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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 June 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 August 12, 1996 was 22,229,200.
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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 . . . . . . . . . . . . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
June 30, December 31,
1996 1995
ASSETS
Cash and due from banks on demand.... $ 75,008 $ 62,381
Interest-bearing deposits with banks. 7,024 8,288
Federal funds sold .................. -0- 4,800
Securities available for sale, at
market.............................. 252,778 244,193
Securities held to maturity, at cost,
(market value $490,479 in 1996 and
$503,568 in 1995).................. 499,825 504,509
Loans................................ 1,633,175 1,531,174
Unearned income.................... (39,663) (43,632)
Allowance for possible credit losses (18,866) (18,152)
Net loans....................... 1,574,646 1,469,390
Property and equipment............... 30,857 29,435
Other real estate owned.............. 1,495 1,408
Other assets......................... 43,474 39,903
TOTAL ASSETS.................... $2,485,107 $2,364,307
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 217,292 $ 200,939
Interest-bearing................... 1,836,657 1,761,821
Total deposits.................. 2,053,949 1,962,760
Short-term borrowings................ 149,173 120,774
Other liabilities.................... 22,741 23,236
Long-term debt....................... 4,725 5,261
Total liabilities............... 2,230,588 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; 22,244,980
and 22,371,626 shares outstanding in
1996 and 1995 respectively......... 22,437 22,437
Additional paid-in capital........... 76,969 77,226
Retained earnings.................... 163,566 157,576
Unrealized gain (loss) on securities
available for sale, net of taxes... (1,088) 511
Treasury stock (191,648 shares at
June 30, 1996 and 65,002 at
December 31, 1995, at cost)........ (3,356) (929)
Unearned ESOP shares................. (4,009) (4,545)
Total shareholders' equity......... 254,519 252,276
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $2,485,107 $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 6 Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Interest Income
Interest and fees on loans....... $33,622 $31,799 $66,719 $62,512
Interest and dividends on investments:
Taxable interest............... 9,717 10,831 19,567 21,840
Interest exempt from Federal
income taxes.................. 899 704 1,697 1,459
Dividends...................... 319 244 650 482
Interest on Federal funds sold... 22 137 82 170
Interest on bank deposits........ 115 104 249 274
Total Interest Income......... 44,694 43,819 88,964 86,737
Interest Expense
Interest on deposits............. 19,649 18,155 39,074 34,993
Interest on short-term borrowings 1,534 2,345 2,850 5,292
Interest on long-term debt....... 98 165 202 328
Total Interest Expense........ 21,281 20,665 42,126 40,613
Net interest income................ 23,413 23,154 46,838 46,124
Provision for possible loan losses 1,050 837 1,950 1,630
Net interest income after provision
for possible loan losses......... 22,363 22,317 44,888 44,494
Other Income
Securities gains (losses)........ (57) (628) (49) (604)
Trust income..................... 562 566 1,178 1,124
Service charges on deposits...... 1,401 1,410 2,763 2,724
Other income..................... 1,029 933 1,984 1,578
Total Other Income............ 2,935 2,281 5,876 4,822
Other Expenses
Salaries and employee benefits... 8,042 7,978 16,228 15,880
Net occupancy expense............ 1,106 1,066 2,296 2,173
Furniture and equipment expense.. 1,154 1,016 2,223 2,016
FDIC expense..................... 67 1,065 139 2,130
Other operating expenses......... 5,059 4,580 9,535 8,923
Total Other Expenses.......... 15,428 15,705 30,421 31,122
Income before taxes................ 9,870 8,893 20,343 18,194
Applicable income taxes.......... 2,982 2,898 6,342 5,909
Net Income......................... $ 6,888 $ 5,995 $14,001 $12,285
Average Shares Outstanding.........21,925,789 21,979,014 21,965,323 21,980,854
Per Share Data:
Net income....................... $ 0.31 $ 0.27 $ 0.64 $ 0.56
Cash dividends per share......... $ 0.18 $ 0.16 $ 0.36 $ 0.32
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- 12,285 -0- -0- -0- 12,285
Cash dividends declared....... -0- -0- (7,156) -0- -0- -0- (7,156)
Change in market value of
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
