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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
For the Quarter ended June 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 August 12, 1994
Common Stock, $1 Par Value 18,642,024 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)
June 30, December 31,
1994 1993
ASSETS
Cash and due from banks.............. $ 50,766 $ 51,044
Interest-bearing bank deposits....... 397 2,569
Securities available for sale........ 442,248 465,224
Investment securities (Market Value
$348,822 in 1994 and
$383,943 in 1993).................. 363,677 381,811
Loans (all domestic)................. 1,105,676 1,037,675
Less unearned income............... 32,976 31,499
Less reserve for possible loan losses 15,063 14,544
Net loans....................... 1,057,637 991,632
Property and equipment............... 22,248 21,911
Other real estate owned.............. 2,319 4,929
Other assets......................... 41,705 36,149
TOTAL ASSETS.................... $1,980,997 $1,955,269
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (all domestic):
Noninterest-bearing................ $ 172,687 $ 167,306
Interest-bearing................... 1,448,328 1,408,318
Total deposits.................. 1,621,015 1,575,624
Short-term borrowings................ 157,020 171,497
Other liabilities.................... 13,892 14,332
Long-term debt....................... 7,639 7,363
Total liabilities............... 1,799,566 1,768,816
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
18,642,024 and 9,321,012 shares
issued and outstanding in 1994 and
1993, respectively................. 18,642 46,605
Additional paid-in capital........... 74,556 35,296
Retained earnings.................... 101,492 107,417
Unrealized gain (loss) on securities
available for sale................. (8,527) 1,584
186,163 190,902
Deferred compensation................ (4,732) (4,449)
Total shareholders' equity......... 181,431 186,453
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $1,980,997 $1,955,269
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 INCOME (Unaudited)
(Dollars in thousands except per share data)
For the 3 Months For the 6 Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
Interest Income
Interest and fees on loans........ $22,291 $21,669 $43,312 $43,364
Interest and dividends on investments:
Taxable interest................ 10,278 10,431 20,492 20,488
Interest exempt from federal
income taxes................... 884 667 1,755 1,477
Dividends....................... 205 138 431 289
Interest on federal funds sold.... 4 34 12 137
Interest on bank deposits......... 7 156 27 355
Total Interest Income.......... 33,669 33,095 66,029 66,110
Interest Expense
Interest on deposits.............. 12,784 13,561 25,543 27,355
Interest on short-term borrowings. 1,712 884 3,234 1,547
Interest on long-term debt........ 130 113 236 228
Total Interest Expense......... 14,626 14,558 29,013 29,130
Net interest income................. 19,043 18,537 37,016 36,980
Provision for possible loan losses 573 519 1,112 1,112
Net interest income after provision
for possible loan losses.......... 18,470 18,018 35,904 35,868
Other Income
Security gains.................... 26 396 239 1,053
Trust income...................... 513 563 1,143 1,166
Service charges on deposits....... 1,228 1,141 2,374 2,325
Other income...................... 662 803 1,492 1,345
Total Other Income............. 2,429 2,903 5,248 5,889
Other Expenses
Salaries and employee benefits.... 6,363 6,334 13,012 12,656
Net occupancy expense............. 924 926 1,895 1,862
Furniture and equipment expense... 873 882 1,738 1,666
FDIC expense...................... 889 883 1,778 1,767
Other operating expenses.......... 3,775 3,932 7,333 7,643
Total Other Expenses........... 12,824 12,957 25,756 25,594
Income before taxes and cumulative
effect of change in accounting
method............................ 8,075 7,964 15,396 16,163
Applicable income taxes........... 2,499 2,292 4,690 4,652
Net income before cumulative effect of
change of accounting method....... 5,576 5,672 10,706 11,511
Cumulative effect of change in method
of accounting for income taxes.... -0- -0- -0- 500
Net Income.......................... $ 5,576 $ 5,672 $10,706 $12,011
Per Share Data:
Net income before effect of change
of accounting method............ $0.30 $0.30 $0.57 $0.62
Cumulative effect of change in
accounting method............... 0.00 0.00 0.00 0.02
