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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
22 North Sixth Street Indiana, PA 15701
(Address of principal executive offices) (Zip Code)
412-349-7220
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate a check mark 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 X No .
Number of shares outstanding of issuer's common stock, $1.00 Par Value as
of November 6, 1995 was 22,371,626.
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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 . . . . . . . . 8
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
September 30, December 31,
1995 1994
ASSETS
Cash and due from banks.............. $ 63,794 $ 66,055
Interest-bearing bank deposits....... 5,456 13,686
Federal funds sold .................. 18,375 -0-
Securities available for sale........ 386,053 443,189
Securities held to maturity (market
value $351,738 in 1995 and
$348,074 in 1994).................. 355,721 370,498
Loans (all domestic)................. 1,491,398 1,422,320
Less unearned income............... 46,314 44,526
Less reserve for possible loan losses 17,551 17,337
Net loans....................... 1,427,533 1,360,457
Property and equipment............... 28,940 29,196
Other real estate owned.............. 2,235 2,269
Other assets......................... 47,953 49,571
TOTAL ASSETS.................... $2,336,060 $2,334,921
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 191,134 $ 199,172
Interest-bearing................... 1,758,447 1,681,888
Total deposits.................. 1,949,581 1,881,060
Short-term borrowings................ 105,897 201,706
Other liabilities.................... 27,522 19,424
Long-term debt....................... 5,609 7,596
Total liabilities............... 2,088,609 2,109,786
SHAREHOLDER'S 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;
22,436,628 issued; 22,373,548 and
22,430,728 shares outstanding in
1995 and 1994, respectively........ 22,437 22,437
Additional paid-in capital........... 77,302 77,964
Retained earnings.................... 155,818 146,814
Unrealized gain (loss) on securities
available for sale................. (2,314) (16,802)
Treasury stock (63,080 shares at
September 30, 1995 and 5,900 at
December 31, 1994)................. (899) (82)
Unearned ESOP shares................. (4,893) (5,196)
Total shareholders' equity......... 247,451 225,135
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $2,336,060 $2,334,921
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,
1995 1994 1995 1994
Interest Income
Interest and fees on loans....... $32,733 $28,226 $95,245 $80,486
Interest and dividends on investments:
Taxable interest............... 9,938 11,137 31,778 33,133
Interest exempt from federal
income taxes.................. 665 835 2,124 2,644
Dividends...................... 246 255 728 787
Interest on federal funds sold... 554 80 724 114
Interest on bank deposits........ 108 142 382 427
Total Interest Income......... 44,244 40,675 130,981 117,591
Interest Expense
Interest on deposits............. 19,140 15,473 54,133 45,021
Interest on short-term borrowings 1,314 1,834 6,606 5,124
Interest on long-term debt....... 140 137 468 373
Total Interest Expense........ 20,594 17,444 61,207 50,518
Net interest income................ 23,650 23,231 69,774 67,073
Provision for possible loan losses 815 766 2,445 2,176
Net interest income after provision
for possible loan losses......... 22,835 22,465 67,329 64,897
Other Income
Security gains (losses).......... -0- (71) (604) 1,728
Trust income..................... 545 537 1,669 1,725
Service charges on deposits...... 1,459 1,383 4,183 3,988
Other income..................... 726 763 2,304 2,454
Total Other Income............ 2,730 2,612 7,552 9,895
Other Expenses
Salaries and employee benefits... 7,994 7,485 23,874 22,555
Net occupancy expense............ 1,090 1,034 3,263 3,255
Furniture and equipment expense.. 1,023 951 3,039 2,910
FDIC expense..................... (17) 1,046 2,113 3,105
Other operating expenses......... 4,291 5,221 13,214 14,212
Total Other Expenses.......... 14,381 15,737 45,503 46,037
Income before taxes................ 11,184 9,340 29,378 28,755
Applicable income taxes.......... 3,729 2,999 9,638 9,415
Net Income......................... $ 7,455 $ 6,341 $19,740 $19,340
Average Shares Outstanding.........22,020,631 22,436,628 21,994,259 22,430,784
Per Share Data:
Net income....................... $ 0.34 $ 0.28 $ 0.90 $ 0.86
Cash dividends per share......... $ 0.16 $ 0.14 $ 0.48 $ 0.42
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 Unearned Total
Common Paid-in Retained Available ESOP Treasury Shareholders'
Stock Capital Earnings For Sale Shares Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