Balance at December 31, 1995.... $22,437 $77,226 $157,576 $ 511 $(4,545) $ (929) $252,276
Net income.................... -0- -0- 14,001 -0- -0- -0- 14,001
Cash dividends declared....... -0- -0- (8,011) -0- -0- -0- (8,011)
Change in market value of
securities available for sale,
net of tax effect........... -0- -0- -0- (1,599) -0- -0- (1,599)
Decrease in unearned ESOP shares -0- 20 -0- -0- 536 -0- 556
Discount on dividend reinvestment
plan purchases.............. -0- (245) -0- -0- -0- -0- (245)
Treasury stock acquired....... -0- -0- -0- -0- -0- (2,943) (2,943)
Treasury stock reissued....... -0- (32) -0- -0- -0- 516 484
Balance at June 30, 1996........ $22,437 $76,969 $163,566 $ (1,088) $(4,009) $(3,356) $254,519
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 6 Months
Ended June 30,
1996 1995
Operating Activities
Net income....................................... $14,001 $12,285
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses.......... 1,950 1,630
Depreciation and amortization................. 2,329 2,501
Net (losses) gains on sales of assets......... (270) 499
Decrease (increase) in interest receivable.... (326) 547
Increase in interest payable.................. 1,002 2,720
Decrease in income taxes payable.............. (695) (14)
Change in deferred taxes...................... 222 (242)
Other-net..................................... (2,944) (3,347)
Net cash provided by operating activities... 15,269 16,579
Investing Activities
Transactions with securities held to maturity:
Proceeds from Sales........................... -0- -0-
Proceeds from maturities and redemptions...... 47,135 21,636
Purchases..................................... (42,164) (7,138)
Transactions with securities available for sale:
Proceeds from sales........................... 12,812 76,170
Proceeds from maturities and redemptions...... 32,522 26,302
Purchases..................................... (56,824) (15,105)
Proceeds from sales of loans and other assets.... 8,810 8,499
Acquisition of affiliate and branch, net of cash
received........................................ 7,836 -0-
Changes net of acquisitions:
Net decrease in time deposits with banks......... 1,265 6,843
Net increase in loans............................ (115,868) (49,977)
Purchases of premises and equipment.............. (3,068) (1,847)
Net cash provided (used) by investing
activities................................... (107,544) 65,383
Financing Activities
Repayments of long-term debt..................... -0- (8)
Discount on dividend reinvestment plan purchases. (245) (155)
Dividends paid................................... (8,034) (7,166)
Net decrease in Federal funds purchased.......... (31,235) (47,200)
Net increase (decrease) in other short-term
borrowings...................................... 59,635 (36,573)
Changes net of acquisitions:
Net increase in deposits......................... 82,885 36,308
Purchase of treasury stock....................... (2,943) (1,459)
Proceeds from sale of treasury stock............. 39 302
Net cash provided (used) by financing
activities................................ 100,102 (55,951)
Net increase (decrease) in cash and cash
equivalents............................... 7,827 26,011
Cash and cash equivalents at January 1............. 67,181 66,055
Cash and cash equivalents at June 30............... $75,008 $92,066
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
June 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 June 30, 1996 and the results of
operations for the three and six month periods ended June 30,
1996 and 1995, and statements of cash flows and changes in
shareholders' equity for the six month periods ended June 30,
1996 and 1995. The results of the three and six months ended
June 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 six
months of the year for:
Interest $41,125 $37,893
Income Taxes $ 6,800 $ 6,051
Noncash investing and financing
activities:
ESOP borrowings $ -0- $ 500
ESOP loan reductions $ 536 $ 535
Gross increase (decrease) in
market value adjustment to
securities available for sale
pursuant to FAS No. 115 $(2,460) $20,582
Loans transferred to other real
estate owned and repossessed
assets $ 1,456 $ 1,844
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
June 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
June 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 Six Months of 1996 as Compared to the First Six Months of
1995
Net income in the six months of 1996 was $14.0 million, an
increase of $1.7 million over the 1995 level of $12.3 million.
