<PAGE>
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, 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 August 11, 1997 was 22,050,726.
<PAGE>
<PAGE>
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 . . . . . . . . . . . . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
June 30, December 31,
1997 1996
ASSETS
Cash and due from banks on demand.... $ 78,046 $ 69,406
Interest-bearing deposits with banks. 5,281 4,199
Federal funds sold .................. -0- -0-
Securities available for sale, at
market.............................. 258,242 244,415
Securities held to maturity, at cost,
(market value $484,364 in 1997 and
$457,189 in 1996).................. 485,451 459,746
Loans................................ 1,847,774 1,778,130
Unearned income.................... (23,704) (30,795)
Allowance for possible credit losses (18,913) (19,324)
Net loans....................... 1,805,157 1,728,011
Property and equipment............... 32,615 32,590
Other real estate owned.............. 1,980 1,647
Other assets......................... 49,333 44,624
TOTAL ASSETS.................... $2,716,105 $2,584,638
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 204,352 $ 200,473
Interest-bearing................... 2,021,942 1,904,310
Total deposits.................. 2,226,294 2,104,783
Short-term borrowings................ 145,453 150,330
Other liabilities.................... 27,315 27,287
Long-term debt....................... 51,950 40,880
Total liabilities............... 2,451,012 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; 22,052,226
and 22,194,426 shares outstanding in
1997 and 1996 respectively......... 22,437 22,437
Additional paid-in capital........... 76,329 76,664
Retained earnings.................... 174,741 168,711
Unrealized gain (loss) on securities
available for sale, net of taxes... 1,500 1,309
Treasury stock (384,402 shares at
June 30, 1997 and 242,202 at
December 31, 1996, at cost)........ (6,976) (4,289)
Unearned ESOP shares................. (2,938) (3,474)
Total shareholders' equity......... 265,093 261,358
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $2,716,105 $2,584,638
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<PAGE>
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,
1997 1996 1997 1996
Interest Income
Interest and fees on loans....... $38,414 $33,622 $75,932 $66,719
Interest and dividends on investments:
Taxable interest............... 9,254 9,717 18,144 19,567
Interest exempt from Federal
income taxes.................. 922 899 1,820 1,697
Dividends...................... 313 319 663 650
Interest on Federal funds sold... 3 22 6 82
Interest on bank deposits........ 90 115 177 249
Total Interest Income......... 48,996 44,694 96,742 88,964
Interest Expense
Interest on deposits............. 22,486 19,649 43,885 39,074
Interest on short-term borrowings 1,626 1,534 3,228 2,850
Interest on long-term debt....... 726 98 1,381 202
Total Interest Expense........ 24,838 21,281 48,494 42,126
Net interest income................ 24,158 23,413 48,248 46,838
Provision for possible credit
losses.......................... 1,390 1,050 2,631 1,950
Net interest income after provision
for possible credit losses........ 22,768 22,363 45,617 44,888
Other Income
Securities gains (losses)........ 1,039 (57) 2,797 (49)
Trust income..................... 700 562 1,391 1,178
Service charges on deposit
accounts........................ 1,448 1,401 2,845 2,763
Other income..................... 1,165 1,029 2,070 1,984
Total Other Income............ 4,352 2,935 9,103 5,876
Other Expenses
Salaries and employee benefits... 8,978 8,042 18,269 16,228
Net occupancy expense............ 1,238 1,106 2,533 2,296
Furniture and equipment expense.. 1,207 1,154 2,431 2,223
FDIC expense..................... 85 67 151 139
Other operating expenses......... 5,131 5,059 9,761 9,535
Total Other Expenses.......... 16,639 15,428 33,145 30,421
Income before taxes................ 10,481 9,870 21,575 20,343
Applicable income taxes.......... 3,277 2,982 6,696 6,342
Net Income......................... $ 7,204 $ 6,888 $14,879 $14,001
Average Shares Outstanding.........21,875,647 21,926,223 21,910,853 21,965,323
Per Share Data:
Net income....................... $ 0.33 $ 0.31 $ 0.68 $ 0.64
Cash dividends per share......... $ 0.20 $ 0.18 $ 0.40 $ 0.36
The accompanying notes are an integral part of these consolidated financial
statements.
