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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
For the Quarter ended June 30, 1995 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 9, 1995
Common Stock, $1 Par Value 22,379,348 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 . . . . . . . . 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)
June 30, December 31,
1995 1994
ASSETS
Cash and due from banks.............. $ 63,841 $ 66,055
Interest-bearing bank deposits....... 6,843 13,686
Federal funds sold .................. 28,225 -0-
Securities available for sale........ 375,773 443,189
Securities held to maturity (market
value $353,493 in 1995 and
$348,074 in 1994).................. 356,025 370,498
Loans (all domestic)................. 1,465,162 1,422,320
Less unearned income............... 47,455 44,526
Less reserve for possible loan losses 17,317 17,337
Net loans....................... 1,400,390 1,360,457
Property and equipment............... 29,236 29,196
Other real estate owned.............. 2,519 2,269
Other assets......................... 44,096 49,571
TOTAL ASSETS.................... $2,306,948 $2,334,921
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 189,138 $ 199,172
Interest-bearing................... 1,728,195 1,681,888
Total deposits.................. 1,917,333 1,881,060
Short-term borrowings................ 117,933 201,706
Other liabilities.................... 21,765 19,424
Long-term debt....................... 7,552 7,596
Total liabilities............... 2,064,583 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; 22,376,686 and
22,430,728 shares outstanding in
1995 and 1994, respectively........ 22,437 22,437
Additional paid-in capital........... 77,412 77,964
Retained earnings.................... 151,943 146,814
Unrealized gain (loss) on securities
available for sale................. (3,423) (16,802)
Treasury stock (59,942 shares at
June 30, 1995 and 5,900 at
December 31, 1994)................. (843) (82)
Unearned ESOP shares................. (5,161) (5,196)
Total shareholders' equity......... 242,365 225,135
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $2,306,948 $2,334,921
The accompanying notes are an integral part of these consolidated financial
statements.
3
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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 6 Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Interest Income
Interest and fees on loans....... $31,799 $26,708 $62,512 $52,260
Interest and dividends on investments:
Taxable interest............... 10,831 11,033 21,840 21,996
Interest exempt from federal
income taxes.................. 704 938 1,459 1,809
Dividends...................... 244 259 482 532
Interest on federal funds sold... 137 14 170 34
Interest on bank deposits........ 104 139 274 285
Total Interest Income......... 43,819 39,091 86,737 76,916
Interest Expense
Interest on deposits............. 18,155 14,795 34,993 29,548
Interest on short-term borrowings 2,345 1,732 5,292 3,290
Interest on long-term debt....... 165 130 328 236
Total Interest Expense........ 20,665 16,657 40,613 33,074
Net interest income................ 23,154 22,434 46,124 43,842
Provision for possible loan losses 837 722 1,630 1,410
Net interest income after provision
for possible loan losses......... 22,317 21,712 44,494 42,432
Other Income
Security gains (losses).......... (628) 1,333 (604) 1,799
Trust income..................... 566 535 1,124 1,188
Service charges on deposits...... 1,410 1,348 2,724 2,605
Other income..................... 933 734 1,578 1,691
Total Other Income............ 2,281 3,950 4,822 7,283
Other Expenses
Salaries and employee benefits... 7,978 7,405 15,880 15,070
Net occupancy expense............ 1,066 1,083 2,173 2,221
Furniture and equipment expense.. 1,016 988 2,016 1,959
FDIC expense..................... 1,065 1,030 2,130 2,059
Other operating expenses......... 4,580 4,803 8,923 8,991
Total Other Expenses.......... 15,705 15,309 31,122 30,300
Income before taxes................ 8,893 10,353 18,194 19,415
Applicable income taxes.......... 2,898 3,553 5,909 6,416
Net Income......................... $ 5,995 $ 6,800 $12,285 $12,999
Average Shares Outstanding.........21,979,014 22,436,628 21,980,854 22,427,813
Per Share Data:
Net income....................... $ 0.27 $ 0.30 $ 0.56 $ 0.58
Cash dividends per share......... $ 0.16 $ 0.14 $ 0.32 $ 0.28
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 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- 12,999 -0- -0- -0- 12,999