Earnings per share was $0.64 for the six months of 1996
reflecting an increase of $0.08 over the 1995 level of $0.56.
Return on average assets was 1.18% and return on average equity
was 10.99% during the 1996 period, compared to 1.06% and 10.56%,
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
$46.8 million for the six months of 1996 compared to $46.1
million for 1995. Both interest income and interest expense for
1996 increased over 1995 levels, reflecting increased volumes for
both interest-earning assets and interest-bearing liabilities.
Net interest margin (net interest income, on a tax-equivalent
basis, as a percentage of average earning assets) for the 1996
period was 4.25%, reflecting a decrease of 6 basis points (0.06%)
from 4.31% reported in 1995.
Interest and fees on loans increased $4.2 million, while interest
income on investments decreased $1.9 million when compared to the
corresponding period of 1995, primarily as a result of volume
increases in loans and decreases in investments. Yields on
investments remained stable for the 1996 period reflecting a
decline of 2 basis points (0.02%) over 1995 yields. Loan yields
began to be impacted by the maturity of long-term loans bearing
interest rates which were higher than current market rates,
combined with the short-term impact of low introductory rates
offered on innovative new loan products.
Interest on deposits increased $4.1 million for the 1996 period
compared to 1995, reflecting both increases due to volume and
increases due to rate. Total cost of deposits increased 17 basis
points (0.17%) over the 1995 period as a result of increases in
all categories of certificates of deposit, but most notably those
with maturities ranging from 24 to 35 months. Interest expense
on short-term borrowings decreased $2.4 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 six months of 1996 increased $127 million over 1995
levels while average deposits increased by $111 million when
compared to 1995 averages.
Average interest-earning assets were 95.6% 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 80.3% for the 1996 period compared to
81.2% during the related 1995 period.
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 1996 as Compared to the First Six Months of
1995 (Continued)
The provision for possible credit losses was $2.0 million for the
six month period of 1996 compared to $1.6 million during the 1995
period. Net charge-offs against the allowance for possible
credit losses were $1.2 million in the 1996 period and $1.7
million in the 1995 period. The 1996 decline in net charge-offs
occurred primarily in commercial loans not secured by real estate
which declined by $541 thousand compared to 1995. See the
"Credit Review" section for an analysis of the quality of the
loan portfolio.
Below is an analysis of the consolidated allowance for possible
credit losses for the six month periods ended June 30, 1996 and
1995.
1996 1995
Balance January 1, $18,152 $17,337
Loans charged off:
Commercial, financial and
agricultural 146 725
Real estate-construction -0- -0-
Real estate-commercial -0- 155
Real estate-residential 47 180
Loans to individuals 1,348 1,030
Lease financing receivables 24 26
Total loans charged off 1,565 2,116
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 46 84
Real estate-construction -0- -0-
Real estate-commercial 20 16
Real estate-residential 15 31
Loans to individuals 247 244
Lease financing receivables 1 91
Total recoveries 329 466
Net charge offs 1,236 1,650
Provision charged to operations 1,950 1,630
Balance June 30, $18,866 $17,317
11<PAGE>
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
First Six Months of 1996 as Compared to the First Six Months of
1995 (Continued)
Other operating income increased $1.1 million in 1996 to $5.9
million. Net securities losses were $49 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 $2.0
million in the 1996 period, an increase of $406 thousand over the
$1.6 million reported in 1995. The most notable components of
the increase in other income were gains on sale of loans
totalling $162 thousand and the inclusion of BSI results
beginning April 1, 1996. BSI loan origination, collection and
servicing revenue increased other income by $176 thousand for the
1996 period when compared to 1995.