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- (8,360) -0- -0- -0- (8,360)
Cash dividends declared by
pooled subsidiaries prior to
merger...................... -0- -0- (1,328) -0- -0- -0- (1,328)
Change in unrealized gain (loss)
on securities available for
sale, net of tax effect..... -0- -0- -0- (11,597) -0- -0- (11,597)
Increase in unearned ESOP shares -0- -0- -0- -0- (15) -0- (15)
Discount on dividend reinvestment
plan purchases.............. -0- (161) -0- -0- -0- -0- (161)
Treasury stock reissued by
pooled subsidiary........... -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
Balance at December 31, 1994.... $22,437 $77,964 $146,814 $(16,802) $(5,196) $ (82) $225,135
Net income.................... -0- -0- 19,740 -0- -0- -0- 19,740
Cash dividends declared....... -0- -0- (10,736) -0- -0- -0- (10,736)
Change in unrealized gain (loss)
on securities available for
sale, net of tax effect..... -0- -0- -0- 14,488 -0- -0- 14,488
Decrease in unearned ESOP shares -0- -0- -0- -0- 303 -0- 303
Discount on dividend reinvestment
plan purchases.............. -0- (242) -0- -0- -0- -0- (242)
Treasury stock acquired....... -0- -0- -0- -0- -0- (1,552) (1,552)
Treasury stock reissued....... -0- (420) -0- -0- -0- 735 315
Balance at September 30, 1995... $22,437 $77,302 $155,818 $ (2,314) $(4,893) $ (899) $247,451
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5<PAGE>
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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,
1995 1994
Operating Activities
Net income....................................... $19,740 $19,340
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses............. 2,445 2,176
Depreciation and amortization.................. 3,793 3,897
Net losses (gains) on sales of assets.......... 468 (1,777)
Increase in interest receivable................ (655) (1,449)
Increase in interest payable................... 3,836 930
Increase (decrease) in income taxes payable.... (446) 1,084
Change in deferred taxes....................... (375) (77)
Other - net.................................... (1,941) (4,906)
Net cash provided by operating activities.... 26,865 19,218
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales........................... -0- 7,476
Proceeds from maturities and redemptions...... 31,935 88,917
Purchases..................................... (17,118) (64,364)
Transactions with securities available for sale:
Proceeds from sales........................... 76,330 46,962
Proceeds from maturities and redemptions...... 39,865 57,077
Purchases..................................... (37,414) (91,701)
Proceeds from sales of loans and other assets..... 16,623 11,632
Net decrease in time deposits with banks.......... 8,231 11,182
Net increase in loans............................. (85,388) (132,951)
Purchase of premises and equipment................ (2,670) (3,225)
Net cash provided (used) by investing activities 30,394 (68,995)
Financing Activities
Repayments of long-term debt..................... (1,684) (11)
Discount on dividend reinvestment plan purchases. (242) (161)
Dividends paid................................... (10,746) (7,736)
Dividends paid by subsidiary prior to merger..... -0- (1,328)
Net increase in deposits......................... 68,574 72,218
Net decrease in federal funds purchased.......... (56,700) (5,505)
Net increase (decrease) in other short-term
borrowings..................................... (39,110) 5,726
Purchase of treasury stock....................... (1,552) 113
Proceeds from sale of treasury stock............. 315 -0-
Net cash provided by financing activities... (41,145) 63,316
Net increase in cash and cash equivalents... 16,114 13,539
Cash and cash equivalents at January 1............. 66,055 57,367
Cash and cash equivalents at September 30.......... $ 82,169 $70,906
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, 1995
(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, 1995 and the results of
operations for the three and nine month periods ended
September 30, 1995 and 1994, and statements of cash flows and
changes in shareholders' equity for the nine month periods ended
September 30, 1995 and 1994. The results of the three and nine
months ended September 30, 1995 and 1994 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 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: 1995 1994
Interest $57,371 $49,587
Income Taxes $10,298 $14,295
The Corporation borrowed $500 and $730 in the first nine months
of 1995 and 1994, respectively, and concurrently loaned these
amounts to the ESOP Trust on identical terms. ESOP loan payments
of $803 and $714 were made by the ESOP Trust during the
respective 1995 and 1994 periods, thereby resulting in
outstanding amounts related to unearned ESOP shares of $4,893 at
September 30, 1995 and $4,464 at September 30, 1994.
