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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, 1996
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 12, 1996 was 22,213,320.
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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 . . . . . . . . . . . . . . . . . . . . . . 23
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
September 30, December 31,
1996 1995
ASSETS
Cash and due from banks on demand.... $ 80,530 $ 62,381
Interest-bearing deposits with banks. 5,021 8,288
Federal funds sold .................. -0- 4,800
Securities available for sale, at
market.............................. 250,718 244,193
Securities held to maturity, at cost,
(market value $476,256 in 1996 and
$503,568 in 1995).................. 481,894 504,509
Loans................................ 1,723,317 1,531,174
Unearned income.................... (35,171) (43,632)
Allowance for possible credit losses (19,170) (18,152)
Net loans....................... 1,668,976 1,469,390
Property and equipment............... 31,453 29,435
Other real estate owned.............. 1,827 1,408
Other assets......................... 44,426 39,903
TOTAL ASSETS.................... $2,564,845 $2,364,307
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 212,618 $ 200,939
Interest-bearing................... 1,865,396 1,761,821
Total deposits.................. 2,078,014 1,962,760
Short-term borrowings................ 200,132 120,774
Other liabilities.................... 24,749 23,236
Long-term debt....................... 4,457 5,261
Total liabilities............... 2,307,352 2,112,031
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 shares issued; 22,213,320
and 22,371,626 shares outstanding in
1996 and 1995 respectively......... 22,437 22,437
Additional paid-in capital........... 76,785 77,226
Retained earnings.................... 165,429 157,576
Unrealized gain on securities
available for sale, net of taxes... 530 511
Treasury stock (223,308 shares at
September 30, 1996 and 65,002 at
December 31, 1995, at cost)........ (3,947) (929)
Unearned ESOP shares................. (3,741) (4,545)
Total shareholders' equity......... 257,493 252,276
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $2,564,845 $2,364,307
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,
1996 1995 1996 1995
Interest Income
Interest and fees on loans....... $34,658 $32,733 $101,377 $ 95,245
Interest and dividends on investments:
Taxable interest............... 9,498 9,938 29,065 31,778
Interest exempt from Federal
income taxes.................. 929 665 2,626 2,124
Dividends...................... 382 246 1,032 728
Interest on Federal funds sold... 1 554 83 724
Interest on bank deposits........ 82 108 331 382
Total Interest Income......... 45,550 44,244 134,514 130,981
Interest Expense
Interest on deposits............. 20,366 19,140 59,440 54,133
Interest on short-term borrowings 2,192 1,314 5,042 6,606
Interest on long-term debt....... 95 140 297 468
Total Interest Expense........ 22,653 20,594 64,779 61,207
Net interest income................ 22,897 23,650 69,735 69,774
Provision for possible credit losses 1,200 815 3,150 2,445
Net interest income after provision
for possible credit losses....... 21,697 22,835 66,585 67,329
Other Income
Securities gains (losses)........ 1 -0- (48) (604)
Trust income..................... 533 545 1,711 1,669
Service charges on deposits...... 1,496 1,459 4,259 4,183
Other income..................... 1,238 726 3,222 2,304
Total Other Income............ 3,268 2,730 9,144 7,552
Other Expenses
Salaries and employee benefits... 8,408 7,994 24,636 23,874
Net occupancy expense............ 1,171 1,090 3,467 3,263
Furniture and equipment expense.. 1,214 1,023 3,437 3,039
FDIC expense..................... 844 (17) 983 2,113
Other operating expenses......... 5,097 4,291 14,632 13,214
Total Other Expenses.......... 16,734 14,381 47,155 45,503
Income before taxes................ 8,231 11,184 28,574 29,378
Applicable income taxes.......... 2,369 3,729 8,711 9,638
Net Income......................... $ 5,862 $ 7,455 $19,863 $19,740
Average Shares Outstanding.........21,947,468 22,020,632 21,959,328 21,994,259
Per Share Data:
Net income....................... $ 0.27 $ 0.34 $ 0.90 $ 0.90
Cash dividends per share......... $ 0.18 $ 0.16 $ 0.54 $ 0.48
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, 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 market value of