Net income........................ 0.30 0.30 0.57 0.64
Cash dividends per share.......... 0.14 0.125 0.28 0.25
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 CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (loss)
Additional on Securities Total
Common Paid-in Retained Available Deferred Shareholders'
Stock Capital Earnings For Sale Compensation Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.... $46,605 $35,455 $ 93,256 $ -0- $(4,913) $170,403
Net income.................... -0- -0- 12,011 -0- -0- 12,011
Cash dividends declared....... -0- -0- (4,397) -0- -0- (4,397)
Decrease in deferred compensation -0- -0- -0- -0- 357 357
Discount on dividend reinvestment
plan purchases.............. -0- (82) -0- -0- -0- (82)
Balance at June 30, 1993........ $46,605 $35,373 $100,870 $ -0- $(4,556) $178,292
Balance at December 31, 1993.... $46,605 $35,296 $107,417 $ 1,584 $(4,449) $186,453
Net income.................... -0- -0- 10,706 -0- -0- 10,706
Cash dividends declared....... -0- -0- (5,220) -0- -0- (5,220)
Transfer to reflect 2-for-1
stock split effected in
the form of a 100% stock
dividend.................... 46,605 (35,258) (11,347) -0- -0- -0-
Transfer to reflect change in
par value of common stock
from $5 per share to $1
per share................... (74,568) 74,568 -0- -0- -0- -0-
Increase in unrealized gain
(loss) on securities
available for sale, net of
tax effect.................. -0- -0- -0- (10,111) -0- (10,111)
Net increase in deferred
compensation................ -0- -0- -0- -0- (283) (283)
Discount on dividend reinvestment
plan purchases.............. -0- (50) (64) -0- -0- (114)
Balance at June 30, 1994........ $18,642 $74,556 $101,492 $(8,527) $(4,732) $181,431
</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 6 Months
Ended June 30,
1994 1993
Operating Activities
Net income....................................... $10,706 $12,011
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses............ 1,112 1,112
Depreciation and amortization................. 2,356 2,258
Net gains on sales of assets.................. (306) (1,203)
Increase in interest receivable............... (442) (223)
Decrease in interest payable.................. (262) (780)
Increase in income taxes payable.............. 58 1,024
Provision for deferred taxes.................. (17) (978)
Other - net................................... 1,637 (843)
Net cash provided by operating activities... 14,842 12,378
Investing Activities
Investment securities transactions:
Proceeds from sales........................... 7,009 46,130
Proceeds from maturities and redemptions...... 63,940 177,493
Purchases..................................... (52,768) (305,009)
Transactions with securities available for sale:
Proceeds from sales........................... 36,539 -0-
Proceeds from maturities and redemptions...... 43,233 -0-
Purchases..................................... (72,197) -0-
Proceeds from sales of loans and other assets.... 5,128 5,435
Net decrease in time deposits with banks......... 2,172 9,000
Net increase in loans............................ (71,286) (24,331)
Purchase of premises and equipment............... (2,616) (1,220)
Net cash used by investing activities.......... (40,846) (92,502)
Financing Activities
Repayments of long-term debt..................... (7) -0-
Discount on dividend reinvestment plan purchases. (113) (82)
Dividends paid................................... (5,127) (4,285)
Dividends paid by subsidiary prior to merger..... -0- (114)
Net increase in deposits......................... 45,450 18,738
Net increase in federal funds purchased.......... (5,505) 12,325
Net increase in other short-term borrowings...... (8,972) 34,598
Net cash provided by financing activities... 25,726 61,180
Net decrease in cash and cash equivalents.. (278) (18,944)
Cash and cash equivalents at January 1............. 51,044 91,451
Cash and cash equivalents at June 30............... $50,766 $72,507
The accompanying notes are an integral part of these consolidated financial
statements.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30, 1994 and the results of
operations for the three and six month periods ended June 30,
1994 and 1993, and statements of cash flows and changes in
shareholders' equity for the three and six month periods ended
June 30, 1994 and 1993. The results of the three and six months
ended June 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.................. $14,544 $14,267
