning assets) was 4.28% of earning assets during 1994, compared
to 4.50% in the 1993 related period.
Average earning assets were 95.1% of average total assets in the
1994 period and 95.0% during the 1993 time frame. Average
interest-bearing liabilities increased as a percentage of average
total assets to 81.1% in the nine months of 1994 and during the
1993 period.
Provision for possible loan losses was $2.2 million for the nine
month period of 1994 compared to $2.0 million during the 1993
period. Net charge-offs against the reserve for possible loan
losses were $1.3 million in the 1994 period and the 1993 period.
Below is an analysis of the consolidated reserve for possible
loan losses for the nine month periods ended September 30, 1994
and 1993.
1994 1993
Balance January 1, $16,483 $15,828
Loans charged off:
Commercial, financial and agricultural 790 379
Real estate-construction -0- -0-
Real estate-commercial 23 520
Real estate-residential 172 304
Loans to individuals 1,184 1,327
Lease financing receivables 29 98
Total loans charged off 2,198 2,628
Recoveries of previously charged off loans:
Commercial, financial and agricultural 171 458
Real estate-construction -0- -0-
Real estate-commercial 241 267
Real estate-residential 43 132
Loans to individuals 398 419
Lease financing receivables 10 7
Total recoveries 863 1,283
Net charge offs 1,335 1,345
Provision charged to operations 2,176 2,021
Balance September 30, $17,324 $16,504
11<PAGE>
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
First Nine Months of 1994 as Compared to the First Nine Months of
1993 (Continued)
Other operating income decreased $656 thousand in 1994 to $9.9
million. Net security gains decreased $688 thousand, primarily
U.S. Treasury Securities and U.S. Government Agency Securities
totaling $52.7 million were sold and reinvested in similar
securities with maturities of 3-5 years. Of these securities
$45.3 million were classified as "securities available for sale"
and $7.4 million were classified as "securities held to maturity"
but were called and sold within three months of the call date or
have had a significant deterioration in the issuer's
creditworthiness, which allowed them to be sold in accordance
with Financial Accounting Standards Board Statement No. 115.
Trust income declined $97 thousand in the 1994 period primarily
as a result of higher nonrecurring income during the 1993 period.
Service charges on deposits increased $112 thousand in the 1994
period primarily as deposits increased.
Noninterest expense was $46.0 million in the nine months of 1994
which reflected an increase of $1.8 million over the 1993 period.
Merger related costs added $1.2 million to the 1994 period.
Employee costs were $22.6 million in 1994, an increase of $792
thousand over the 1993 related period. Employee costs
(annualized) as a percentage of average assets was 1.33% in the
1994 period, reduced from 1.36% (annualized) in the 1993 period.
Furniture and equipment expense increased $176 thousand as a
result of increased depreciation on computer equipment acquired
to automate new customer loan and deposit processes. Other
operating expenses, excluding merger costs decreased $492
thousand in the nine months of 1994 when compared to the 1993
related period as loan collection costs and professional fees
decreased. The amortization of core deposit intangibles
decreased $324 thousand during the 1994 period as the intangibles
related to the Deposit Bank merger in 1984 became fully amortized
and will result in a $51 thousand savings per month for the
remainder of 1994. Loan collection costs should continue to be
favorable throughout the remainder of the year. The loss on the
disposition of real estate and repossessed assets increased $130
thousand.
Income tax expense was $9.4 million during the nine months of
1994 and 1993. Income before taxes decreased $1.3 million in the
1994 period when compared to the same time period of 1993.
Taxable income decreased only $654 thousand since merger costs
were nondeductible and tax-free income decreased.
Three Months ended September 30, 1994 as Compared to the Three
Months Ended September 30, 1993
Net income was $6.3 million for the third quarter of 1994, which
compared to $6.4 million in the same quarter of 1993. Merger
related expenses were $774 thousand in the 1994 quarter.
Earnings per share was $0.28 during the 1994 quarter and $0.29
during the related quarter of 1993. Net interest income
12<PAGE>
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Three Months ended September 30, 1994 as Compared to the Three
Months Ended September 30, 1993 (Continued)
increased $155 thousand to $23.2 million in the third quarter of
1994 when compared to the related 1993 quarter.