Cash dividends declared....... -0- -0- (5,220) -0- -0- -0- (5,220)
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- (10,336) -0- -0- (10,336)
Increase in unearned ESOP shares -0- -0- -0- -0- (283) -0- (283)
Discount on dividend reinvestment
plan purchases.............. -0- (114) -0- -0- -0- -0- (114)
Treasury stock reissued by
pooled subsidiary........... -0- -0- (105) -0- -0- 218 113
Balance at June 30, 1994........ $22,517 $78,980 $137,726 $ (8,752) $(4,732) $ (998) $224,741
Balance at December 31, 1994.... $22,437 $77,964 $146,814 $(16,802) $(5,196) $ (82) $225,135
Net income.................... -0- -0- 12,285 -0- -0- -0- 12,285
Cash dividends declared....... -0- -0- (7,156) -0- -0- -0- (7,156)
Change in unrealized gain (loss)
on securities available for
sale, net of tax effect..... -0- -0- -0- 13,379 -0- -0- 13,379
Decrease in unearned ESOP shares -0- -0- -0- -0- 35 -0- 35
Discount on dividend reinvestment
plan purchases.............. -0- (155) -0- -0- -0- -0- (155)
Treasury stock acquired....... -0- -0- -0- -0- -0- (1,459) (1,459)
Treasury stock reissued....... -0- (397) -0- -0- -0- 698 301
Balance at June 30, 1995........ $22,437 $77,412 $151,943 $ (3,423) $(5,161) $ (843) $242,365
</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,
1995 1994
Operating Activities
Net income....................................... $12,285 $12,999
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses............. 1,630 1,410
Depreciation and amortization.................. 2,501 2,585
Net losses (gains) on sales of assets.......... 499 (1,870)
Decrease (increase) in interest receivable..... 547 (525)
Increase in interest payable................... 2,720 253
Decrease in income taxes payable............... (14) (374)
Change in deferred taxes....................... (242) (211)
Other - net.................................... (3,347) 354
Net cash provided by operating activities.... 16,579 14,621
Investing Activities
Investment securities transactions:
Proceeds from sales........................... -0- 7,009
Proceeds from maturities and redemptions...... 21,636 72,264
Purchases..................................... (7,138) (60,865)
Transactions with securities available for sale:
Proceeds from sales........................... 76,170 39,858
Proceeds from maturities and redemptions...... 26,302 45,481
Purchases..................................... (15,105) (78,812)
Proceeds from sales of loans and other assets..... 8,499 8,076
Net decrease (increase) in time deposits with banks 6,843 4,553
Net decrease (increase) in loans.................. (49,977) (74,159)
Purchase of premises and equipment................ (1,847) (2,066)
Net cash used by investing activities........... 65,383 (38,661)
Financing Activities
Repayments of long-term debt..................... (8) (7)
Discount on dividend reinvestment plan purchases. (155) (113)
Dividends paid................................... (7,166) (5,127)
Dividends paid by subsidiary prior to merger..... -0- (1,324)
Net increase in deposits......................... 36,308 48,473
Net decrease in federal funds purchased.......... (47,200) (5,505)
Net decrease in other short-term borrowings...... (36,573) (12,986)
Purchase of treasury stock....................... (1,459) -0-
Proceeds from sale of treasury stock............. 302 113
Net cash provided by financing activities... (55,951) 23,524
Net increase (decrease) in cash and
cash equivalents.......................... 26,011 (516)
Cash and cash equivalents at January 1............. 66,055 57,367
Cash and cash equivalents at June 30............... $ 92,066 $56,851
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, 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 June 30, 1995 and the results of
operations for the three and six month periods ended June 30,
1995 and 1994, and statements of cash flows and changes in
shareholders' equity for the six month periods ended June 30,
1995 and 1994. The results of the three and six months ended
June 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 three months of the year for interest
and income taxes were as follows: 1995 1994
Interest $37,893 $32,821
Income Taxes $ 6,051 $ 5,863
The Corporation borrowed $500 and $730 in the first six months of
1995 and 1994, respectively, and concurrently loaned these
amounts to the ESOP Trust on identical terms. ESOP loan payments
of $535 and $447 were made by the ESOP Trust during the
respective 1995 and 1994 periods, thereby resulting in
outstanding amounts related to unearned ESOP shares of $5,161 at
June 30, 1995 and $4,732 at June 30, 1994.