1995 1994
Loans transferred to Other real estate
owned and Repossessed assets $ 2,354 $ 1,943
Change in Market value adjustment to
securities available for sale
pursuant to FAS 115 $22,290 $(17,834)
NOTE 3 Business Combination
Effective September 29, 1994 the Corporation acquired all of the
outstanding common shares of Reliable Financial Corporation
("Reliable"), a savings and loan holding company headquartered in
Bridgeville, Pennsylvania. Each of the 1,410,194 outstanding
shares were exchanged for 1.6 shares of the Corporation's common
stock. Effective September 27, 1994 the Corporation acquired all
of the outstanding common shares of United National
Bancorporation ("United"), a bank holding company headquartered
in Chambersburg, Pennsylvania. Each of the 769,147 outstanding
shares were exchanged for two shares of the Corporation's common
stock. The mergers were accounted for as poolings of interests,
and accordingly, all financial statements were restated as though
the mergers had occurred at the beginning of the earliest period
presented.
7<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
The Corporation acquired United National Bancorporation and its
subsidiaries ("United") and Reliable Financial Corporation and
its subsidiary ("Reliable") effective September 29, 1994 and
September 27, 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.
First Nine Months of 1995 as Compared to the First Nine Months of
1994
Net income in the nine months of 1995 was $19.7 million, an
increase of $400 thousand from the 1994 period. Earnings per
share was $0.90 during the nine months of 1995 compared to $0.86
during the 1994 period. Return on average assets was 1.14% and
return on average equity was 11.07% during the 1995 period,
compared to 1.14% and 11.29%, respectively during the same period
of 1994. During September 1995, the FDIC rebated deposit
insurance premiums collected in excess of the regulatory cap.
This rebate increased pre-tax earnings of the Corporation by $1.1
million for the 1995 period. During the 1994 period net
securities gains were $1.8 million compared to a net loss of $604
thousand during the 1995 period. The 1994 period also included
$1.2 million merger costs. The FDIC insurance savings is
expected to be ongoing.
The securities losses during 1995 resulted from the sale of $76.2
million of securities, primarily U.S. Treasury securities,
classified as "available for sale" having an average yield of
4.91% and an average remaining life of about 17 months. The
proceeds were used to pay off short-term borrowings costing 6.00%
(subsequently would have been reduced to 5.75%). This
transaction is expected to result in a net improvement in net
interest income over the original remaining maturity in excess of
the net loss on the sale. Since the short-term borrowings were
variable rate, the exact benefit is not determinable until after
the securities would have matured, but at current interest rates
the net benefit is expected to exceed $250 thousand. The sale
occurred in June resulting in a pre-tax benefit of approximately
$191 thousand during the reporting period. The securities gains
experienced during the 1994 period were primarily marketable
equity securities, which represented $1.5 million of the net
gain. Additionally, during the 1994 period U.S. Treasury
securities and U.S. Government agency securities with short-term
maturities were sold and reinvested in similar securities with
maturities of 3-5 years. All of the "held to maturity"
securities sold during 1994 were within the exception parameters
specified in FAS 115.
8<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
First Nine Months of 1995 as Compared to the First Nine Months of
1994 (Continued)
Since the FDIC Bank Insurance Fund has reached its regulatory cap
the assessment rate has been reduced for banks to $0.04 per $100
of deposits compared to $0.23 per $100 of deposits previously
assessed. This reduction is expected to result in an additional
pre-tax savings during the final quarter of 1995 of approximately
$800 thousand. However, the Savings and Loan Insurance Fund is
still underfunded and there could be an additional one-time
pretax assessment against the thrift deposits of the Corporation
during the fourth quarter of approximately $1.0 million. The
recurring assessment on these funds is expected to be
subsequently reduced.
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 1995 period was $69.8 million compared to $67.1 million
during the same time period in 1994. Interest income, on a tax-
equivalent basis, increased 64 basis points (0.64%) as a
percentage of average earning assets to 8.04% in 1995 from 7.40%
in the 1994 period. Yields have improved each quarter since the
first quarter of 1994, reflecting higher interest rates over that
time period. The rise in interest rates stabilized prepayments
of the mortgage backed securities portfolio and portfolio yields.