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
Balance at December 31, 1995.... $22,437 $77,226 $157,576 $ 511 $(4,545) $ (929) $252,276
Net income.................... -0- -0- 19,863 -0- -0- -0- 19,863
Cash dividends declared....... -0- -0- (12,010) -0- -0- -0- (12,010)
Change in market value of
securities available for sale,
net of tax effect........... -0- -0- -0- 19 -0- -0- 19
Decrease in unearned ESOP shares -0- 63 -0- -0- 804 -0- 867
Discount on dividend reinvestment
plan purchases.............. -0- (377) -0- -0- -0- -0- (377)
Treasury stock acquired....... -0- -0- -0- -0- -0- (3,689) (3,689)
Treasury stock reissued....... -0- (127) -0- -0- -0- 671 544
Balance at September 30, 1996... $22,437 $76,785 $165,429 $ 530 $(3,741) $(3,947) $257,493
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 9 Months
Ended September 30,
1996 1995
Operating Activities
Net income....................................... $19,863 $19,740
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses............ 3,150 2,445
Depreciation and amortization................. 3,311 3,793
Net losses (gains) on sales of assets......... (271) 468
Increase in interest receivable............... (143) (655)
Increase in interest payable.................. 1,771 3,836
Increase (decrease) in income taxes payable... 1,210 (446)
Change in deferred taxes...................... (1,486) (375)
Other-net..................................... (4,024) (1,941)
Net cash provided by operating activities... 23,381 26,865
Investing Activities
Transactions with securities held to maturity:
Proceeds from Sales........................... -0- -0-
Proceeds from maturities and redemptions...... 65,359 31,935
Purchases..................................... (42,428) (17,118)
Transactions with securities available for sale:
Proceeds from sales........................... 12,976 76,330
Proceeds from maturities and redemptions...... 40,446 39,865
Purchases..................................... (60,390) (37,414)
Proceeds from sales of loans and other assets.... 13,530 16,623
Acquisition of affiliate and branch, net of cash
received........................................ 7,836 -0-
Changes net of acquisitions:
Net decrease in time deposits with banks......... 3,268 8,231
Net increase in loans............................ (216,271) (85,388)
Purchases of premises and equipment.............. (4,667) (2,670)
Net cash provided (used) by investing
activities................................... (180,341) 30,394
Financing Activities
Repayments of long-term debt..................... -0- (1,684)
Discount on dividend reinvestment plan purchases. (377) (242)
Dividends paid................................... (12,038) (10,746)
Net decrease in Federal funds purchased.......... (31,235) (56,700)
Net increase (decrease) in other short-term
borrowings...................................... 110,593 (39,110)
Changes net of acquisitions:
Net increase in deposits......................... 106,955 68,574
Purchase of treasury stock....................... (3,689) (1,552)
Proceeds from sale of treasury stock............. 100 315
Net cash provided (used) by financing
activities................................ 170,309 (41,145)
Net increase in cash and cash equivalents... 13,349 16,114
Cash and cash equivalents at January 1............. 67,181 66,055
Cash and cash equivalents at September 30.......... $80,530 $82,169
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, 1996
(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, 1996 and the results of
operations for the three and nine month periods ended
September 30, 1996 and 1995, and statements of cash flows and
changes in shareholders' equity for the nine month periods ended
September 30, 1996 and 1995. The results of the three and nine
months ended September 30, 1996 and 1995 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)
1996 1995
Cash paid during the first nine
months of the year for:
Interest $63,008 $57,371
Income Taxes $ 9,350 $10,298
Noncash investing and financing
activities:
ESOP borrowings $ -0- $ 500
ESOP loan reductions $ 804 $ 803
Gross increase (decrease) in
market value adjustment to
securities available for sale
pursuant to FAS No. 115 $ 30 $22,290
Loans transferred to other real
estate owned and repossessed
assets $ 2,127 $ 2,354
NOTE 3 New Accounting Pronouncements
The Corporation adopted the Financial Accounting Standards Board
Statement No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("FAS No.