Interest income increased $2.4 million as average earning assets
increased $116 million. Yields increased 4 basis points (0.04%)
as yields on variable rate loans and investments improved as
interest rates began to rise in 1994. Refinancings of the fixed
rate instruments declined to normal levels during the 1994
quarter as a result of the recent rise in interest rates. The
yield on average interest earning assets was 7.52% in the 1994
quarter, and compared to 7.48% in the related 1993 quarter.
Interest expense increased $829 thousand in the 1994 quarter as
average interest-bearing liabilities increased $101 million and
the cost of these funds decreased 3 basis points (0.03%). The
cost of funds decreased from 3.75% in the 1993 quarter to 3.72%
in the third quarter of 1994. The decline in deposit rates
occurred in most categories except money market accounts and
short-term certificates of deposit.
Provision for possible loan losses was $767 thousand in the 1994
quarter or $107 thousand more than the 1993 period. Net loans
charged off in the third quarter of 1994 were $682 thousand and
can be compared to $364 thousand in the related 1993 quarter.
The third quarter of 1993 includes a significant recovery not
included in the 1994 period. Any additional increase during the
1994 period does not appear to indicate a trend.
Noninterest income decreased $766 thousand in the third quarter
of 1994 to $2.6 million. Net security gains decreased $736
thousand while other income increased $190 thousand in the 1994
quarter when compared to the third quarter of 1993. The 1994
period included an increase of $74 thousand income from credit
life insurance activities.
Noninterest expense was $15.7 million in the three month period
ended September 30, 1994 compared to $14.7 million in the 1993
related period, reflecting a increase of $1.1 million. Merger
related costs for the 1994 quarter were $774 thousand. Salaries
and employee benefits increased $214 thousand to $6.4 million in
the third quarter of 1994. Net occupancy expense and furniture
and equipment expense remained stable in the 1994 quarter when
compared to the 1993 related period. Other operating expenses
decreased $252 thousand excluding merger costs. Core deposit
amortization decreased by $160 thousand in the 1994 period.
Income taxes decreased $173 thousand primarily because the 1993
period included a retroactive tax rate adjustment in the amount
of $188 thousand due to the enactment of the Omnibus Budget
Reconciliation Act of 1993.
13<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity
Liquidity is a measure of the Corporation's ability to meet
normal cash flow requirements of both borrowers and depositors
efficiently. In the ordinary course of business, funds are
generated from deposits (primary source) and maturity or
repayment of earning assets, such as securities and loans. As an
additional secondary source, short-term liquidity needs may be
provided through the use of overnight federal funds purchased and
borrowings from the Federal Reserve Bank. Additionally, each of
the subsidiary banks are members of the Federal Home Loan Bank
and may borrow up to ten percent of their total assets at any one
time.
Net loans increased $122.0 million in the first nine months of
1994 as all major categories of loans increased. Consumer demand
resulted in $92.4 million of growth in consumer mortgages and
loans to individuals for personal and household purposes. Total
deposits grew $72.1 million as all deposit categories increased.
The growth is primarily from core customer deposit relationships.
Investment securities held to maturity declined $63.3 million
while interest-bearing bank deposits declined $11.1 million and
Federal funds sold increased nearly $3.2 million since
December 31, 1993.
An additional source of liquidity is certain marketable
securities that the Corporation holds in its investment
portfolio. These securities are classified as "securities
available for sale". While the Corporation does not have
specific intentions to sell these securities, they may be sold
for the purpose of obtaining future liquidity, for management of
interest rate risk or as part of the implementation of tax
management strategies. As of September 30, 1994 securities
available for sale had an amortized cost of $483.6 million and an
approximate market value of $468.0 million. As interest rates
rose since the end of 1993, the market value securities available
for sale declined $11.6 million. This is not of major concern to
management since the average life of the entire portfolio is just
over five years.
Interest Sensitivity
The objective of interest rate sensitivity management is to
maintain an appropriate balance between the stable growth of
income and the risks associated with maximizing income through
interest sensitivity imbalances. While no single number can
accurately describe the impact of changes in interest rates on
net interest income, interest rate sensitivity positions, or
"gaps", when measured over a variety of time periods, may be
helpful.
14<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Sensitivity (Continued)
An asset or liability is considered to be interest-sensitive if
the rate it yields or bears is subject to change within a
predetermined time period. If interest-sensitive assets ("ISA")
exceeds interest-sensitive liabilities ("ISL") during a
prescribed time period, a positive gap results. Conversely, when
ISL exceeds ISA during a time period, a negative gap results.