Additions:
Provision charged to operating expenses 1,112 1,112
Recoveries of previously charged off
loans................................ 632 773
Deductions:
Loans charged off...................... 1,225 1,667
Reserve balance March 31................... $15,063 $14,485
NOTE 3 Cash Flow Disclosures (dollar amounts in thousands)
Cash paid during the first three months of the year for interest
and income taxes were as follows:
1994 1993
Interest $29,275 $30,056
Income Taxes 4,649 3,740
During 1994 the Corporation borrowed $730 and concurrently loaned
this amount to the ESOP Trust on identical terms. ESOP loan
payments of $447 and $357 were made by the ESOP Trust during the
respective 1994 and 1993 periods, thereby resulting in
outstanding amounts related to deferred compensation of $4,732 at
June 30, 1994 and $4,556 at June 30, 1993.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 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 Proposed Business Combination
On March 25, 1994, the Corporation entered into a definitive
agreement to merge United National Bancorporation and its
subsidiaries ("United") into the Corporation. Under the terms of
the Agreement and Plan of Reorganization, the holders of shares
of United common stock will receive two shares of the
Corporation's common stock for each share of United common stock.
The transaction is expected to be accounted for as a pooling of
interests.
United was organized as a Pennsylvania business corporation in
1982 for the purposes of operating as a bank holding company.
United is headquartered in Chambersburg, Pennsylvania with two
active Subsidiaries. Unitas National Bank, a national banking
association, headquartered in Chambersburg, Pennsylvania and
Unitas Mortgage Corporation, having its principal place of
business in Carlisle, Pennsylvania, and is engaged in the
origination of mortgages for the secondary market. Total assets
of United were $148 million serviced through twelve community
offices. The proposed transaction requires the approval of the
shareholders of United and approval of the appropriate regulatory
agencies.
On April 21, 1994 the Corporation entered into a definitive
agreement to merge Reliable Financial Corporation ("Reliable")
into the Corporation. Under the terms of the Agreement and Plan
of Reorganization, the holders of shares of Reliable common stock
will receive 1.6 shares of the Corporation's common stock for
each share of Reliable common stock. The transaction is expected
to be accounted for as a pooling of interests.
Reliable is a holding company which was established in 1991 for
the purpose of owning 100% of the outstanding common stock of
Reliable Savings Bank, PaSA. Reliable Savings Bank, PaSA is a
Pennsylvania-chartered savings and loan association,
headquartered in Bridgeville, Pennsylvania with total assets of
$151 million serviced through three community offices. Reliable
shares are traded on the NASDAQ National Market System under the
symbol "RESB". The proposed transaction requires the approval
of the shareholders of Reliable and approval of the appropriate
regulatory agencies.
8<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 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 18,642,024.
NOTE 7 Reclassifications
Certain items of the Consolidated Statements of Income for the
three and six months ended June 30, 1993 have been reclassified
to conform with the June 30, 1994 presentations. None of these
reclassifications affected net income.
9<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
Results of Operations
Effective December 31, 1993, the Corporation acquired Peoples
Bank of Western Pennsylvania ("PBWPA"), a Pennsylvania-chartered
bank. The merger was accounted for as a pooling of interests and
accordingly, all financial statements have been restated as
though the merger 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 Six Months of 1994 as Compared to the First Six Months of
1993
Net income in the six months of 1994 was $10.7 million, a
decrease of $805 thousand from the 1993 period before the change
in the method of accounting for income taxes which added $500
thousand to the 1993 amount. Earnings per share was $0.57 during
the six months of 1994 compared to $0.64 during the 1993 period.
Earnings per share during the 1993 period was $0.62 before the
effect of change in the method of accounting for income taxes.