1995 1994
Loans transferred to Other real estate
owned and Repossessed assets $1,844 $ 867
Change in Market value adjustment to
securities available for sale
pursuant to FAS 115 $20,582 $(15,555)
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.
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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 Six Months of 1995 as Compared to the First Six Months of
1994
Net income in the six months of 1995 was $12.3 million, a
decrease of $714 thousand from the 1994 period. Earnings per
share was $0.56 during the six months of 1995 compared to $0.58
during the 1994 period. Return on average assets was 1.06% and
return on average equity was 10.56% during the 1995 period,
compared to 1.16% and 11.39%, respectively during the same period
of 1994. The primary reason for the decrease resulted from
incurring net securities gains during the 1994 period of $1.8
million compared to a net loss of $604 thousand during the 1995
period. Excluding securities transactions, net income would have
increased 7% and net income per share would have increased 9%
indicating that core earnings increased.
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%. This transaction is expected to result in a net
improvement in net interest income over the remaining life 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, so the benefits were
only minor 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.
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 $46.1 million compared to $43.8 million
during the same time period in 1994. Interest income, on a tax-
equivalent basis, increased 67 basis points (0.67%) as a
percentage of average earning assets to 8.01% in 1995 from 7.34%
in the 1994 period. Yields have improved each quarter since the
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 Six Months of 1995 as Compared to the First Six Months of
1994 (Continued)
quarter ended March 31, 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 4.32% and 3.63% in the six months of 1995 and 1994,
respectively, as deposit costs, the predominant category of
interest-bearing liabilities, increased 50 basis points (0.50%)
to 3.74%. 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 4.31% of earning assets during 1995,
compared to 4.24% in the 1994 related period.
The sale of the investment securities and repayment of the short-
term debt described above is expected to further improve net
interest income and net interest margin for the remainder of
1995.
Average earning assets were 95.1% of average total assets in the
1995 period and 95.2% during the 1994 time frame. Average
interest-bearing liabilities increased as a percentage of average
total assets to 81.2% in the six months period of 1995 and the
related 1994 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 Six Months of 1995 as Compared to the First Six Months of
1994 (Continued)
Provision for possible loan losses was $1.6 million for the six
month period of 1995 compared to $1.4 million in the 1994 period.
Net charge-offs against the reserve for possible loan losses were
$1.7 million in the 1995 period and $655 thousand 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 six month periods ended June 30, 1995 and
1994.
1995 1994
Balance January 1, $17,337 $16,483
Loans charged off:
Commercial, financial and
agricultural 725 369
Real estate-construction -0- -0-
Real estate-commercial 155 19
Real estate-residential 180 81
Loans to individuals 1,030 823
Lease financing receivables 26 15
Total loans charged off 2,116 1,307
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 84 103
Real estate-construction -0- -0-
Real estate-commercial 16 233
Real estate-residential 31 24
Loans to individuals 244 282
Lease financing receivables 91 10
Total recoveries 466 652
Net charge offs 1,650 655
Provision charged to operations 1,630 1,410
Balance June 30, $17,317 $17,238
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 1995 as Compared to the First Six Months of
1994 (Continued)
Other operating income decreased $2.5 million in 1995 to $4.8
million. Net securities gains decreased $2.4 million as a result
of the above mentioned sale of securities available for sale.
Trust income declined $64 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
$119 thousand in the 1995 period primarily as deposits increased.
Other income declined $113 thousand in the 1995 period when
compared to the 1994 total of $1.7 million for the six months of
1994. The largest component of the decline was a reduction of
gains on the sales of other real estate owned and loans.