Noninterest expense was $30.4 million in the six months of 1996
which reflected a decrease of $701 thousand over the 1995 period.
Total noninterest expense was 2.56% of average assets during the
1996 period compared to 2.69% for the 1995 related time frame.
The major component of this decrease was the deposit insurance
assessment from the Federal Deposit Insurance Corporation
("FDIC") which decreased by $2.0 million in 1996 to $139 thousand
from $2.1 million reported in 1995. The 1996 amount represents
the minimum FDIC assessment for the Corporation's commercial bank
subsidiary combined with a regular assessment against thrift
deposits of the Corporation. The additional one-time assessment
against the Corporation's thrift deposits, which was anticipated
as a result of the Savings and Loan Insurance Fund remaining
underfunded, has not yet been enacted.
Employee costs were $16.2 million in 1996, representing 1.36% of
average assets on an annualized basis compared to $15.9 million
and 1.37% of average assets on an annualized basis for 1995. 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 through the use of telephone banking.
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. 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 $143
when compared to 1995.
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 Six Months of 1996 as Compared to the First Six Months of
1995 (Continued)
Other operating expenses increased $612 thousand in 1996 to $9.5
million. Telephone cost increases of $175 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 an increase of $193 thousand in
advertising expenses for the six months of 1996. The merger of
the Corporation's eight commercial bank subsidiaries during the
fourth quarter of 1995 has begun to impact several expense
categories in the current period.
Income tax expense was $6.3 million during the six months of 1996
compared to $5.9 million during the 1995 period. Income before
taxes increased $2.1 million in the 1996 period when compared to
the corresponding period of 1995. The Corporation's effective
tax rate was 31.2% for the 1996 period and compared to 32.5% for
1995, reflecting an increase in tax-free income.
Three Months ended June 30, 1996 as Compared to the Three Months
Ended June 30, 1995
Net income was $6.9 million for the second quarter of 1996, an
increase of $893 thousand over the same quarter of 1995.
Earnings per share was $0.31 during the 1996 quarter and can be
compared to $0.27 for the same period of 1995. Net security
losses were $57 thousand during the 1996 period compared to
securities losses of $628 thousand during the 1995 related
period. The FDIC deposit insurance assessment described
previously, decreased by $998 thousand for the second quarter of
1996 down from $1.1 million reported for the 1995 quarter.
Interest income increased $874 thousand in the second quarter of
1996 reflecting increased interest income on loans combined with
decreased interest income on investments. The decrease in
investment income for the 1996 quarter was primarily a result of
volume decreases, as investment yields remained stable with a
reduction of 5 basis points (0.05%) compared to the same period
of 1995. Loan volumes for the 1996 period resulted in increased
interest income on loans even though loan yields for the 1996
quarter reflected decreases of 36 basis points (0.36%) compared
to the second quarter of 1995. Average loans outstanding for the
second quarter of 1996 were $148.2 million higher than 1995
averages. Total cost of funds remained flat for the 1996 quarter
and included deposit cost increases of 7 basis points (0.07%)
combined with a reduction in the short-term borrowing rate of 64
basis points (0.64%) when compared to the second quarter of 1995.
Net interest margin was 4.20% for the 1996 quarter compared to
4.30% during the 1995 period.
Provision for possible credit losses was $1.1 million for the
three months ended June 30, 1996 and compared to $837 thousand
for the three months ended June 30, 1995. Net loans charged of
in the second quarter of 1996 were $659 thousand, a reduction of
$188 thousand from net charge-offs of $847 thousand reported for
the corresponding period of 1995. The increase in the provision
for possible credit losses for the second quarter of 1996 can be
mainly attributed to loan growth.