Return on average assets was 1.10% and return on average equity
was 11.54% during the 1994 period, compared to 1.33% and 13.75%,
respectively during the same period of 1993. The change in
accounting method during 1993 added 6 basis points (0.06%) to the
return on average assets and 57 basis points (0.57%) 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 was
$37.0 million for both the 1994 time period and the related 1993
period. Interest income, on a tax-equivalent basis, decreased 64
basis points (0.64%) as a percentage of average earning assets to
7.28% in 1994, from 7.92% in the 1993 period. Although yields
have improved since the first quarter of 1994, they have declined
when compared to the six 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 3.65% and
3.97% in the six months of 1994 and 1993, respectively, as
deposit costs, the predominant category, decreased only 33 basis
points (0.33%) to 3.24%. This was 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
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 Six Months of 1994 as Compared to the First Six Months of
1993 (Continued)
were lower during the first six months of 1994 when compared to
the first six 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 4.15% of earning assets during 1994, compared
to 4.52% in the 1993 related period.
Average earning assets were 95.0% of average total assets in the
1994 period and 94.8% during the 1993 time frame. Average
interest-bearing liabilities increased as a percentage of average
total assets to 81.5% in the six months of 1994 and 81.3% during
the 1993 period.
Provision for possible loan losses was $1.1 million for the six
month periods of 1994 and 1993. Net charge-offs against the
reserve for possible loan losses were $593 thousand in the 1994
period and can be compared to $894 thousand during the 1993
period. Below is an analysis of the consolidated reserve for
possible loan losses for the six month periods ended June 30,
1994.
1994 1993
Balance January 1, $14,544 $14,267
Loans charged off:
Commercial, financial and agricultural 362 204
Real estate-construction -0- -0-
Real estate-commercial 19 349
Real estate-residential 81 209
Loans to individuals 760 826
Lease financing receivables 3 79
Total loans charged off 1,225 1,667
Recoveries of previously charged off loans:
Commercial, financial and agricultural 101 311
Real estate-construction -0- -0-
Real estate-commercial 233 224
Real estate-residential 24 6
Loans to individuals 265 232
Lease financing receivables 9 -0-
Total recoveries 632 773
Net charge offs 593 894
Provision charged to operations 1,112 1,112
Balance June 30, $15,063 $14,485
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 Six Months of 1994 as Compared to the First Six Months of
1993 (Continued)
Other operating income decreased $641 thousand in 1994 to $5.2
million. Net security gains decreased $814 thousand. U.S.
Treasury securities and U.S. Government agency securities
totaling $43.3 million with maturities within one year were sold
and reinvested in similar securities with maturities of 3-5
years. Of these securities $7.0 million were classified as
"securities held to maturity" but were called and sold within
three months of the call date in accordance with Financial
Accounting Standards Board Statement No. 115 and $36.1 million
were classified as "securities available for sale". Other income
increased $147 thousand in the 1994 period primarily as the gain
on the sale of loans increased and income from club account
service charges increased. Fees related to club accounts should
tend to level out since customer promotions began during the
fourth quarter of 1993.
Noninterest expense was $25.8 million in the six months of 1994
which reflected an increase of $162 thousand over the 1993
period. Employee costs were $13.0 million in 1994, an increase
of $356 thousand over the 1993 related period. Employee costs
(annualized) as a percentage of average assets was 1.33% in the
1994 period, reduced from 1.40% (annualized) in the 1993 period.
Furniture and equipment expense increased primarily as a result
of increased depreciation on computer equipment acquired to
automate new customer loan and deposit processes. Other
operating expenses decreased $310 thousand to $7.3 million in the
six 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 $164 thousand
during the 1994 period as the intangibles related to the Deposit
Bank merger that occurred 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. Professional fees are
expected to increase as pending acquisitions progress.
Federal income tax expense was $4.7 million during the six months
of 1994 and 1993. Income before taxes decreased $767 thousand in
the 1994 period as compared to the same time period of 1993.