4<PAGE>
<PAGE>
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, 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
Balance at December 31, 1996.... $22,437 $76,664 $168,711 $ 1,309 $(3,474) $(4,289) $261,358
Net income.................... -0- -0- 14,879 -0- -0- -0- 14,879
Cash dividends declared....... -0- -0- (8,849) -0- -0- -0- (8,849)
Change in market value of
securities available for sale,
net of tax effect........... -0- -0- -0- 191 -0- -0- 191
Decrease in unearned ESOP shares -0- -0- -0- -0- 536 -0- 536
Discount on dividend reinvestment
plan purchases.............. -0- (307) -0- -0- -0- -0- (307)
Treasury stock acquired....... -0- -0- -0- -0- -0- (2,728) (2,728)
Treasury stock reissued....... -0- (28) -0- -0- -0- 41 13
Balance at June 30, 1997........ $22,437 $76,329 $174,741 $ 1,500 $(2,938) $(6,976) $265,093
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 6 Months
Ended June 30,
1997 1996
Operating Activities
Net income....................................... $14,879 $14,001
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses............ 2,631 1,950
Depreciation and amortization................. 2,737 2,329
Net gains on sales of assets.................. (2,845) (270)
Increase in interest receivable............... (4,044) (326)
Increase in interest payable.................. 162 1,002
Decrease in income taxes payable.............. (518) (695)
Change in deferred taxes...................... 403 222
Other-net..................................... (1,568) (2,944)
Net cash provided by operating activities... 11,837 15,269
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales........................... -0- -0-
Proceeds from Maturities and redemptions...... 34,422 47,135
Purchases..................................... (60,078) (42,164)
Transactions with securities available for sale:
Proceeds from Sales........................... 13,769 12,812
Proceeds from Maturities and redemptions...... 20,643 32,522
Purchases..................................... (45,198) (56,824)
Proceeds from sales of loans and other assets.... 6,668 8,810
Acquisition of affiliate and branch, net of cash
received........................................ -0- 7,836
Changes net of acquisitions:
Net (increase) decrease in time deposits with
banks........................................... (1,082) 1,265
Net increase in loans............................ (86,780) (115,868)
Purchases of premises and equipment.............. (1,915) (3,068)
Net cash used by investing activities.......... (119,551) (107,544)
Financing Activities
Repayments of long-term debt..................... (25,392) -0-
Proceeds from issuance of long-term debt......... 36,999 -0-
Discount on dividend reinvestment plan purchases. (306) (245)
Dividends paid................................... (8,876) (8,034)
Net decrease in Federal funds purchased.......... (5,750) (31,235)
Net increase in other short-term borrowings...... 873 59,635
Changes net of acquisitions:
Net increase in deposits......................... 121,521 82,885
Purchase of treasury stock....................... (2,728) (2,943)
Proceeds from sale of treasury stock............. 13 39
Net cash provided by financing activities... 116,354 100,102
Net increase (decrease) in cash and cash
equivalents............................... 8,640 7,827
Cash and cash equivalents at January 1............. 69,406 67,181
Cash and cash equivalents at June 30............... $78,046 $ 75,008
The accompanying notes are an integral part of these consolidated financial
statements.
6<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30, 1997 and the results of
operations for the three month and six month periods ended
June 30, 1997 and 1996, and statements of cash flows and changes
in shareholders' equity for the six month periods ended June 30,
1997 and 1996. The results of the three and six months ended
June 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 six
months of the year for:
Interest $48,332 $41,125
Income Taxes $ 6,600 $ 6,800
Noncash investing and financing
activities:
ESOP loan reductions $ 536 $ 536
Gross increase (decrease) in
market value adjustment to
securities available for sale
pursuant to FAS No. 115 $ 293 $(2,460)
Loans transferred to other real
estate owned and repossessed
assets $ 2,589 $ 1,456
NOTE 3 New Accounting Pronouncements
In February 1997 the Financial Accounting Standards Board 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
7<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
NOTE 3 New Accounting Pronouncements (Continued)
the earnings of the entity. FAS No. 128 also 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 six
month periods ended June 30, 1997 and 1996.
8<PAGE>
<PAGE>
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 1997 as Compared to the First Six 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 of update
these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
Net income in the six months of 1997 was $14.9 million and can be
compared to $14.0 million for the six months of 1997. Earnings
per share was $0.68 for the six months of 1997 reflecting an
increase of $0.04 over the 1996 level of $0.64. The impact of
net securities transactions increased earnings per share $0.13 in
1997 while changes in net interest income increased earnings by
$0.07 per share during 1997. Salary and benefit costs reduced
earnings per share by $0.09 during 1997. Return on average
assets was 1.15% and return on average equity was 11.29% during
the 1997 period, compared to 1.18% and 10.99%, 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
$48.2 million for the six months of 1997 compared to $46.8
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 4.05%, reflecting
a decrease of 20 basis points (0.20%) from 4.25% reported in
1996.
