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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, 1997
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, 1997 was 22,046,126.
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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 . . . . . . . . 9
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . 22
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
September 30, December 31,
1997 1996
ASSETS
Cash and due from banks on demand.... $ 65,771 $ 69,406
Interest-bearing deposits with banks. 1,825 4,199
Securities available for sale, at
market.............................. 266,959 244,415
Securities held to maturity, at cost,
(market value $491,266 in 1997 and
$457,189 in 1996).................. 489,761 459,746
Loans................................ 1,902,272 1,778,130
Unearned income.................... (20,428) (30,795)
Allowance for possible credit losses (19,409) (19,324)
Net loans....................... 1,862,435 1,728,011
Property and equipment............... 32,340 32,590
Other real estate owned.............. 1,802 1,647
Other assets......................... 51,197 44,624
TOTAL ASSETS.................... $2,772,090 $2,584,638
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 194,701 $ 200,473
Interest-bearing................... 2,027,533 1,904,310
Total deposits.................. 2,222,234 2,104,783
Short-term borrowings................ 189,943 150,330
Other liabilities.................... 30,135 27,287
Long-term debt....................... 60,668 40,880
Total liabilities............... 2,502,980 2,323,280
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; 22,051,026
and 22,194,426 shares outstanding in
1997 and 1996 respectively......... 22,437 22,437
Additional paid-in capital........... 76,144 76,664
Retained earnings.................... 179,043 168,711
Unrealized gain on securities
available for sale, net of taxes... 1,130 1,309
Treasury stock (385,602 shares at
September 30, 1997 and 242,202 at
December 31, 1996, at cost)........ (7,001) (4,289)
Unearned ESOP shares................. (2,643) (3,474)
Total shareholders' equity......... 269,110 261,358
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $2,772,090 $2,584,638
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,
1997 1996 1997 1996
Interest Income
Interest and fees on loans....... $39,627 $34,658 $115,559 $101,377
Interest and dividends on investments:
Taxable interest............... 10,068 9,498 28,212 29,065
Interest exempt from Federal
income taxes.................. 966 929 2,786 2,626
Dividends...................... 292 382 955 1,032
Interest on Federal funds sold... 4 1 10 83
Interest on bank deposits........ 36 82 213 331
Total Interest Income......... 50,993 45,550 147,735 134,514
Interest Expense
Interest on deposits............. 23,563 20,366 67,448 59,440
Interest on short-term borrowings 2,083 2,192 5,311 5,042
Interest on long-term debt....... 859 95 2,240 297
Total Interest Expense........ 26,505 22,653 74,999 64,779
Net interest income................ 24,488 22,897 72,736 69,735
Provision for possible credit
losses.......................... 1,791 1,200 4,422 3,150
Net interest income after provision
for possible credit losses........ 22,697 21,697 68,314 66,585
Other Income
Securities gains (losses)........ 3,193 1 5,990 (48)
Trust income..................... 670 533 2,061 1,711
Service charges on deposit
accounts........................ 1,425 1,496 4,270 4,259
Other income..................... 1,246 1,238 3,316 3,222
Total Other Income............ 6,534 3,268 15,637 9,144
Other Expenses
Salaries and employee benefits... 8,982 8,408 27,251 24,636
Net occupancy expense............ 1,242 1,171 3,775 3,467
Furniture and equipment expense.. 1,199 1,214 3,630 3,437
FDIC expense..................... 84 844 235 983
Other operating expenses......... 5,024 5,097 14,785 14,632
Total Other Expenses.......... 16,531 16,734 49,676 47,155
Income before taxes................ 12,700 8,231 34,275 28,574
Applicable income taxes.......... 3,989 2,369 10,685 8,711
Net Income......................... $ 8,711 $ 5,862 $23,590 $19,863
Average Shares Outstanding.........21,840,434 21,947,468 21,887,122 21,959,328
Per Share Data:
Net income....................... $ 0.40 $ 0.27 $ 1.08 $ 0.90
Cash dividends per share......... $ 0.20 $ 0.18 $ 0.60 $ 0.54
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
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, 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
Balance at December 31, 1996.... $22,437 $76,664 $168,711 $1,309 $(3,474) $(4,289) $261,358
Net income.................... -0- -0- 23,590 -0- -0- -0- 23,590
Cash dividends declared....... -0- -0- (13,258) -0- -0- -0- (13,258)
Change in market value of
securities available for sale,
net of tax effect........... -0- -0- -0- (179) -0- -0- (179)
Decrease in unearned ESOP shares -0- -0- -0- -0- 831 -0- 831
Discount on dividend reinvestment
plan purchases.............. -0- (488) -0- -0- -0- -0- (488)
Treasury stock acquired....... -0- -0- -0- -0- -0- (2,759) (2,759)