Since a majority of the cash flows provided by maturities and
repayments of securities were redeployed into loan growth, the
improved investment portfolio yields resulted primarily from
adjustable rate instruments repricing. The cost of funds was
4.35% and 3.66% in the nine months of 1995 and 1994,
respectively, as deposit costs, the predominant category of
interest-bearing liabilities, increased 55 basis points (0.55%)
to 3.80%. The increase in rates on short-term deposits were
partially offset by a stable cost of longer term deposits. As
deposit customers tended to extend maturities when interest rates
declined in the recent past, the cost of these deposits did not
rise as fast as interest rates. Net interest margin (net
interest income, on a tax-equivalent basis, as a percentage of
average earning assets) was 4.33% of earning assets during 1995,
compared to 4.28% in the 1994 related period.
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
First Nine Months of 1995 as Compared to the First Nine Months of
1994 (Continued)
Provision for possible loan losses was $2.4 million for the nine
month period of 1995 compared to $2.2 million in the 1994 period.
Net charge-offs against the reserve for possible loan losses were
$2.2 million in the 1995 period and $1.3 million in the 1994
period. Management does not feel that the additional charge-offs
during the 1995 period indicate a trend. See "Credit Review"
section for an analysis of the quality of the loan portfolio.
Below is an analysis of the consolidated reserve for possible
loan losses for the nine month periods ended September 30, 1995
and 1994.
1995 1994
Balance January 1, $17,337 $16,483
Loans charged off:
Commercial, financial and
agricultural 831 790
Real estate-construction -0- -0-
Real estate-commercial 184 23
Real estate-residential 289 172
Loans to individuals 1,553 1,184
Lease financing receivables 40 29
Total loans charged off 2,897 2,198
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 114 171
Real estate-construction -0- -0-
Real estate-commercial 28 241
Real estate-residential 44 43
Loans to individuals 386 398
Lease financing receivables 94 10
Total recoveries 666 863
Net charge offs 2,231 1,335
Provision charged to operations 2,445 2,176
Balance September 30, $17,551 $17,324
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
First Nine Months of 1995 as Compared to the First Nine Months of
1994 (Continued)
Other operating income decreased $2.3 million in 1995 to $7.6
million. Net securities gains decreased $2.3 million as a result
of the above mentioned sale of securities. Trust income declined
$56 thousand in the 1995 period primarily as a result of higher
nonrecurring income, such as estate fees, during the 1994 period.
Service charges on deposits increased $195 thousand in the 1995
period primarily as deposits increased.
Noninterest expense was $45.5 million in the nine months of 1995
which reflected a decrease of $534 thousand from the 1994 period.
Employee costs were $23.9 million in 1995, an increase of $1.3
million over the 1994 related period. Employee costs
(annualized) as a percentage of average assets was 1.37% in the
1995 period compared to 1.33% (annualized) in the 1994 period.
The reduction in the FDIC expense reflects the above mentioned
rate changes. Other operating expenses decreased $998 thousand
in the nine months of 1995 when compared to the 1994 related
period. Professional fees were reduced by $1.3 million during
the 1995 period primarily because the 1994 period contained
merger related expenses. No single expense category resulted in
significant increases during the 1995 period.
Income tax expense was $9.6 million during the nine months of
1995 and $9.4 million during the 1994 period. Income before
taxes increased $623 thousand in the 1995 period when compared to
the same time period of 1994. The Corporation's effective tax
rate was 32.8% for the 1995 period and compared to 32.7% for the
1994 period.
Three Months ended September 30, 1995 as Compared to the Three
Months Ended September 30, 1994
Net income was $7.5 million for the third quarter of 1995, which
was compared to $6.3 million in the same quarter of 1994.
Professional fees were $875 thousand less in the 1995 period when
compared to the 1994 quarter, primarily due to merger related
costs during the 1994 period. Additionally, FDIC expense was
nearly $1.1 million less in the 1995 period because of the rate
reduction. Earnings per share was $0.34 during the 1995 quarter
and $0.28 during the related quarter of 1994.