Taxable income decreased only $134 thousand as tax-free income
reduced $633 thousand.
Three Months ended June 30, 1994 as Compared to the Three Months
Ended June 30, 1993
Net income was $5.6 million for the second quarter of 1994, which
compared to $5.7 million in the same quarter of 1993. Earnings
per share was $0.30 during both the 1994 quarter and the related
quarter of 1993. Net interest income increased $506 thousand to
$19.0 million in the second quarter of 1994 when compared to the
related 1993 quarter.
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 June 30, 1994 as Compared to the Three Months
Ended June 30, 1993 (Continued)
Interest income increased $574 thousand as average earning assets
increased $117 million but yields declined 40 basis points
(0.40%). 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 7.36% in the 1994
quarter, and compared to 7.76% in the related 1993 quarter.
Interest expense increased $68 thousand in the 1994 quarter as
average interest-bearing liabilities increased $102 million and
the cost of these funds decreased 23 basis points (0.23%). The
cost of funds decreased from 3.88% in the 1993 quarter to 3.65%
in the second quarter of 1994. The decline in deposit rates were
across the board.
Provision for possible loan losses was $573 thousand in the 1993
quarter or $54 thousand more than the 1993 period. Net loans
charged off in the second quarter of 1994 were $396 thousand and
can be compared to $436 thousand in the related 1993 quarter.
Noninterest income decreased $474 thousand in the second quarter
of 1994 to $2.4 million. Net security gains decreased $370
thousand while other income decreased $141 thousand in the 1994
quarter when compared to the second quarter of 1993. The 1993
period included a $90 thousand gain on the termination of the
Central Bank pension plan.
Noninterest expense was $12.8 million in the three month period
ended June 30, 1994 compared to $13.0 million in the 1993 related
period, reflecting a decrease of $133 thousand. Salaries and
employee benefits increased only $29 thousand to $6.4 million in
the second 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 $157 thousand which primarily reflects the reduction of
core deposit amortization by $144 thousand in the 1994 period.
Loan collection costs and professional fees also decreased during
the 1994 quarter. Various expense items increased during the
quarter but none appeared significant.
Federal income taxes increased $207 thousand primarily as a
result of higher taxable income. Income before taxes increased
$111 thousand in the second quarter of 1994 compared to the same
period of 1993 while income exempt from federal income taxes
decreased $247 thousand.
13<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)
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 $66.0 million in the first six months of 1994
as all major categories of loans increased. Consumer demand
resulted in $50.3 million of growth in consumer mortgages and
loans to individuals for personal and household purposes. Total
deposits grew $45.4 million as all deposits increased. Time
deposits in denominations of $100 thousand or more increased only
$4.9 million indicating that the growth is primarily from core
customer relationships. Investment securities held to maturity
declined $18.1 million while interest-bearing bank deposits
declined $2.2 million and short-term borrowings decreased $14.5
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 June 30, 1994 securities available
for sale had an amortized cost of $455.4 million and an
approximate market value of $442.2 million. As interest rates
rose since the end of 1994, the market value securities available
for sale declined $10.1 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>
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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)
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>
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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)
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 June 30, 1994 and December 31, 1993.