Treasury stock reissued....... -0- (32) -0- -0- -0- 47 15
Balance at September 30, 1997... $22,437 $76,144 $179,043 $1,130 $(2,643) $(7,001) $269,110
</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,
1997 1996
Operating Activities
Net income....................................... $23,590 $19,863
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses.......... 4,422 3,150
Depreciation and amortization................. 4,127 3,311
Net gains on sales of assets.................. (6,158) (271)
Increase in interest receivable............... (5,646) (143)
Increase in interest payable.................. 1,323 1,771
Increase in income taxes payable.............. 1,515 1,210
Change in deferred taxes...................... 0 (1,486)
Other-net..................................... (1,808) (4,024)
Net cash provided by operating activities... 21,365 23,381
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales........................... -0- -0-
Proceeds from Maturities and redemptions...... 75,599 65,359
Purchases..................................... (105,542) (42,428)
Transactions with securities available for sale:
Proceeds from Sales........................... 24,266 12,976
Proceeds from Maturities and redemptions...... 39,204 40,446
Purchases..................................... (80,373) (60,390)
Proceeds from sales of loans and other assets.... 14,705 13,530
Acquisition of affiliate and branch, net of cash
received........................................ -0- 7,836
Changes net of acquisitions:
Net decrease in time deposits with banks......... 2,374 3,268
Net increase in loans............................ (153,840) (216,271)
Purchases of premises and equipment.............. (2,574) (4,667)
Net cash used by investing activities.......... (186,181) (180,341)
Financing Activities
Repayments of long-term debt..................... (51,169) -0-
Proceeds from issuance of long-term debt......... 71,788 -0-
Discount on dividend reinvestment plan purchases. (488) (377)
Dividends paid................................... (13,286) (12,038)
Net (decrease) increase in Federal funds
purchased....................................... 35,495 (31,235)
Net increase in other short-term borrowings...... 4,117 110,593
Changes net of acquisitions:
Net increase in deposits......................... 117,468 106,955
Purchase of treasury stock....................... (2,759) (3,689)
Proceeds from sale of treasury stock............. 15 100
Net cash provided by financing activities... 161,181 170,309
Net (decrease) increase in cash and cash
equivalents................................ (3,635) 13,349
Cash and cash equivalents at January 1............. 69,406 67,181
Cash and cash equivalents at September 30,......... $65,771 $ 80,530
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, 1997
(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, 1997 and the results of
operations for the three month and nine month periods ended
September 30, 1997 and 1996, and statements of cash flows and
changes in shareholders' equity for the nine month periods ended
September 30, 1997 and 1996. The results of the three and nine
months ended September 30, 1997 and 1996 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)
1997 1996
Cash paid during the first nine
months of the year for:
Interest $73,675 $63,008
Income Taxes $ 8,850 $ 9,350
Noncash investing and financing
activities:
ESOP loan reductions $ 831 $ 804
Gross increase (decrease) in
market value adjustment to
securities available for sale $ (277) $ 30
Loans transferred to other real
estate owned and repossessed
assets $ 3,890 $ 2,127
NOTE 3 New Accounting Pronouncements
In February 1997 the Financial Accounting Standards Board (FASB)
issued Statement No. 128 "Earnings per Share" ("FAS No. 128")
which is effective for financial statements issued after December
15, 1997; earlier adoption is not permitted. This statement
replaces the presentation of primary and fully diluted earnings
per share with a presentation of basic and diluted earnings per
share, respectively. Basic earnings per share excludes dilution
and is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. FAS No. 128 also
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 3 New Accounting Pronouncements (Continued)
requires a reconciliation of the numerator and denominator of the
basic EPS calculation to the numerator and denominator of the
diluted EPS calculation. Adoption of this statement is not
expected to have a material impact on the disclosure of earnings
per share in the financial statements. The pro forma effect of
adopting FAS No. 128 would not change the reported earnings per
share for either basic or fully diluted earnings per share for
the three and nine month periods ended September 30, 1996. The
pro forma effect of adopting FAS No. 128 would not change the
reported earnings per share for basic earnings per share for
either the three or nine month periods ended September 30, 1997
but would change fully diluted earnings per share for the nine
month period to $1.07 from the $1.08 reported.