121") effective January 1, 1996. This statement requires long-
lived assets, such as premises and equipment and intangibles to
be reviewed for impairment whenever events or changes in
circumstances, such as a significant decrease in the market value
of an asset or the extent or manner in which an asset is used
indicate that the carrying amount of an asset may not be
recoverable. If there is an indication that the carrying amount
of an asset may not be recoverable, future cash flows expected to
result from the use of the asset are estimated. If the sum of
the expected cash flows is less than the carrying value of the
asset a loss is recognized for the difference between the
carrying value and fair market value of the asset. Adoption of
this statement did not have a material impact on the
Corporation's financial condition or results of operations.
7<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
NOTE 3 New Accounting Pronouncements (Continued)
Effective January 1, 1996 the Corporation adopted the Financial
Accounting Standards Board Statement No. 122 "Accounting for
Mortgage Servicing Rights an amendment of FASB Statement No. 65"
("FAS No. 122"). This statement eliminates the accounting
distinction between rights to service mortgage loans for others
that are acquired through loan origination activities from those
servicing rights acquired through purchase transactions. When a
mortgage banking enterprise purchases or originates mortgage
loans with a definitive plan to sell or securitize those loans
and retain the mortgage servicing rights, the Corporation must
measure the mortgage servicing rights at cost by allocating the
cost of the mortgage loans between the mortgage servicing rights
and the mortgage loans (without the mortgage servicing rights)
based on their relative fair values at the date of purchase or
origination. When the mortgage banking enterprise does not have
a definitive plan at the purchase or origination date and later
sells or securitizes the mortgage loans and retains the mortgage
servicing rights, the Corporation must allocate the amortized
cost of the mortgage loans between the mortgage servicing rights
and the mortgage loans (without mortgage servicing rights) based
on their relative fair values at the date of sale. The amount
capitalized as the right to service mortgage loans is recognized
as a separate asset and amortized in proportion to, and over the
period of, estimated net servicing income (servicing revenue in
excess of servicing cost). FAS No. 122 also requires mortgage
servicing rights to be periodically evaluated for impairment
based on fair values. The adoption of FAS No. 122 did not have a
material impact on the Corporation's financial condition or
results of operations.
The Corporation adopted the Financial Accounting Standards Board
Statement No. 123 "Accounting for Stock Based Compensation" ("FAS
No. 123") effective January 1, 1996. This statement defines a
method of measuring stock based compensation, such as stock
options granted, at an estimated fair value. FAS No. 123 also
permits the continued measurement of stock based compensation
under provisions of the Accounting Practice Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25").
Corporations electing to measure stock based compensation under
APB 25 are required to disclose, in a footnote to the financial
statements, net income and earnings per share determined as if
the fair value methodology of FAS No. 123 was implemented. The
Corporation granted 195,048 stock options during the second
quarter of 1996 and will provide footnote disclosures required by
FAS No. 123 in the Corporation's annual financial statements, as
interim disclosures are not required. The adoption of FAS No.
123 did not have a material impact on the Corporation's financial
condition or results of operations.
8<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
NOTE 4 Business Combination
Effective April 1, 1996 the Corporation acquired all of the
outstanding common stock of BSI Financial Services Inc.("BSI"),
headquartered in Titusville, PA for cash and stock consideration
aggregating $1.2 million. BSI provides mortgage banking, loan
servicing and collection services to the Corporation's subsidiary
banks as well as unaffiliated organizations. The acquisition was
accounted for as a purchase transaction, whereby the identifiable
tangible and intangible assets and liabilities of BSI were
recorded at their fair values at the acquisition date. Under the
purchase method of accounting, the results of operations of BSI
from the date of acquisition are included in the Corporation's
financial statements.
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
First Nine Months of 1996 as Compared to the First Nine Months of
1995
Net income in the nine months of 1996 was $19.9 million and can
be compared to $19.7 million for the nine months of 1995. Both
the 1996 and 1995 periods include nonrecurring adjustments to the
Corporation's Federal Deposit Insurance costs. The 1996 period
includes an additional one-time assessment against the
Corporation's thrift deposits of $768 thousand as a result of the
Savings and Loan Insurance Fund (SAIF) remaining underfunded
while the 1995 related period includes a rebate of $1.1 million
of deposit insurance costs to the Corporation's commercial
banking subsidiaries as a result of the Federal Deposit Insurance
Corporation's Bank Insurance Fund (BIF) reaching its regulatory
cap. These adjustments have been made to enable banks and
thrifts to pay equal deposit insurance rates in the future. BIF
insured institutions will pay an annual rate of approximately
$1.29 cents per $100 of deposits while SAIF insured institutions
will pay approximately $6.44 cents per $100 annually for the
years 1997 through 1999. It is anticipated that beginning in the
year 2000 banks and thrifts will pay an equal rate of $2.43 cents
per $100 of deposits.