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)
Three Months ended June 30, 1996 as Compared to the Three Months
Ended June 30, 1995 (Continued)
Occupancy and furniture and equipment cost increases for the 1996
quarter totalling $178 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 second quarter of 1996 reflected increases in advertising,
stationery and supplies and printing aggregating $363 thousand
compared to the second quarter of 1995. Income taxes increased
$84 thousand for the second quarter of 1996 primarily as a result
of an increase in income which was partially offset by an
increase in the level of tax free income over 1995 levels. The
Corporation's effective tax rate was 30.2% for the 1996 period
and compared to 32.6% for the 1995 period.
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 $105.3 million in the first six months of
1996 as specialized loan products and target marketing strategies
generated results. Residential mortgages increased by $60.4
million during the six months of 1996 while municipal loans and
commercial loans increased by $13.6 and $16.1 million
respectively. Loan growth for the period was funded primarily by
deposit growth. Total deposits grew $91.2 million and reflected
increases in time deposits of $53.3 million combined with
increases in demand deposits and savings of $16.4 million and
$21.6 million respectively. Growth in time deposits occurred
primarily in maturity ranges of 12 to 23 months and 36 to 59
months.
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)
LIQUIDITY (Continued)
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
June 30, 1996 securities available for sale had an amortized cost
of $254.1 million and an approximate fair value of $252.8
million. The difference between the amortized cost and
approximate fair value of securities available for sale is not of
major concern to management as the Corporation does not
anticipate a need to liquidate the investments until maturity.
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.
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.
15<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest Sensitivity (Continued)
The following table lists the amounts and ratios of assets and
liabilities with rates or yields subject to change within the
periods indicated as of June 30, 1996 and December 31, 1995.
June 30, 1996
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 690,894 $ 95,299 $154,497 $ 940,690
Investments.............. 47,919 17,147 50,926 115,992
Other interest-earning
assets.................. 12,783 2,222 4,908 19,913
Total interest-sensitive
assets................ 751,596 114,668 210,331 1,076,595
Certificates of deposits. 218,652 121,389 267,550 607,591
Other deposits........... 701,838 -0- -0- 701,838
Borrowings............... 134,011 5,715 12,892 152,618
Total interest-sensitive
liabilities........... 1,054,501 127,104 280,442 1,462,047
GAP.................... $(302,905) $(12,436) $(70,111) $ (385,452)
ISA/ISL.................. 0.71 0.90 0.75 0.74
Gap/Total assets......... 12.19% 0.50% 2.82% 15.51%
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%
The Corporation has not experienced the kind of earnings
volatility indicated from the gap analysis. This is because
assets and liabilities with similar contractual repricing
characteristics may not reprice at the same time or to the same
degree.
16<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest Sensitivity (continued)
Therefore, to more precisely measure the impact of interest rate
changes on the Corporation's net interest income, management
simulates the potential effects of changing interest rates
through computer modeling. The Corporation is then better able
to implement strategies which would include an acceleration of a
deposit rate reduction or lag in a deposit rate increase. The
repricing strategies for loans would be inversely related.
The analysis at June 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.
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,
1996 1995
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 7,920 $ 7,522
Past due loans 10,467 5,251
Renegotiated loans 286 626
Total nonperforming loans $ 18,673 $ 13,399
Other real estate owned $ 1,495 $ 2,519
Loans outstanding at end of period $1,593,512 $1,417,707
Average loans outstanding (year-to-date) $1,527,493 $1,399,246
Nonperforming loans as percent of
total loans 1.17% 0.95%
Provision for possible credit losses $ 1,950 $ 1,630
Net charge-offs $ 1,236 $ 1,650
Net charge-offs as percent of
average loans 0.08% 0.12%
Provision for possible credit losses as
percent of net charge-offs 157.77% 98.79%
Allowance for possible credit losses as
percent of average loans outstanding 1.24% 1.24%
Allowance for possible credit losses as
percent of nonperforming loans 101.03% 129.24%
17<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CREDIT 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, 1996, there
were no significant concentrations of credit.