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income", which requires businesses to disclose
comprehensive income and its component in their general-purpose
financial statements. This statement requires the reporting of
all items of comprehensive income in a financial statement that
is displayed with the same prominence as other financial
statements. This statement is effective for fiscal years
beginning after December 15, 1997, with reclassification of
comparative financial statements and is applicable to interim
periods. Management is in the process of evaluating the impact
of this statement on financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which
is effective for financial statements for periods beginning after
December 15, 1997. Statement No. 131 redefines how operating
segments are determined and requires disclosure of certain
financial and descriptive information about a company's operating
segments. Management's preliminary determination is that under
current conditions the Corporation will report one business
segment.
8<PAGE>
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Nine Months of 1997 as Compared to the First Nine Months of
1996
This discussion and the related financial data are presented to
assist in the understanding and evaluation of the consolidated
financial condition and results of operations of First
Commonwealth Financial Corporation (the "Corporation") including
its subsidiaries. In addition to historical information, this
discussion and analysis contains forward-looking statements. The
forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference
include, but are not limited to, those discussed in the
"Management's Discussion and Analysis of Financial Condition and
Results of Operations." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The
Corporation undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
Net income in the nine months of 1997 was $23.6 reflecting an
increase of $3.7 million over 1996 results of $19.9 million.
Earnings per share was $1.08 for the nine months of 1997
reflecting an increase of $0.18 over the 1996 level of $0.90.
The impact of net securities transactions increased earnings per
share $0.28 in 1997 while changes in net interest income
increased earnings by $0.15 per share during 1997. Salary and
benefit costs reduced earnings per share by $0.12 during 1997
while changes in the provision for possible credit losses reduced
earnings by $0.06 per share compared to 1996 levels. Return on
average assets was 1.19% and return on average equity was 11.81%
during the 1997 period, compared to 1.09% and 10.34%,
respectively during the same period of 1996.
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
$72.7 million for the nine months of 1997 compared to $69.7
million for the same period of 1996. Net interest margin (net
interest income, on a tax-equivalent basis, as a percentage of
average earning assets) for the 1997 period was 3.99%, reflecting
a decrease of 16 basis points (0.16%) from 4.15% reported in
1996.
Interest and fees on loans increased $14.2 million for 1997 over
1996 levels reflecting volume increases in all loan categories as
average total loans for the nine months of 1997 increased $241.9
million over 1996 averages. The most notable components of loan
growth for 1997 were an increase in average mortgage loans of
$109.4 million and an increase in average installment loans of
$39.5 million over 1996 averages. The increase in interest and
fees on loans for 1997 included increases due to volume of $14.9
million and decreases due to rate of $688 thousand. Yields on
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 (CONTINUED)
RESULTS OF OPERATIONS
First Nine months of 1997 as Compared to the First Nine Months of
1996 (Continued)
loans for the nine months of 1997 decreased by 9 basis points
(0.09%) when compared to 1996 yields, as yields on mortgage loans
nd installment loans decreased by 13 basis points (0.13%) and 25
basis points (0.25%), respectively. The decline in loan yields
is primarily the result of the maturity of loans bearing interest
rates which were higher than current market rates and the
increased utilization of indirect automobile lending. Interest
income on investments decreased $770 thousand when compared to
the corresponding period of 1996 as a result of decreases due to
volume, primarily in US government agency securities which
matured. Yields on investments for the 1997 period reflected an
increase of 7 basis points (0.07%) over 1996 yields.