Interest and fees on loans increased $9.2 million for 1997 over
1996 levels reflecting volume increase in all loan categories as
average total loans for the six months of 1997 increased $255.4
million over 1996 averages. The most notable components of loan
growth for 1997 were an increase in average mortgage loans of
$118.7 million and an increase in average installment loans of
$50.3 million over 1996 averages. The increase in interest and
fees on loans for 1997 included increases due to volume of $10.5
million and decreases due to rate of $1.7 million. Yields on
loans for the six months of 1997 decreased by 23 basis points
(0.23%) when compared to 1996 yields, as yields on mortgage loans
9<PAGE>
<PAGE>
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 Six Months of 1997 as Compared to the First Six Months of
1997 (Continued)
and installment loans decreased by 20 basis points (0.20%) and 29
basis points (0.29%), respectively. The decline in installment
loan yields is primarily the result of increased utilization of
indirect automobile lending while the decline in mortgage loan
yields can mainly be attributed to the maturity of long-term
loans bearing interest rates which were higher than current
market rates. Interest income on investments decreased $1.3
million when compared to the corresponding period of 1996 as a
result of decreases due to volume. Yields on investments
remained stable for the 1997 period reflecting an increase of 3
basis points (0.03%) over 1996 yields.
Interest on deposits increased $4.8 million for the 1997 period
compared to 1996, and included increases in interest on time
deposits of $3.2 million. The most notable increase in time
deposit interest occurred in the 36 to 59 month maturity range
which increased by $2.1 million over 1996 levels as a result of
volume increases. Average time deposits in the 36-59 month
maturity range increased $73.3 million for the six months of 1997
compared to 1996 averages as competitive rates and aggressive
marketing programs generated results. Total cost of deposits
increased 19 basis points (0.19%) over the 1996 level and
included cost increases of 39 basis points (0.39%) for total
savings deposits. Rate increases for savings can primarily be
attributed to new savings products bearing higher interest rates
than standard savings accounts. These new savings products have
been designed to build long-term customer relationships and are
intended to produce a favorable impact on the Corporation's net
interest margin over the long-term.
Interest expense on long-term debt increased $1.2 million
compared to the 1996 period as average long-term debt for the six
months of 1997 increased $31.5 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 10 years.
The provision for possible credit losses was $2.6 million for the
six month period of 1997 compared to $2.0 million during the 1996
period. Net charge-offs against the allowance for possible
credit losses were $3.0 million in the 1997 period and $1.2
million in the 1996 period. The 1997 increase in net charge-offs
included an increase in net charge-offs for loans to individuals
of $931 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.
See the "Credit Review" section for an analysis of the quality of
the loan portfolio.
10<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
First Six Months of 1997 as Compared to the First Six Months of
1996 (Continued)
Below is an analysis of the consolidated allowance for possible
credit losses for the six month periods ended June 30, 1997 and
1996.
1997 1996
Balance January 1, $19,324 $18,152
Loans charged off:
Commercial, financial and
agricultural 778 146
Real estate-construction -0- -0-
Real estate-commercial 85 -0-
Real estate-residential 303 47
Loans to individuals 2,293 1,348
Lease financing receivables -0- 24
Total loans charged off 3,459 1,565
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 118 46
Real estate-construction -0- -0-
Real estate-commercial 13 20
Real estate-residential 14 15
Loans to individuals 261 247
Lease financing receivables 11 1
Total recoveries 417 329
Net charge offs 3,042 1,236
Provision charged to operations 2,631 1,950
Balance June 30, 1997 $18,913 $18,866
Total other operating income increased $3.2 million in 1997 to
$9.1 million. Net securities gains were $2.8 million during the
1997 period compared to securities losses of $49 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 $8.8 million. Trust income also reflected an
increase for the 1997 period of $213 thousand, primarily in the
form of revenues from estates.
11<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
First Six Months of 1997 as Compared to the First Six Months of
1996 (Continued)
Noninterest expense was $33.1 million for the six months of 1997
which reflected an increase of $2.7 million over the 1996 level
of $30.4 million. Although total noninterest expense has
increased over 1996 levels, total noninterest expense as a
percent of average assets remained the same for both 1997 and
1996 periods at 2.56%. Employee costs were $18.3 million in
1997, representing 1.41% of average assets on an annualized basis
compared to $16.2 million and 1.36% of average assets on an
annualized basis for 1996. Salary and benefit increases can also
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 $237
thousand and $208 thousand respectively for 1997 when compared to
1996, primarily as a result of additional branches. Other
operating expenses increased $226 thousand in 1997 to $9.8
million. Telephone cost increases of $136 thousand reflected
usage increases for both voice and data lines. Strong loan
growth impacted filing and recording expenses which increased
$147 thousand over the six months of 1996. Loan collection and
repossession expenses decreased $152 thousand during the 1997
period and may be impacted in future periods by the redesign of
the collection process and the use of internal resources rather
than outsourcing collection efforts.