Net interest income increased $419 thousand to $23.7 million in
the third quarter of 1995 when compared to the related 1994
quarter. Interest income increased $3.6 million as average
earning assets increased $13.1 million. Yields increased 56
basis points (0.56%) as yields on investments and variable rate
loans improved. The yield on average interest earning assets was
8.08% in the 1995 quarter, and compared to 7.52% in the related
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
Three Months ended September 30, 1995 as Compared to the Three
Months Ended September 30, 1994 (Continued)
1994 quarter. Interest expense increased $3.2 million in the
1995 quarter while average interest-bearing liabilities decreased
$6.4 million and the cost of funds increased 69 basis points
(0.69%). The cost of funds increased from 3.72% in the 1994
quarter to 4.41% in the third quarter of 1995. The increase in
deposit rates occurred primarily in the short-term certificates
of deposit. Net interest margin was 4.36% for the 1995 quarter
compared to 4.35% during the 1994 period.
Provision for possible loan losses was $815 thousand in the 1995
quarter or $49 thousand more than the 1994 period. Net loans
charged off in the third quarter of 1995 were $581 thousand and
can be compared to $682 thousand in the related 1994 quarter.
The loan quality continues to remain strong.
Noninterest income increased $118 thousand in the third quarter
of 1995 to $2.7 million. Net security losses were $71 thousand
during the 1994 period while the 1995 period had no securities
gains nor losses.
Noninterest expense was $14.4 million in the three month period
ended September 30, 1995 compared to $15.7 million in the 1994
period, reflecting a decrease of $1.4 million. Salaries and
employee benefits increased $509 thousand to $8.0 million in the
third quarter of 1995. Net occupancy expense and furniture and
equipment expense remained stable in the 1995 quarter when
compared to the 1994 related period. FDIC expense and other
operating expenses decreased primarily as a result of the FDIC
rate decrease and the reduction in merger related professional
fees. Income taxes increased $730 thousand primarily because the
taxable income increased.
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.
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
LIQUIDITY (Continued)
Net loans increased $67.1 million in the first nine months of
1995. Consumer demand resulted in $47.3 million of growth in
consumer mortgages and loans to individuals for personal and
household purposes. Total deposits grew $68.5 million as all
deposit categories increased. The growth is primarily from core
customer deposit relationships. Investment securities classified
as "held to maturity" declined $14.8 million while interest-
bearing bank deposits declined $8.2 million and Federal funds
sold increased $18.4 million since December 31, 1994.
An additional source of liquidity are 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
strategies. As of September 30, 1995 securities available for
sale had an amortized cost of $389.5 million and an approximate
value of $386.1 million. As long-term interest rates stabilized
since the end of 1994, the market value of securities available
for sale improved. The difference between the market value and
amortized cost of the securities available for sale 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.
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 the
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 rate 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.
13<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest Sensitivity (continued)
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, N.O.W. accounts and short-term borrowings.
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, 1995 and December 31, 1994.
September 30, 1995
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 442,147 $ 94,672 $175,856 $ 712,675
Investments.............. 24,969 30,655 48,955 104,579
Other interest-earning
assets.................. 116,623 6,311 8,794 131,728
Total interest-sensitive
assets................ 583,739 131,638 233,605 948,982
Certificates of deposits. 158,477 171,094 268,356 597,927
Other deposits........... 674,086 -0- -0- 674,086
Borrowings............... 88,409 10,587 12,407 111,403
Total interest-sensitive
liabilities........... 920,972 181,681 280,763 1,383,416
GAP.................... (337,233) (50,043) (47,158) (434,434)
ISA/ISL.................. 0.63 0.72 0.83 0.69
Gap/Total assets......... 14.44% 2.14% 2.02% 18.60%
December 31, 1994
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 423,116 $ 95,292 $182,799 $ 701,207
Investments.............. 20,298 24,414 55,647 100,359
Other interest-earning
assets.................. 92,845 6,696 6,707 106,248
Total interest-sensitive
assets................ 536,259 126,402 245,153 907,814
Certificates of deposits. 166,557 114,482 125,588 406,627
Other deposits........... 687,882 -0- -0- 687,882
Borrowings............... 174,728 16,554 4,074 195,356
Total interest-sensitive
liabilities........... 1,029,167 131,036 129,662 1,289,865
GAP.................... (492,908) (4,634) 115,491 (382,051)
ISA/ISL.................. 0.52 0.96 1.89 0.70
Gap/Total assets......... 21.11% 0.20% 4.95% 16.36%
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.