Interest on deposits increased $8.0 million for the 1997 period
compared to 1996, and included increases in interest on time
deposits of $5.6 million and increases in interest on total
savings deposits of $2.4 million. The most notable increase in
time deposit interest occurred in the 24 to 35 month and 36 to 59
month maturity ranges which increased by $2.9 million and $2.6
million respectively over 1996 levels as a result of volume
increases. Average time deposits in the 24 to 35 month maturity
range increased $68.8 million for the nine months of 1997
compared to 1996 averages while time deposits in the 36 to 59
month maturity range increased $57.8 million for the same time
period. Volume increases have been achieved through competitive
rates and aggressive marketing programs. Rate increases for
savings accounts of 37 basis points (0.37%) 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. Total cost of deposits
increased 21 basis points (0.21%) over the 1996 level.
Interest expense on long-term debt increased $1.9 million
compared to the 1996 period as average long-term debt for the
nine months of 1997 increased $39.0 million over 1996 averages.
The long-term debt increase for 1997 was a result of borrowings
from the Federal Home Loan Bank with maturities of up to ten
years.
The provision for possible credit losses was $4.4 million for the
nine month period of 1997 compared to $3.2 million during the
1996 period. Net charge-offs against the allowance for possible
credit losses were $4.3 million in the 1997 period and $2.1
million in the 1996 period. The 1997 increase in net charge-offs
included an increase in net charge-offs for loans to individuals
of $982 thousand compared to 1996. The total dollar amount of
charge-offs of loans to individuals during 1997 increased
primarily as a result of unsecured loans and credit card loans.
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 1997 as Compared to the First Nine Months of
1996 (Continued)
The increase in charge offs for unsecured loans does not appear
to be a trend since past due unsecured loans have declined. Net
charge-offs also increased for loans secured by residential real
estate which reflected an increase of $548 thousand over 1996
levels. 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 nine month periods ended September 30, 1997
and 1996. (amounts in thousands)
1997 1996
Balance January 1, $19,324 $18,152
Loans charged off:
Commercial, financial and
agricultural 820 287
Real estate-construction -0- -0-
Real estate-commercial 200 20
Real estate-residential 601 73
Loans to individuals 3,370 2,263
Lease financing receivables -0- 25
Total loans charged off 4,991 2,668
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 122 60
Real estate-construction -0- -0-
Real estate-commercial 13 83
Real estate-residential 22 31
Loans to individuals 485 360
Lease financing receivables 12 2
Total recoveries 654 536
Net charge offs 4,337 2,132
Provision charged to operations 4,422 3,150
Balance September 30 $19,409 $19,170
Total other operating income increased $6.5 million in 1997 to
$15.6 million. Net securities gains were $6.0 million during the
1997 period compared to securities losses of $48 thousand during
the 1996 related period. The securities gains during 1997
resulted from the sale of investments in Pennsylvania bank stocks
classified as equity securities "available for sale" having a
book value of $16.1 million. Trust income also reflected an
increase for the 1997 period of $350 thousand, as the book value
of assets managed increased over 1996 levels. Service charges on
deposits remained constant but is expected to improve over the
remainder of the year since a change was instituted in November
1997 for non-customer use of the Corporation's ATMs.