Earnings per share was $0.90 for both the 1996 and 1995 periods.
Excluding the impact of the FDIC and SAIF adjustments, earnings
for 1996 reflected an increase of $0.06 per share over 1995
levels. Return on average assets was 1.09% and return on average
equity was 10.34% during the 1996 period, compared to 1.14% and
11.07%, respectively during the same period of 1995.
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
$69.7 million for the nine months of 1996 compared to $69.8
million for the same period of 1995. Net interest margin (net
interest income, on a tax-equivalent basis, as a percentage of
average earning assets) for the 1996 period was 4.15%, reflecting
a decrease of 18 basis points (0.18%) from 4.33% reported in
1995.
Interest and fees on loans increased $6.1 million reflecting
volume increases in all loan categories as average total loans
for the nine months of 1996 increased $156.6 million over 1995
averages. Yields on loans for the nine months of 1996 decreased
by 33 basis points (0.33%) when compared to 1995 yields, as
yields on mortgage loans and time and demand loans decreased by
47 basis points (0.47%) and 35 basis points (0.35%) respectively
while installment loan yields increased by 12 basis points
(0.12%). The decline in mortgage loan yields is primarily the
short-term impact of low introductory rates offered on innovative
new loan products while the decline in time and demand loan
yields can mainly be attributed to the repricing of prime and
10<PAGE>
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
First Nine Months of 1996 as Compared to the First Nine Months of
1995 (Continued)
other variable rate loans at lower rates during 1996 than the
rates for the corresponding 1995 period. Yields on investments
remained stable for the 1996 period reflecting a decline of 3
basis points (0.03%) over 1995 yields.
Interest on deposits increased $5.3 million for the 1996 period
compared to 1995, reflecting both increases due to volume of $3.7
million and increases due to rate of 1.6 million. Total cost of
deposits increased 14 basis points (0.14%) over the 1995 level
and included cost increases of 19 basis points (0.19%) and 8
basis points (0.08%) for total savings deposits and total time
deposits, respectively. Rate increases for savings can primarily
be attributed to new savings products bearing higher interest
rates than standard savings accounts. These new savings products
have been designed to build long-term customer relationships and
are intended to produce a favorable impact on the Corporation's
net interest margin over the long-term.
Interest expense on short-term borrowings decreased $1.6 million
compared to the 1995 period, primarily as a result of a
de-leveraging strategy during the second quarter of 1995,
combined with the Corporation's ability to fund loan growth from
deposits. Average loans for the nine months of 1996 increased
$157 million over 1995 levels while average deposits increased by
$111 million when compared to 1995 averages.
Average interest-earning assets were 95.5% of average total
assets in the 1996 period and 95.0% during the 1995 time frame.
Average interest-bearing liabilities decreased as a percentage of
average total assets to 80.4% for the 1996 period compared to
80.9% during the related 1995 period.
The provision for possible credit losses was $3.2 million for the
nine month period of 1996 compared to $2.4 million during the
1995 period. Net charge-offs against the allowance for possible
credit losses were $2.1 million in the 1996 period and $2.2
million in the 1995 period. The 1996 reduction in net charge-
offs included a decline in net charge-offs for commercial loans
not secured by real estate of $488 thousand and an increase in
net charge-offs for loans to individuals of $565 thousand
compared to 1995. See the "Credit Review" section for an
analysis of the quality of the loan portfolio.
11<PAGE>
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
First Nine Months of 1996 as Compared to the First Nine Months of
1995 (Continued)
Below is an analysis of the consolidated allowance for possible
credit losses for the nine month periods ended September 30, 1996
and 1995.