Nonperforming loans at June 30, 1996 increased $5.3 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 June 30, 1996, 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. The provision for possible credit losses for the six
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 June 30, 1996, the Corporation had a recorded investment in
impaired loans of $8.2 million which included loans on a
nonaccrual basis and renegotiated loans. The average balance of
impaired loans for the six month period was $8.3 million. An
allocation of the allowance for possible credit losses in the
amount of $1.1 million relates to $4.8 million of the impaired
loans. Impaired loans totalling $3.4 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 six months of 1996 was
$53 thousand.
18<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES
Equity capital increased $2.2 million in the first six months of
1996. Dividends declared reduced equity by $8.0 million over the
1996 period while earnings retention was $6.0 million,
representing an earnings retention rate of 42.8%. 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 $556 thousand. Amounts paid to
fund the discount on reinvested dividends and optional cash
payments reduced equity by $245 thousand. The market value
adjustment to securities available for sale reduced equity by
$1.6 million. The cost of purchasing treasury shares net of the
reissuance of treasury shares, decreased equity by $2.5 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.
19<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
June 30, 1996:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $242,564 15.2%
Risk-Based Requirement 63,654 4.0
Total Capital 261,573 16.4
Risk-Based Requirement 127,309 8.0
Minimum Leverage Capital 242,564 10.0
Minimum Leverage Requirement 96,690 4.0
At June 30, 1996 the Corporation and its banking subsidiaries are
considered well capitalized as defined by the Federal Deposit
Insurance Corporation Improvement Act of 1991.
20<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
Form 8-k dated June 3, 1996 reporting that
the Corporation granted incentive stock
options.
21
<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 12, 1996 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: AUGUST 12, 1996 /S/ John J. Dolan
John J. Dolan, Sr. Vice President,
Comptroller, and Chief Financial
Officer
22
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 APR-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 75,008 75,008
<INT-BEARING-DEPOSITS> 7,024 7,024
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 252,778 252,778
<INVESTMENTS-CARRYING> 499,825 499,825
<INVESTMENTS-MARKET> 490,479 490,479
<LOANS> 1,633,175 1,633,175
<ALLOWANCE> 18,866 18,866
<TOTAL-ASSETS> 2,485,107 2,485,107
<DEPOSITS> 2,053,949 2,053,949
<SHORT-TERM> 149,173 149,173
<LIABILITIES-OTHER> 22,741 22,741
<LONG-TERM> 4,725 4,725
0 0
0 0
<COMMON> 22,437 22,437
<OTHER-SE> 232,082 232,082
<TOTAL-LIABILITIES-AND-EQUITY> 2,485,107 2,485,107
<INTEREST-LOAN> 33,622 66,719
<INTEREST-INVEST> 10,935 21,914
<INTEREST-OTHER> 137 331
<INTEREST-TOTAL> 44,694 88,964
<INTEREST-DEPOSIT> 19,649 39,074
<INTEREST-EXPENSE> 21,281 42,126
<INTEREST-INCOME-NET> 23,413 46,838
<LOAN-LOSSES> 1,050 1,950
<SECURITIES-GAINS> (57) (49)
<EXPENSE-OTHER> 15,428 30,421
<INCOME-PRETAX> 9,870 20,343
<INCOME-PRE-EXTRAORDINARY> 6,888 14,001
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,888 14,001
<EPS-PRIMARY> $0.31 $0.64
<EPS-DILUTED> $0.31 $0.64
<YIELD-ACTUAL> 4.20 4.25
<LOANS-NON> 7,920 7,920
<LOANS-PAST> 10,467 10,467
<LOANS-TROUBLED> 286 286
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 18,152 18,152
<CHARGE-OFFS> 1,565 1,565
<RECOVERIES> 329 329
<ALLOWANCE-CLOSE> 18,866 18,866
<ALLOWANCE-DOMESTIC> 0 0
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