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 1997 as Compared to the First Nine Months of
1996 (Continued)
Noninterest expense was $49.7 million for the nine months of 1997
which reflected an increase of $2.5 million over the 1996 level
of $47.2 million. Although total noninterest expense has
increased over 1996 levels, total noninterest expense as a
percent of average assets declined from 2.59% for the nine months
of 1996 to 2.50% for the same period of 1997. Employee costs
were $27.3 million in 1997, representing 1.37% of average assets
on an annualized basis compared to $24.6 million and 1.35% of
average assets on an annualized basis for 1996. Salary and
benefit increases can be attributed to an increase in the number
of full-time equivalent employees for 1997. The employees were
primarily customer contact employees to support our expansion and
our convenience banking center.
Net occupancy and furniture and equipment expenses increased $308
thousand and $193 thousand respectively for 1997 when compared to
1996, primarily as a result of additional branches. Other
operating expenses increased $153 thousand in 1997 to $14.8
million. Telephone cost increases of $165 thousand reflected
usage increases for both voice and data lines. Growth of the
Corporation's credit card merchant program resulted in an
increase in charge card interchange fees of $121 thousand.
Outside data processing charges for the nine months of 1997
decreased $172 thousand compared to the same period of 1996,
primarily as a result of centralized management of these
expenses. FDIC expense decreased $748 thousand to $235 thousand
for the nine months of 1997 compared to $983 thousand for 1996.
The 1996 period includes an additional one-time assessment
against the Corporation's thrift deposits of $768 thousand.
Institutions whose deposits are insured by the bank insurance
fund 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.
Income tax expense was $10.7 million for the nine months of 1997
compared to $8.7 million for 1996. Income before taxes increased
$5.7 million in the 1997 period to $34.3 million. The
Corporation's effective tax rate was 31.2% for the 1997 period
and compared to 30.5% for 1996, reflecting a disproportional
increase in taxable income.
12<PAGE>
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Three Months ended September 30, 1997 Compared to the Three
Months Ended September 30, 1996
Net income was $8.7 million for the third quarter of 1997, an
increase of $2.8 million over the same quarter of 1996. Earnings
per share was $0.40 during the 1997 quarter compared to $0.27 for
the same period of 1996. Net security gains were $3.2 million
during the 1997 period compared to $1 thousand during the 1996
related period. The securities gains during 1997 resulted from
the sale of investments in Pennsylvania bank stocks classified as
equity securities "available for sale" having a book value of
$7.3 million.
Interest income increased $5.4 million in the third quarter of
1997 reflecting an increase in interest and fees on loans of $5.0
million and an increase in interest income on investments of $517
thousand compared to the third quarter of 1996. Included in the
change in investment income was an increase in income from U.S.
treasury securities of $250 thousand and an increase in income
from U.S. government agency securities of $399 thousand which was
partially offset by a decrease in income from equity securities
of $89 thousand. The change in income from U.S. treasury
securities and stocks were primarily the result of changes in
volumes while the change in income from U.S. government agencies
resulted from both volume and rate increases. Yield on
investments for the 1997 quarter increased 15 basis points
(0.15%) to 6.25% from 6.10% for 1996.
Total interest income on loans for the three months ending
September 30, 1997 increased $4.3 million compared to the three
months ending September 30, 1996, reflecting increases due to
volume of $4.4 million and decreases due to rate of $120
thousand. Average loans outstanding for the third quarter of
1997 were $215.0 million higher than 1996 averages, reflecting
increases in all loan categories but most notably in residential
mortgages. Fees on loans for the third quarter of 1997 also
reflected increases of $669 thousand over third quarter 1996
fees. Although total yield on loans (including fees on loans)
for the third quarter of 1997 was 8.60%, an increase of 8 basis
points (0.08%) over 1996 yields, installment loan yields
reflected a decrease of 20 basis points (0.20%) and municipal
loan yields reflected a decrease of 35 basis points (0.35%) when
comparing the third quarter of 1997 to the related 1996 period.
These yield decreases were primarily the result of the maturity
of loans bearing interest rates which were higher than current
market rates combined with the Corporation's pricing strategies
which offer highly competitive rates.