1996 1995
Balance January 1, $18,152 $17,337
Loans charged off:
Commercial, financial and
agricultural 287 831
Real estate-construction -0- -0-
Real estate-commercial 20 184
Real estate-residential 73 289
Loans to individuals 2,263 1,553
Lease financing receivables 25 40
Total loans charged off 2,668 2,897
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 60 114
Real estate-construction -0- -0-
Real estate-commercial 83 28
Real estate-residential 31 44
Loans to individuals 360 386
Lease financing receivables 2 94
Total recoveries 536 666
Net charge offs 2,132 2,231
Provision charged to operations 3,150 2,445
Balance September 30, $19,170 $17,551
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)
First Nine Months of 1996 as Compared to the First Nine Months of
1995 (Continued)
Other operating income increased $1.6 million in 1996 to $9.1
million. Net securities losses were $48 thousand during the 1996
period compared to securities losses of $604 thousand during the
1995 related period. 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 resulted in a net improvement in
net interest income over the remaining life of the securities in
excess of the net loss on the sale. Other income was $3.2
million in the 1996 period, an increase of $918 thousand over the
$2.3 million reported in 1995. The most notable components of
the increase in other income were increased merchant fees on
debit card transactions and the inclusion of BSI results
beginning April 1, 1996. BSI loan origination, collection and
servicing revenue increased other income by $408 thousand for the
1996 period when compared to 1995. Additional increases in other
income during the 1996 period occurred in gains on the sale of
loans and other assets and income from the Corporation's credit
life insurance subsidiary which reflected increases of $160
thousand and $132 thousand respectively over the corresponding
period of 1995.
Noninterest expense was $47.2 million in the nine months of 1996
which reflected an increase of $1.7 million over the 1995 period.
Total noninterest expense was 2.59% of average assets during the
1996 period compared to 2.62% for the 1995 related time frame.
Employee costs were $24.6 million in 1996, representing 1.35% of
average assets on an annualized basis compared to $23.9 million
and 1.37% of average assets on an annualized basis for 1995.
Inclusion of BSI in the 1996 period accounted for $353 thousand
of the $762 thousand total increase in employee costs for the
1996 period. A shift in full time equivalent employees during
1996 occurred from back office positions to customer contact
positions, most notably staffing levels of the Corporation's
"Convenience Banking Center". This center is open for extended
hours during the week and on weekends to provide customers with a
wide array of financial services though the use of telephone
banking. Employee benefit costs in the 1996 period also reflect
an increase in the employer's matching contribution for the
Corporation's 401(k) plan to 80% of the amount contributed by the
employee, up from 60% in 1995. Employee benefit cost increases
for 1996 were partially offset by a reduction in hospitalization
costs as a result of the Corporation's conversion to a managed
health care plan effective in January which reduced costs by $196
when compared to 1995.
Other operating expenses increased $1.4 million in 1996 to $14.6
million. Telephone cost increases of $285 thousand reflected
usage increases for both voice and data lines partially offset by
rate decreases. Aggressive marketing of innovative new products
and services resulted in increases of $218 thousand in
advertising expenses and $63 thousand in promotional expenses for
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)
First Nine Months of 1996 as Compared to the First Nine Months of
1995 (Continued)
the nine months of 1996. Additional cost increases occurred in
stationery and supplies, filing and recording fees and printing
which incurred increases of $215 thousand, $196 thousand and $80
thousand respectively over the nine months of 1995. The cost of
processing debit and credit cards increased $229 thousand during
the 1996 period. These expenses are not expected to grow as
rapidly over the rest of 1996. Other professional fees increased
$235 thousand for the nine months of 1996 compared to 1995 as a
result of the use of outside consultants to help analyze and
implement standardized fee schedules.
Income tax expense was $8.7 million during the nine months of
1996 compared to $9.6 million during the 1995 period. Income
before taxes decreased $804 thousand in the 1996 period when
compared to the corresponding period of 1995. The Corporation's
effective tax rate was 30.5% for the 1996 period and compared to
32.8% for 1995, reflecting an increase in tax-free income.