14<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 1995, indicated that a 300 basis
point (3.00%) 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 REVIEW
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.
Loans on a nonaccrual basis include impaired loans (see
description below).
At September 30,
1995 1994
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 6,876 $ 9,407
Past due loans 8,578 8,421
Renegotiated loans 294 753
Total nonperforming loans $ 15,748 $ 18,581
Other real estate owned $ 2,235 $ 2,903
Loans outstanding at end of period $1,445,084 $1,334,035
Average loans outstanding (year-to-date) $1,406,998 $1,260,655
Nonperforming loans as percent of
total loans 1.09% 1.39%
Provision for possible loan losses $ 2,445 $ 2,176
Net charge-offs $ 2,231 $ 1,335
Net charge-offs as percent of
average loans 0.16% 0.11%
Provision for possible loan losses as
percent of net charge-offs 109.59% 163.00%
Reserve for possible loan losses as
percent of average loans outstanding 1.25% 1.37%
Reserve for possible loan losses as
percent of nonperforming loans 111.45% 93.24%
15<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CREDIT REVIEW (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 prepayment terms. Additionally,
the portfolio is well diversified and as of September 30, 1995,
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
1995.
The Corporation adopted Financial Accounting Standards Board
Statement No. 114 "Accounting by Creditors for Impairment of a
Loan", as amended by Statement No. 118 "Accounting by Creditors
for Impairment of a Loan Income Recognition and Disclosures",
("FAS No. 118") effective January 1, 1995. These statements
address 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
loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The adoption of
FAS No. 118 did not have a material impact on the Corporation's
financial condition or results of operations.
As of September 30, 1995, the Corporation had a recorded
investment in impaired loans of $5.1 million with an average
balance of $5.8 million for the nine month period. An allocation
of the reserve for possible loan losses in the amount of $803
thousand relates to $3.4 million of the impaired loans. Impaired
loans totalling $1.8 million have no reserve allocation, in
accordance with FAS No. 118.
Payments received on impaired loans are applied against the
recorded investment in the loan. For loans other than those that
the Corporation expects repayment through liquidation of the
collateral, when the remaining recorded investment in the
impaired loan is less than or equal to the present value of
expected discounted cash flows, income is recorded on a cash
basis. Income recorded on impaired loans during the first nine
months of 1995 was $18 thousand.
16<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES
Equity capital increased $22.3 million in 1995. Earnings
retention was $9.0 million, representing an earnings retention
rate of 45.6%. 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 $500 thousand while
the loan repayments by the ESOP of debt guaranteed by the
Corporation increased equity by $803 thousand. Amounts paid to
fund the discount on reinvested dividends reduced equity by $242
thousand. The market value adjustment to securities available
for sale increased equity by $14.5 million resulting from a
rebound in market values as longer term interest rates decreased
in the first nine months of 1995. Treasury stock in the amount
of $1.6 million, acquired to satisfy outstanding stock option
commitments, reduced equity by a like amount, while reissuance of
Treasury stock to satisfy exercised options added $315 thousand.
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.
The Federal Reserve Board 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 must 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 3-5 percent for all but the most highly
rated banks, as determined by a regulatory rating system. As of
September 30, 1995, the Corporation had a Tier I Capital to risk-
weighted assets ratio and total capital to risk-weighted assets
ratio of 16.88% and 18.14%, respectively and a minimum leverage
ratio of 10.27%.
17
<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
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8-K dated August 23, 1995 reporting the
Corporation's intent to merge eight of its
commercial bank subsidiaries into one.
18 <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 7, 1995 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: NOVEMBER 7, 1995 /S/ John J. Dolan
John J. Dolan, Sr. Vice President,
Comptroller, and Chief Financial
Officer
19
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
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<INT-BEARING-DEPOSITS> 5,456 5,456
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<EXPENSE-OTHER> 14,381 45,503
<INCOME-PRETAX> 11,184 29,378
<INCOME-PRE-EXTRAORDINARY> 7,455 19,740
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