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 September 30, 1997 Compared to the Three
Months Ended September 30, 1996 (Continued)
Interest on deposits for the three months ending September 30,
1997 of $23.6 million reflected an increase of $3.2 million over
the same three months of 1996. Interest on time deposits for the
three months ended September 30, 1997 was $18.4 million compared
to $16.0 million for the 1996 related period. The increase in
interest on time deposits was primarily due to increases due to
volume of $2.3 million as average time deposits for the three
months of 1997 increased $135.5 million over 1996 averages. The
time deposit categories reflecting the largest increases in
average balances were time deposits in the 24 to 35 month
maturity range which increased $94.5 million and time deposits
greater than $100 thousand with maturities of greater than one
year which increased by $73.8 million when compared to average
balances for the third quarter of 1996. Interest on total
savings deposits for the third quarter of 1997 increased $828
thousand over 1996 levels and contained increases due to rate of
4.9 million which were partially offset by decreases due to
volume of $4.0 million. Total cost of deposits for the third
quarter of 1997 increased 25 basis points (0.25%) from 3.95% in
1996 to 4.20% in 1997 and included increases in the cost of
savings deposits of 34 basis points (0.34%) and increases of 13
basis points (0.13%) for time deposits compared to the third
quarter of 1996.
Interest on long term debt for the three months ending September
30, 1997 increased $764 thousand over the three months ending
September 30, 1996, primarily as a result of increases in average
long term debt of $54.1 million for the third quarter of 1997
compared to the 1996 quarter. Long term debt increases were
borrowings from the Federal Home Loan Bank with maturities of up
to ten years. Net interest margin was 3.87% for the third
quarter of 1997 compared to 3.96% during the 1996 period.
Provision for possible credit losses was $1.8 million for the
three months ended September 30, 1997 compared to $1.2 million
for the three months ended September 30, 1996. Net loans charged
off in the third quarter of 1997 were $1.3 million, an increase
of $399 thousand from net charge-offs of $896 thousand reported
for the corresponding period of 1996. Net charge-offs of loans
secured by 1-4 family residential properties increased by $280
thousand while net charge-offs of commercial loans secured by
real estate increased by $158 thousand during the 1997 quarter
compared to the three months of 1996. Increases in net charge-
offs of credit card loans of $153 thousand for the third quarter
of 1997 compared to 1996 were partially offset by decreases in
net charge-offs of other unsecured loans to individuals of $102
thousand during the 1997 quarter compared to the three months of
1996. Net charge-offs of commercial loans not secured by real
estate decreased by $89 thousand when comparing 1997 results to
the same period of 1996.
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, 1997 Compared to the Three
Months Ended September 30, 1996 (Continued)
Total noninterest expense for the three months ending September
30, 1997 was $16.5 million reflecting a decrease of $203 thousand
over the $16.7 million reported for the corresponding period of
1996. Employee costs were $9.0 million for the third quarter of
1997 compared to $8.4 million for the 1996 quarter. Staff
increases have occurred primarily in customer contact positions
needed to provide convenient and timely access to financial
products and services. Employee costs will be maintained over
the long term through attrition management programs and the
redeployment of personnel as changes are made to centralized
operations. Other operating expenses for the three months ended
September 30, 1997 included a decrease of $113 thousand in
advertising and promotions costs compared to the three months of
1996. The 1996 period included advertising and promotions
expenses related to new product offerings. The cost of outside
data processing for the third quarter of 1997 reflected a
decrease of $83 thousand over the third quarter of 1996 as
centralized management of these costs which occurred during 1997
generated results. Collection and repossession costs for the
three months ended September 30, 1997 increased $154 thousand
over the corresponding period of 1996, primarily as a result of
loan growth. Income taxes increased $1.6 million for the third
quarter of 1997 compared to the 1996 quarter as a result of an
increase in taxable income. The Corporation's effective tax rate
was 31.4% for the 1997 period compared to 28.8% for the 1996
period, primarily as a result of the disproportional increase in
taxable income due to securities gains being fully taxable.
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 under overnight and term borrowing
arrangements. The sale of earning assets may also provide an
additional source of liquidity.