June 30, 1994
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 394,162 $ 76,524 $147,259 $ 617,945
Investments.............. 118,083 38,290 48,804 205,177
Other interest-earning
assets.................. -0- 198 99 297
Total interest-sensitive
assets................ 512,245 115,012 196,162 823,419
Certificates of deposits. 122,411 98,008 108,182 328,601
Other deposits........... 619,481 -0- -0- 619,481
Borrowings............... 132,927 7,592 9,667 150,186
Total interest-sensitive
liabilities........... 874,819 105,600 117,849 1,098,268
GAP.................... (362,574) 9,412 78,313 (274,849)
ISA/ISL.................. 0.59 1.09 1.66 0.75
Gap/Total assets......... 18.30% 0.48% 3.95% 13.87%
December 31, 1993
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 384,639 $ 74,328 $134,258 $ 593,225
Investments.............. 162,510 48,313 65,695 276,518
Other interest-earning
assets.................. 1,974 198 297 2,469
Total interest-sensitive
assets................ 549,123 122,839 200,250 872,212
Certificates of deposits. 160,487 118,381 125,896 404,764
Other deposits........... 503,288 -0- -0- 503,288
Borrowings............... 155,518 9,578 3,707 168,803
Total interest-sensitive
liabilities........... 819,293 127,959 129,603 1,076,855
GAP.................... (270,170) (5,120) 70,647 (204,643)
ISA/ISL.................. 0.67 0.96 1.55 0.81
Gap/Total assets......... 13.82% 0.26% 3.61% 10.47%
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>
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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)
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 June 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 June 30,
1994 1993
(amounts in thousands)
Nonperforming Loans:
Loans in nonaccural basis $ 8,370 $ 7,138
Past due loans 6,187 5,741
Renegotiated loans 598 1,503
Total nonperforming loans $ 15,155 $ 14,382
Other real estate owned (including
in-substance foreclosures) $ 2,319 $ 3,890
Loans outstanding at end of period $1,072,700 $982,640
Average loans outstanding (year-to-date) $1,034,981 $983,231
Nonperforming loans as percent
of total loans 1.41% 1.46%
Provision for possible loan losses $ 1,112 $ 1,112
Net charge-offs $ 593 $ 894
Net charge-offs as percent of
average loans 0.06% 0.09%
Provision for possible loan losses as
percent of net charge-offs 187.52% 124.38%
Reserve for possible loan losses as
percent of average loans outstanding 1.46% 1.47%
Reserve for possible loan losses as
percent of nonperforming loans 99.39% 100.72%
17<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)
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 June 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 $5.0 million in 1994. Earnings
retention was $5.5 million, representing an earnings retention
rate of 51.2%. 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 $447 thousand while amounts paid
to fund the discount on reinvested dividends reduced equity by
$114 thousand. The market value adjustment to securities
available for sale reduced equity by $10.1 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>
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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)
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
June 30, 1994, the Corporation had a Tier I Capital to risk-
weighted assets ratio and total capital to risk-weighted assets
ratio of 15.95% and 17.24%, respectively and a minimum leverage
ratio of 8.89%.
Pending Acquisitions
On March 25, 1994 the Corporation entered into a definitive
agreement to merge with United National Bancorporation
("United"), a bank holding company headquartered in Chambersburg,
Pennsylvania. Under the terms of the Agreement and Plan of
Reorganization with United, the holders of 769,147 shares of
United common stock will receive 2 shares of the Corporation's
common stock for each share of United common stock. On April 21,
1994 the Corporation entered into a definitive agreement to merge
with Reliable Financial Corporation ("Reliable), a savings and
loan holding company headquartered in Bridgeville, Pennsylvania.
Under the terms of the Agreement and Plan of Reorganization with
Reliable, the holders of 1,410,194 shares of Reliable common
stock will receive 1.6 shares of the Corporation's common stock
for each share of Reliable common stock.
The proposed merger with United is a separate and independent
transaction from the proposed Reliable merger. The consummation
of either merger is not a condition precedent to the consummation
of the other merger.
While the future impact on the Corporation's financial condition,
results of operations and liquidity are not certain, and except
for the acquisition costs, the transactions are not expected to
be dilutive to earnings, nor have a significant impact on the
financial condition of the Corporation. The proposed mergers are
not expected to have a material impact on the liquidity or
capital position of the Corporation.
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.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
Form 8-K dated July 12, 1994 reporting a change in
the Corporation's certifying accountant.
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: August 11, 1994 /S/ E. James Trimarchi
E. James Trimarchi, Chairman of the
Board, President and Chief Executive
Officer
DATED: August 11, 1994 /S/ John J. Dolan
John J. Dolan, Sr. Vice President,
Comptroller, and Chief Financial
Officer
21