Noninterest expense was $31.1 million in the six months of 1995
which reflected an increase of $396 thousand over the 1994
period. Employee costs were $15.9 million in 1995, an increase
of $810 thousand over the 1994 related period. Employee costs
(annualized) as a percentage of average assets was 1.37% in the
1995 period compared to 1.34% (annualized) in the 1994 period.
Net occupancy expense and furniture and equipment expense
remained fairly constant from the 1994 period to the 1995 period.
Other operating expenses decreased $68 thousand in the six months
of 1995 when compared to the 1994 related period. Professional
fees were reduced by $450 thousand during the 1995 period because
of the 1994 period contained some merger related expenses. No
single expense category contributed significantly to increases
during the 1995 period.
Income tax expense was $6.0 million during the six months of 1995
and $6.4 million during the 1994 period. Income before taxes
decreased $1.2 million in the 1995 period when compared to the
same time period of 1994. The Corporation's effective tax rate
was 32.5% for the 1995 period and compared to 33.0% for the 1994
period.
Three Months ended June 30, 1995 as Compared to the Three Months
Ended June 30, 1994
Net income was $6.0 million for the second quarter of 1995, which
was compared to $6.8 million in the same quarter of 1994.
Professional fees were $408 thousand less in the 1995 period when
compared to the 1994 quarter, primarily due to merger related
costs during the 1994 period. Net securities losses were $628
thousand during the 1995 period compared to $1.3 million net
securities gains during the 1994 related period. Earnings per
share was $0.27 during the 1995 quarter and $0.30 during the
related quarter of 1994.
Net interest income increased $720 thousand to $23.2 million in
the second quarter of 1995 when compared to the related 1994
quarter. Interest income increased $4.7 million as average
earning assets increased $60.5 million. Yields increased 63
basis points (0.63%) as yields on investments and variable rate
loans improved. The yield on average interest earning assets was
8.03% in the 1995 quarter, and compared to 7.40% 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 (Continued)
Three Months ended June 30, 1995 as Compared to the Three Months
Ended June 30, 1994 (Continued)
1994 quarter. Interest expense increased $4.0 million in the
1995 quarter as average interest-bearing liabilities increased
$45.6 million and the cost of funds increased 76 basis points
(0.76%). The cost of funds increased from 3.63% in the 1994
quarter to 4.39% in the second quarter of 1995. The increase in
deposit rates occurred primarily in the short-term certificates
of deposit. Average earning assets grew faster than average
interest-bearing liabilities thereby stabilizing the net interest
margin. Net interest margin was 4.30% for the 1995 quarter
compared to 4.31% during the 1994 period.
Provision for possible loan losses was $837 thousand in the 1995
quarter or $115 thousand more than the 1994 period. Net loans
charged off in the second quarter of 1995 were $847 thousand and
can be compared to $427 thousand in the related 1994 quarter.
The increase in net charge offs is not a major concern of
management since loan quality continues to remain strong.
Noninterest income decreased $1.7 million in the second quarter
of 1995 to $2.3 million. Net security gains decreased $2.0
million while other income increased $199 thousand in the 1995
quarter when compared to the second quarter of 1994. The 1995
period included an increase of $98 thousand income from credit
life insurance activities.
Noninterest expense was $15.7 million in the three month period
ended June 30, 1995 compared to $15.3 million in the 1994 period,
reflecting an increase of $396 thousand. Salaries and employee
benefits increased $573 thousand to $8.0 million in the second
quarter of 1995. Net occupancy expense and furniture and
equipment expense remained stable in the 1995 quarter when
compared to the 1994 related period. Other operating expenses
decreased $223 thousand primarily as merger related professional
fees declined. Income taxes decreased $655 thousand primarily
because the taxable income was reduced.