A positive gap tends to indicate that earnings will be impacted
favorably if interest rates rise during the period and negatively
when interest rates fall during the time period. A negative gap
tends to indicate that earnings will be affected inversely to
interest rates changes. In other words, as interest rates fall,
a negative gap should tend to produce a positive effect on
earnings, and when interest rates rise, a negative gap should
tend to affect earnings negatively.
The primary components of ISA include adjustable rate loans and
investments, loan repayments, investment maturities and money
market investments. The primary components of ISL include
maturing certificates of deposit, money market deposits, savings
deposits, NOW accounts and short-term borrowings.
15<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Sensitivity (Continued)
The following table lists the amounts and ratios of assets and
liabilities with rates or yields subject to change within the
periods indicated as of September 30, 1994 and December 31, 1993.
September 30, 1994
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 430,581 $ 93,289 $177,238 $ 701,108
Investments.............. 43,109 18,041 51,660 112,810
Other interest-earning
assets.................. 83,268 6,301 8,801 98,370
Total interest-sensitive
assets................ 556,958 117,631 237,699 912,288
Certificates of deposits. 155,760 119,211 126,070 401,041
Other deposits........... 727,219 -0- -0- 727,219
Borrowings............... 159,283 1,750 7,814 168,847
Total interest-sensitive
liabilities........... 1,042,262 120,961 133,884 1,297,107
GAP.................... (485,304) (3,330) 103,815 (384,819)
Gap/Total assets......... 20.83% 0.14% 4.46% 16.51%
ISA/ISL.................. 0.53 0.97 1.78 0.70
December 31, 1993
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 419,308 $ 86,025 $151,115 $ 656,448
Investments.............. 188,531 57,063 80,883 326,477
Other interest-earning
assets.................. 3,607 198 297 4,102
Total interest-sensitive
assets................ 611,446 143,286 232,295 987,027
Certificates of deposits. 183,780 133,953 138,774 456,507
Other deposits........... 584,845 13,994 16,092 614,931
Borrowings............... 160,205 9,578 3,707 173,490
Total interest-sensitive
liabilities........... 928,830 157,525 158,573 1,244,928
GAP.................... (317,384) (14,239) 73,722 (257,901)
Gap/Total assets......... 14.09% 0.63% 3.27% 11.45%
ISA/ISL.................. 0.66 0.91 1.46 0.79
The Corporation has not experienced the kind of earnings
volatility indicated from the gap analysis. This is because
assets and liabilities with similar contractual repricing
characteristics may not reprice at the same time or to the same
degree.
16<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Sensitivity (continued)
Therefore, to more precisely measure the impact of interest rate
changes on the Corporation's net interest income, management
simulates the potential effects of changing interest rates
through computer modeling. The Corporation is then better able
to implement strategies which would include an acceleration of a
deposit rate reduction or a lag in a deposit rate increase. The
repricing strategies for loans would be inversely related.
The analysis at September 30, 1994, indicated that a 200 basis
point (2.00%) movement in interest rates in either direction over
the next twelve months would not have a significant impact on the
Corporation's anticipated net interest income over that time
frame.
Credit Quality Risk
The following table identifies amounts of loan losses and
nonperforming loans. Past due loans are those which were
contractually past due 90 days or more as to interest or
principal payments but were well secured and in the process of
collection. Renegotiated loans are those which terms had been
renegotiated to provide a reduction or deferral of principal or
interest as a result of the deteriorating financial position of
the borrower and are in compliance with the restructured terms.
At September 30,
1994 1993
(amounts in thousands)
Nonperforming Loans:
Loans in nonaccural basis $ 9,400 $ 10,716
Past due loans 8,421 6,327
Renegotiated loans 753 760
Total nonperforming loans $ 18,581 $ 17,803
Other real estate owned (including
in-substance foreclosures) $ 2,903 $ 4,155
Loans outstanding at end of period $1,334,035 $1,197,791
Average loans outstanding (year-to-date) $1,260,655 $1,182,859
Nonperforming loans as percent
of total loans 1.39% 1.49%
Provision for possible loan losses $ 2,176 $ 2,021
Net charge-offs $ 1,335 $ 1,345
Net charge-offs as percent of
average loans 0.11% 0.11%
Provision for possible loan losses as
percent of net charge-offs 163.00% 150.26%
Reserve for possible loan losses as
percent of average loans outstanding 1.37% 1.40%
Reserve for possible loan losses as
percent of nonperforming loans 93.24% 92.70%
17<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Credit Quality Risk (Continued)
Other than those described above, there are no material credits
that management has serious doubts as to the borrower's ability
to comply with the present loan repayment terms. Additionally,
the portfolio is well diversified and as of September 30, 1994,
there were no significant concentrations of credit.