Three Months ended September 30, 1996 as Compared to the Three
Months Ended September 30, 1995
Net income was $5.9 million for the third quarter of 1996, a
decrease of $1.6 million over the same quarter of 1995. Earnings
per share was $0.27 during the 1996 quarter and can be compared
to $0.34 for the same period of 1995. The FDIC deposit insurance
assessment described previously, increased by $861 thousand for
the third quarter of 1996 up from a credit of $17 thousand
reported for the 1995 quarter.
Interest income increased $1.3 million in the third quarter of
1996 reflecting increased interest income on loans partially
offset by a decrease in interest income on Federal funds sold.
The decrease in income on Federal funds sold for the 1996 quarter
was primarily a result of volume decreases. Loan volumes for the
1996 period resulted in increased interest income on loans even
though loan yields for the 1996 quarter reflected decreases of 68
basis points (0.68%) compared to the third quarter of 1995.
Average loans outstanding for the third quarter of 1996 were
$212.7 million higher than 1995 averages as all loan types
reflected growth but most notable were mortgage loans which grew
$104.8 million over 1995 averages for nine months. Yields on
mortgage loans and time and demand loans decreased by 80 basis
points (0.80%) and 49 basis points (0.49%) respectively. The
decline in mortgage loan yields is primarily the short-term
impact of low introductory rates offered on innovative new loan
products while the decline in time and demand loan yields can
mainly be attributed to the repricing of prime and other variable
rate loans at lower rates during 1996 than the rates for the
corresponding 1995 period. The yield on the new mortgage product
is expected to begin to rise dramatically beginning in the fourth
quarter of 1997.
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)
Three Months ended September 30, 1996 as Compared to the Three
Months Ended September 30, 1995
Interest expense on deposits increased $1.2 million for the third
quarter of 1996 when compared to the 1995 quarter primarily a
result of increased deposit balances. The cost of deposits
increased by 3 basis points (0.03%) and included an increase of
21 basis points (0.21%) for total savings deposits combined with
a decrease of 8 basis points (0.08%) for time deposits. A
reduction in the short-term borrowing rate of 26 basis points
(0.26%) for the 1996 quarter was offset by increased borrowings
of $72.2 million in average balances for the third quarter of
1996 compared to 1995 quarter to date averages. Interest expense
on short-term borrowings for the three months of 1996 increased
$878 thousand over the three months of 1995. Net interest margin
was 3.96% for the 1996 quarter compared to 4.38% during the 1995
period.
Provision for possible credit losses was $1.2 million for the
three months ended September 30, 1996 and compared to $815
thousand for the three months ended September 30, 1995. Net
loans charged off in the third quarter of 1996 were $896
thousand, an increase of $315 thousand from net charge-offs of
$581 thousand reported for the corresponding period of 1995.
Salaries and employee benefits increased by $414 thousand for the
1996 quarter over the three months of 1995. Inclusion of BSI for
the three months of 1996 accounted for nearly half of this
increase. As described previously employee benefit costs in the
1996 period also reflect an increase in the employers matching
contribution for the Corporation's 401(k) plan to 80% of the
amount contributed by the employee up from 60% in 1995. The
Corporation's 401(k) expenses increased by $97 thousand for the
quarter.
Occupancy and furniture and equipment cost increases for the 1996
quarter totalling $272 thousand can primarily be attributed to
the preparation of facilities to be used for centralization of
various functional areas of the Corporation such as loan
operations, accounting, human resources and marketing. These
functional areas of the Corporation are being redesigned to more
efficiently support the new organizational structure resulting
from the merger of eight commercial bank subsidiaries into a
single operating unit during 1995.
Other operating expenses for the third quarter of 1996 reflected
increases in filing and recording fees, stationery and supplies,
promotions and telephone expenses of $118 thousand, $114
thousand, $138 thousand and $109 thousand respectively, compared
to the third quarter of 1995. Income taxes decreased $1.4
million for the third quarter of 1996 primarily as a result of a
decrease in income which was combined with an increase in the
level of tax free income over 1995 levels. The Corporation's
effective tax rate was 28.8% for the 1996 period and compared to
33.3% for the 1995 period.
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)
LIQUIDITY
Liquidity is a measure of the Corporation's ability to
efficiently meet normal cash flow requirements of both borrowers
and depositors. 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,
borrowings through the use of lines available for repurchase
agreements, and borrowings from the Federal Reserve Bank.