Net loans increased $134.5 million in the first nine months of
1997 as specialized loan products and target marketing strategies
generated results. Residential mortgages increased by $77.2
million during the nine months of 1997 while commercial loans
secured by real estate increased by $19.3 million. The
Corporation's FlexLease product introduced in 1996 continued to
generate strong growth reflecting an increase of $11.0 million so
far for 1997. Municipal loans also reflected strong growth
during 1997 with increases of $21.6 million since year end 1996.
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 (Continued)
Loan growth for the period was funded primarily by deposit growth
and borrowings from the Federal Home Loan Bank with maturities of
p to ten years which is classified as long-term debt. Total
deposits grew $117.5 million and reflected increases in time
deposits of $81.0 million combined with increases in savings
deposits of $42.3 million since year-end 1996. Time deposits
grew $79.5 million in the 24 to 35 month maturity range as
deposit customers extended maturities to take advantage of
competitive rates being offered by the affiliate banks.
Customers also took advantage of time deposits in the 24 month
maturity range which included the option of withdrawal without
penalty with 30 day notice. These "Option" certificate of
deposit products give customers the ability to guarantee a fixed
interest rate for 24 months, usually slightly below market rates,
in return for the flexibility to reinvest in higher yielding
deposit products if interest rates rise.
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, 1997 securities available for sale had an amortized
cost of $265.0 million and an approximate fair value of $267.0
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.
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.
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)
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, 1997 and December 31, 1996.
September 30, 1997
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 799,040 $111,203 $247,800 $1,158,043
Investments.............. 48,410 48,071 126,626 223,107
Other interest-earning
assets.................. 103,770 5,831 13,195 122,796
Total interest-sensitive
assets................ 951,220 165,105 387,621 1,503,946
Certificates of deposits. 205,234 182,600 233,193 621,027
Other deposits........... 742,704 -0- -0- 742,704
Borrowings............... 206,447 25,127 1,396 232,970
Total interest-sensitive
liabilities........... 1,154,385 207,727 234,589 1,596,701
GAP....................$ (203,165) $(42,622) $153,032 $ (92,755)
ISA/ISL.................. 0.82 0.79 1.65 0.94
Gap/Total assets......... 7.33% 1.54% 5.52% 3.35%
December 31, 1996
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans....................$ 669,043 $102,628 $190,064 $ 961,735
Investments.............. 17,574 37,133 84,794 139,501
Other interest-earning
assets.................. 97,201 7,346 11,361 115,908
Total interest-sensitive
assets................ 783,818 147,107 286,219 1,217,144
Certificates of deposits. 269,090 154,045 227,381 650,516
Other deposits........... 700,445 -0- -0- 700,445
Borrowings............... 179,308 5,621 4,946 189,875
Total interest-sensitive
liabilities........... 1,148,843 159,666 232,327 1,540,836
GAP....................$ (365,025) $(12,559) $ 53,892 $ (323,692)
ISA/ISL.................. 0.68 0.92 1.23 0.79
Gap/Total assets......... 14.12% 0.49% 2.09% 12.52%
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.
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)
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, 1997, indicated that a 300 basis
point (3.00%) movement in interest rates in either direction over
the next twelve months would not have a significant impact on the
Corporation's anticipated net interest income over that time
frame.
CREDIT REVIEW
The following table identifies amounts of loan losses and
nonperforming loans. Past due loans are those which were
contractually past due 90 days or more as to interest or
principal payments but were well secured and in the process of
collection. Renegotiated loans are those which terms had been
renegotiated to provide a reduction or deferral of principal or
interest as a result of the deteriorating financial position of
the borrower and are in compliance with the restructured terms.
Loans on a nonaccrual basis include impaired loans (see
description below).