Although the ratio of the reserve for possible loan losses as a
percentage of nonperforming loans is lower than the Corporation's
peers, other factors should be considered such as historical loan
losses, and nonperforming loan levels. These were favorable when
compared to peer group levels over the past five years.
Management believes that the reserve for possible loan losses and
nonperforming loans remain safely within acceptable levels during
1994.
The Corporation will be required to adopt Financial Accounting
Standards Board Statement No. 114 "Accounting by Creditors for
Impairment of a Loan", effective January 1, 1995. This statement
addresses the accounting by creditors, such as banks, for the
impairment of certain loans. It requires that impaired loans
that are within the scope of this statement be measured based on
the present value of expected cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the
loans' observable market price or the fair value of the
collateral if the loan is collateral dependent. The adoption of
this statement is not anticipated to have a material effect on
the Corporation's financial position, liquidity or results of
operations.
Capital Resources
Equity capital decreased $2.0 million in 1994. Earnings
retention was $9.7 million, representing an earnings retention
rate of 49.9%. The retained net income remains in permanent
capital to fund future growth and expansion. Stock purchased by
the Employee Stock Ownership Plan (the "ESOP"), subject to the
debt of the Corporation, reduced equity by $730 thousand while
the loan repayment by the ESOP of debt guaranteed by the
Corporation increased equity by $715 thousand while amounts paid
to fund the discount on reinvested dividends reduced equity by
$160 thousand. The market value adjustment to securities
available for sale reduced equity by $10.0 million resulting from
market values declining as interest rates increased.
A capital base can be considered adequate when it enables the
Corporation to intermediate funds responsibly and provide related
services, while protecting against future uncertainties. The
evaluation of capital adequacy depends on a variety of factors,
including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In
consideration of these factors, management's primary emphasis
with respect to the Corporation's capital position is to maintain
an adequate and stable ratio of equity to assets.
18<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Capital Resources (Continued)
The Federal Reserve Board has issued risk-based capital adequacy
guidelines which are designed principally as a measure of credit
risk. These guidelines require: (1) at least 50% of a banking
organization's total capital be common and other "core" equity
capital ("Tier I Capital"); (2) assets and off-balance-sheet
items be weighted according to risk; (3) the total capital to
risk-weighted assets ratio be at least 8%; and (4) a minimum
leverage ratio of Tier I capital to average total assets. The
minimum leverage ratio is not specifically defined, but is
generally expected to be 4-5 percent for all but the most highly
rated banks, as determined by a regulatory rating system. As of
September 30, 1994, the Corporation had a Tier I Capital to risk-
weighted assets ratio and total capital to risk-weighted assets
ratio of 17.69% and 18.97%, respectively and a minimum leverage
ratio of 10.13%.
19<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION.
The Corporation acquired United National
Bancorporation and Reliable Financial Corporation on
September 27, 1994 and September 29, 1994, respectively.
In connection with pooling-of-interests accounting,
Section 201.01 of the Commission's Codification of
Financial Reporting Policies provides that the
publication of at least 30 days of post-merger combined
operations can take the form of a Form 10-Q filing.
Accordingly, the combined operations of the Corporation,
including these two subsidiaries, for the month of
October 1994 generated interest income of $13.8 million,
net interest income of $7.7 million and net income of
$4.4 million. All results are unaudited and should not
be construed as being indicative of the expected results
for the remainder of 1994.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
(1) Form 8-K dated July 12, 1994, reporting a
change in the Corporation's certifying
accountant.
(2) Form 8-K dated September 27, 1994 reporting
the acquisitions by the Corporation of United
National Bancorporation and its subsidiaries
and Reliable Financial Corporation and its
subsidiary. Filing includes financial
statements of businesses acquired and pro
forma financial statements.
20<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
DATED: November 14, 1994 /S/ E. James Trimarchi
E. James Trimarchi, Chairman of the
Board, President and Chief Executive
Officer
DATED: November 14, 1994 /S/ John J. Dolan
John J. Dolan, Sr. Vice President,
Comptroller, and Chief Financial
Officer
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