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 (Continued)
LIQUIDITY (Continued)
Net loans increased $39.9 million in the first six months of
1995. Consumer demand resulted in $36.4 million of growth in
consumer mortgages and loans to individuals for personal and
household purposes. Total deposits grew $36.3 million as all
deposit categories increased. The growth is primarily from core
customer deposit relationships. Investment securities classified
as "held to maturity" declined $14.5 million while interest-
bearing bank deposits declined $6.8 million and Federal funds
sold increased $28.2 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 June 30, 1995 securities available for sale
had an amortized cost of $381.0 million and an approximate value
of $375.8 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 (Continued)
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 June 30, 1995 and December 31, 1994.
June 30, 1995
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 430,456 $ 92,479 $168,243 $ 691,178
Investments.............. 22,375 25,525 51,186 99,086
Other interest-earning
assets.................. 132,535 4,773 10,914 148,222
Total interest-sensitive
assets................ 585,366 122,777 230,343 938,486
Certificates of deposits. 155,652 126,671 271,211 553,534
Other deposits........... 666,628 -0- -0- 666,628
Borrowings............... 112,931 4,575 12,059 129,565
Total interest-sensitive
liabilities........... 935,211 131,246 283,270 1,349,727
GAP.................... (349,845) (8,469) (52,927) (411,241)
ISA/ISL.................. 0.63 0.94 0.81 0.70
Gap/Total assets......... 15.16% 0.37% 2.29% 17.83%
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 (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, 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 June 30,
1995 1994
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 7,522 $ 12,708
Past due loans 5,251 6,358
Renegotiated loans 626 900
Total nonperforming loans $ 13,399 $ 19,966
Other real estate owned $ 2,519 $ 2,960
Loans outstanding at end of period $1,417,707 $1,377,794
Average loans outstanding (year-to-date) $1,399,246 $1,238,996
Nonperforming loans as percent of
total loans 0.95% 1.45%
Provision for possible loan losses $ 1,630 $ 1,410
Net charge-offs $ 1,650 $ 655
Net charge-offs as percent of
average loans 0.12% 0.05%
Provision for possible loan losses as
percent of net charge-offs 98.79% 215.27
Reserve for possible loan losses as
percent of average loans outstanding 1.24% 1.39%
Reserve for possible loan losses as
percent of nonperforming loans 129.24% 86.34%
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)
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 June 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 June 30, 1995, the Corporation had a recorded investment in
impaired loans of $5.5 million with an average balance of $6.2
million for the six month period. An allocation of the reserve
for possible loan losses in the amount of $778 thousand relates
to $3.5 million of the impaired loans. Impaired loans totalling
$2.0 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 six
months of 1995 was $12 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 (Continued)
CAPITAL RESOURCES
Equity capital increased $17.2 million in 1995. Earnings
retention was $5.1 million, representing an earnings retention
rate of 41.8%. 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 $535 thousand. Amounts paid to
fund the discount on reinvested dividends reduced equity by $155
thousand. The market value adjustment to securities available
for sale increased equity by $13.4 million resulting from a
rebound in market values as longer term interest rates decreased
in the first six months of 1995. Treasury stock in the amount of
$1.5 million, acquired to satisfy outstanding stock option
commitments, reduced equity by a like amount, while reissuance of
Treasury stock to satisfy exercised options added $301 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
June 30, 1995, the Corporation had a Tier I Capital to risk-
weighted assets ratio and total capital to risk-weighted assets
ratio of 16.93% and 18.20%, respectively and a minimum leverage
ratio of 9.97%.
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
Not applicable.
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: AUGUST 10, 1995 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: AUGUST 10, 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 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-END> JUN-30-1995 JUN-30-1995
<CASH> 63,841 63,841
<INT-BEARING-DEPOSITS> 6,843 6,843
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<TOTAL-ASSETS> 2,306,948 2,306,948
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<INTEREST-TOTAL> 43,819 86,737
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<EXPENSE-OTHER> 15,705 31,122
<INCOME-PRETAX> 8,893 18,194
<INCOME-PRE-EXTRAORDINARY> 5,995 12,285
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<EPS-PRIMARY> $0.27 $0.56
<EPS-DILUTED> $0.27 $0.56
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