At September 30,
1997 1996
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 7,094 $ 7,424
Past due loans 12,277 12,676
Renegotiated loans 275 283
Total nonperforming loans $ 19,646 $ 20,383
Other real estate owned $ 1,802 $ 1,827
Loans outstanding at end of period $1,881,844 $1,688,146
Average loans outstanding (year-to-date) $1,805,487 $1,563,576
Nonperforming loans as percent of
total loans 1.04% 1.21%
Provision for possible credit losses $ 4,422 $ 3,150
Net charge-offs $ 4,337 $ 2,132
Net charge-offs as percent of
average loans 0.24% 0.14%
Provision for possible credit losses as
percent of net charge-offs 101.96% 147.75%
Allowance for possible credit losses as
percent of average loans outstanding 1.08% 1.23%
Allowance for possible credit losses as
percent of nonperforming loans 98.79% 94.05%
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 (Continued)
Other than those described above, there are no material credits
that management has serious doubts as to the borrower's ability
to comply with the present loan repayment terms. Additionally,
the portfolio is well diversified and as of September 30, 1997,
there were no significant concentrations of credit.
Nonperforming loans at September 30, 1997 decreased $737 thousand
over 1996 levels and included decreases in nonaccrual loans of
$330 thousand and decreases in past due loans of $399 thousand.
Nonaccrual loans reflected decreases in commercial loans secured
by real estate of $1.0 million and increases in commercial loans
not secured by real estate of $285 thousand and increases in
residential loans secured by real estate of $492 thousand. Past
due loans reflected decreases in commercial loans secured by real
estate of $1.2 million and decreases in unsecured loans to
individuals of $589 thousand which were partially off-set by
increases in residential loans secured by real estate of $1.4
million. Nonperforming loans as a percent of total loans of
1.04% at September 30, 1997 is at the lowest level since
September 1995.
Net charge-offs in both dollars and as a percentage of average
loans have increased over 1996 levels, but remain below peer
averages. The allowance for possible credit losses as percent of
average loans outstanding remains below peer levels and has
decreased when compared to September 1996. Management has
considered both the favorable charge-off history compared to peer
and the unfavorable allowance for possible credit losses as
percentage of average loans outstanding compared to peer as
factors when analyzing the adequacy of the allowance for possible
credit losses. Management believes that the allowance for
possible credit losses and nonperforming loans remain safely
within acceptable levels.
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.
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)
As of September 30, 1997 and 1996 the Corporation had a recorded
investment in impaired loans of $7.4 million and $7.7 million
respectively. Impaired loans include loans on a nonaccrual basis
and renegotiated loans. The average balance of impaired loans
for the nine month periods ending September 30, 1997 and 1996
were $8.2 million for both periods. An allocation of the
allowance for possible credit losses in the amount of $1.7
million relates to $3.3 million of the impaired loans at
September 30, 1997. 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 at September 30, 1996. Impaired
loans totalling $4.1 million and $3.2 million at September 30,
1997 and 1996 respectively 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 1997 was $86
thousand compared to $74 thousand for the related 1996 period.
CAPITAL RESOURCES
Equity capital increased $7.8 million in the first nine months of
1997. Dividends declared reduced equity by $13.3 million during
the 1997 period, while earnings retention was $10.3 million,
representing an earnings retention rate of 43.8%. 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 $831 thousand. Amounts paid to
fund the discount on reinvested dividends and optional cash
payments reduced equity by $488 thousand. The market value
adjustment to securities available for sale decreased equity by
$179 thousand. The cost of purchasing treasury shares, net of
the reissuance of treasury shares, decreased equity by $2.7
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.
20<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 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.
The table below presents the Corporation's capital position at
September 30, 1997:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $256,441 14.4%
Risk-Based Requirement 71,365 4.0
Total Capital 275,850 15.5
Risk-Based Requirement 142,730 8.0
Minimum Leverage Capital 256,441 9.4
Minimum Leverage Requirement 108,972 4.0
At September 30, 1997 the Corporation and its banking
subsidiaries are considered well capitalized as defined by the
Federal Deposit Insurance Corporation Improvement Act of 1991.
21<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 September 18, 1997 reporting a
change in the registrants independent certified
public accountants
22<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 13, 1997 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: NOVEMBER 13, 1997 /S/ John J. Dolan
John J. Dolan, Sr. Vice President,
Comptroller, and Chief Financial
Officer
23
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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