Additionally, the banking subsidiaries are members of the Federal
Home Loan Bank and may borrow up to ten percent of their total
assets at any one time. The sale of earning assets may also
provide an additional source of liquidity.
Net loans increased $199.6 million in the first nine months of
1996 as specialized loan products and target marketing strategies
generated results. Residential mortgages increased by $106.8
million during the nine months of 1996 while loans to individuals
increased by $36.2 million. Loan growth for the period was
funded primarily by deposit growth. Total deposits grew $115.3
million and reflected increases in time deposits of $87.1 million
combined with increases in demand deposits and savings of $11.7
million and $16.5 million respectively. Growth in time deposits
occurred primarily in maturity ranges of 36 to 59 months.
Marketable securities that the Corporation holds in its
investment portfolio are an additional source of liquidity.
These securities are classified as "securities available for
sale" and while the Corporation does not have specific intentions
to sell these securities they have been designated as "available
for sale" because they may be sold for the purpose of obtaining
future liquidity, for management of interest rate risk or as part
of the implementation of tax management strategies. As of
September 30, 1996 securities available for sale had an amortized
cost of $249.6 million and an approximate fair value of $250.7
million.
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")
exceed 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.
16<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest Sensitivity (Continued)
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.
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.
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, 1996 and December 31, 1995.
September 30, 1996
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 643,445 $ 97,243 $163,566 $ 904,254
Investments.............. 18,264 18,515 76,046 112,825
Other interest-earning
assets.................. 102,846 6,070 14,213 123,129
Total interest-sensitive
assets................ 764,555 121,828 253,825 1,140,208
Certificates of deposits. 209,412 180,171 227,708 617,291
Other deposits........... 696,773 -0- -0- 696,773
Borrowings............... 175,338 16,440 13,353 205,131
Total interest-sensitive
liabilities........... 1,081,523 196,611 241,061 1,519,195
GAP.................... $(316,968) $(74,783) $ 12,764 $ (378,987)
ISA/ISL.................. 0.71 0.62 1.05 0.75
Gap/Total assets......... 12.36% 2.92% 0.50% 14.78%
December 31, 1995
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 515,833 $ 82,754 $167,780 $ 766,367
Investments.............. 18,351 33,319 42,960 94,630
Other interest-earning
assets.................. 91,408 6,698 6,272 104,378
Total interest-sensitive
assets................ 625,592 122,771 217,012 965,375
Certificates of deposits. 223,659 130,053 257,833 611,545
Other deposits........... 680,303 -0- -0- 680,303
Borrowings............... 102,527 10,164 6,838 119,529
Total interest-sensitive
liabilities........... 1,006,489 140,217 264,671 1,411,377
GAP....................$ (380,897) $(17,446) $(47,659) $ (446,002)
ISA/ISL.................. 0.62 0.88 0.82 0.68
Gap/Total assets......... 16.11% 0.74% 2.02% 18.86%
17<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest Sensitivity (continued)
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.
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 lag in a deposit rate increase. The
repricing strategies for loans would be inversely related.
The analysis at September 30, 1996, 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.
18<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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,
1996 1995
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 7,424 $ 6,876
Past due loans 12,676 8,578
Renegotiated loans 283 294
Total nonperforming loans $ 20,383 $ 15,748
Other real estate owned $ 1,827 $ 2,235
Loans outstanding at end of period $1,688,146 $1,445,084
Average loans outstanding (year-to-date) $1,563,576 $1,406,998
Nonperforming loans as percent of
total loans 1.21% 1.09%
Provision for possible credit losses $ 3,150 $ 2,445
Net charge-offs $ 2,132 $ 2,231
Net charge-offs as percent of
average loans 0.14% 0.16%
Provision for possible credit losses as
percent of net charge-offs 147.75% 109.59%
Allowance for possible credit losses as
percent of average loans outstanding 1.23% 1.25%
Allowance for possible credit losses as
percent of nonperforming loans 94.05% 111.45%
19<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 September 30, 1996,
there were no significant concentrations of credit.
Nonperforming loans at September 30, 1996 increased $4.6 million
over 1995 levels primarily as a result of increases in past due
commercial and residential loans secured by real estate.
Although the ratio of the allowance for possible credit losses as
a percent of nonperforming loans is lower than the Corporation's
peers at September 30, 1996, other factors should be considered
such as historical net charge offs, and the composition of the
loan portfolio. These were favorable when compared to peer group
levels over the past five years. The provision for possible
credit losses for the nine months of 1996 exceeds that reported
for 1995 while net charge-offs have declined, resulting in an
increase in the provision for possible credit losses as a percent
of net charge-offs. Management believes that the allowance for
possible credit losses and nonperforming loans remain safely
within acceptable levels during 1996.
The Corporation considers a loan to be impaired when, based on
current information and events, it is probable that the
Corporation will be unable to collect principal or interest due
according to the contractual terms of the loan. Loan impairment
is 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.
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 the
expected cash flows, income is recorded on a cash basis.
As of September 30, 1996, the Corporation had a recorded
investment in impaired loans of $7.7 million which included loans
on a nonaccrual basis and renegotiated loans. The average
balance of impaired loans for the nine month period was $8.2
million. An allocation of the allowance for possible credit
losses in the amount of $1.5 million relates to $4.5 million of
the impaired loans. Impaired loans totalling $3.2 million have
no allocation of the allowance, in accordance with the Financial
Accounting Standards Board Statement No. 118 "Accounting by
Creditors for Impairment of a Loan Income Recognition and
Disclosures." Income earned on impaired loans during the first
nine months of 1996 was $74 thousand.
20<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 $5.2 million in the first nine months of
1996. Dividends declared reduced equity by $12.0 million over
the 1996 period while earnings retention was $7.9 million,
representing an earnings retention rate of 39.5%. The retained
net income remains in permanent capital to fund future growth and
expansion. Payments by the Corporation's Employee Stock
Ownership Plan (the "ESOP") to reduce debt it incurred to acquire
the Corporation's common stock for future distribution as
employee compensation, net of fair value adjustments to Unearned
ESOP shares, increased equity by $867 thousand. Amounts paid to
fund the discount on reinvested dividends and optional cash
payments reduced equity by $377 thousand. The market value
adjustment to securities available for sale increased equity by
$19 thousand. The cost of purchasing treasury shares net of the
reissuance of treasury shares, decreased equity by $3.1 million.
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.
21<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 (Continued)
The table below presents the Corporation's capital position at
September 30, 1996:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $244,121 14.8%
Risk-Based Requirement 65,988 4.0
Total Capital 263,434 16.0
Risk-Based Requirement 131,976 8.0
Minimum Leverage Capital 244,121 9.8
Minimum Leverage Requirement 99,614 4.0
At September 30, 1996 the Corporation and its banking
subsidiaries are considered well capitalized as defined by the
Federal Deposit Insurance Corporation Improvement Act of 1991.
22<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceedings to which
the Corporation or its subsidiaries are a party, or
of which any of their property is the subject,
except proceedings which arise in the normal course
of business and, in the opinion of management, will
not have a material adverse effect on the
consolidated operations or financial position of the
Corporation and its subsidiaries.
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
None
23 <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 12, 1996 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: NOVEMBER 12, 1996 /S/ John J. Dolan
John J. Dolan, Sr. Vice President,
Comptroller, and Chief Financial
Officer
24
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 80,530
<INT-BEARING-DEPOSITS> 5,021
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 250,718
<INVESTMENTS-CARRYING> 481,894
<INVESTMENTS-MARKET> 476,256
<LOANS> 1,723,317
<ALLOWANCE> 19,170
<TOTAL-ASSETS> 2,564,845
<DEPOSITS> 2,078,014
<SHORT-TERM> 200,132
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0
0
<COMMON> 22,437
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<INTEREST-TOTAL> 45,550
<INTEREST-DEPOSIT> 20,366
<INTEREST-EXPENSE> 22,653
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<EXPENSE-OTHER> 16,734
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<INCOME-PRE-EXTRAORDINARY> 5,862
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<LOANS-NON> 7,424
<LOANS-PAST> 12,676
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