Income tax expense was $6.7 million for the six months of 1997
compared to $6.3 million for 1996. Income before taxes increased
$1.2 million in the 1997 period to $21.6 million. The
Corporation's effective tax rate was 31.0% for the 1997 period
and compared to 31.2% for 1996, reflecting a slight increase in
tax-free income.
Three Months ended June 30, 1997 Compared to the Three Months
Ended June 30, 1996
Net income was $7.2 million for the second quarter of 1997, an
increase of $316 thousand over the same quarter of 1996.
Earnings per share was $0.33 during the 1997 quarter and can be
compared to $0.31 for the same period of 1996. Net security
gains were $1.0 million during the 1997 period compared to
securities losses of $57 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 $2.9
million.
12<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, 1997 Compared to the Three Months
Ended June 30, 1996 (Continued)
Interest income increased $4.3 million in the second quarter of
1997 reflecting an increase in interest and fees on loans of $4.8
million and a decrease in interest income on investments of $445
thousand. The decrease in investment income for the 1997 quarter
was primarily a result of volume decreases. Although yields on
loans for the 1997 quarter decreased 18 basis points (0.18%) over
1996 yields, total interest income on loans increased for the
1997 quarter as a result of volume increases. Average loans
outstanding for the second quarter of 1997 were $245.8 million
higher than 1996 averages reflecting increases in all loan
categories but most notably in residential mortgages. The change
in loan interest due to volume was an increase of 5.0 million for
the 1997 quarter while declining loan yields caused a decrease in
interest income due to rate of $527 thousand.
The total cost of funds increased 27 basis points (0.27%) for the
1997 quarter and included savings deposit increases of 43 basis
points (0.43%) and time deposit and short-term borrowings
increases of 10 basis points (0.10%) which were partially offset
by a decrease in the cost of long-term debt of 233 basis points
(2.33%). The reduction of the cost of long-term debt for the
1997 quarter is primarily the result of refinancing debt incurred
by the Corporations Employee Stock Ownership Plan Trust. Net
interest margin was 3.99% for the second quarter of 1997 compared
to 4.20% during the 1996 period.
Provision for possible credit losses was $1.4 million for the
three months ended June 30, 1997 compared to $1.1 million for the
three months ended June 30, 1996. Net loans charged off in the
second quarter of 1997 were $2.0 million, an increase of $1.4
million from net charge-offs of $659 thousand reported for the
corresponding period of 1996. Net charge-offs of loans secured
by 1-4 family residential properties increased by $230 thousand
while net charge-offs of commercial loans not secured by real
estate increased by $668 thousand and unsecured loans to
individuals increased by $398 thousand during the 1997 quarter
compared to the three months of 1996.
Total noninterest expense for the three months ending June 30,
1997 reflected an increase of $1.2 million over the corresponding
period of 1996. Employee costs were $9.0 million for the second
quarter of 1997 compared to $8.0 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. Occupancy and furniture and equipment
cost increases for the 1997 quarter totalling $185 thousand are a
result of additional branches. Other operating expenses for the
three months ended June 30, 1997 reflected decreases of $110
thousand in advertising and $220 thousand in other professional
fees compared to the three months of 1996. The 1996 period
included other professional fees for the use of outside
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, 1997 Compared to the Three Months
Ended June 30, 1996 (Continued)
consultants to help analyze and implement standardized fee
schedules while advertising expenses for 1996 included amounts
related to new product offerings. Income taxes increased $295
thousand for the second quarter of 1997 compared to the 1996
quarter primarily as a result of an increase in income. The
Corporation's effective tax rate was 31.3% for the 1997 period
compared to 30.2% for the 1996 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 under overnight and term borrowing
arrangements. The sale of earning assets may also provide an
additional source of liquidity.
Net loans increased $77.1 million in the first six months of 1997
as specialized loan products and target marketing strategies
generated results. Residential mortgages increased by $42.4
million during the six months of 1997 while commercial loans
secured by real estate increased by $10.9 million. The
Corporation's FlexLease product introduced in 1996 continued to
generate strong growth reflecting an increase of $7.1 million so
far for 1997. Loan growth for the period was funded primarily by
deposit growth and borrowings from the Federal Home Loan Bank
with maturities of up to ten years which is classified as long-
term debt. Total deposits grew $121.5 million and reflected
increases in time deposits of $68.5 million combined with
increases in savings of $49.1 million since year-end 1996. Time
deposits grew $27.7 million in the 36 to 59 month maturity range
as deposit customers extended maturities to take advantage of
competitive rates being offered by the subsidiary 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.
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, 1997 securities available for sale had an amortized cost
of $255.7 million and an approximate fair value of $258.2
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.
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)
LIQUIDITY (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, 1997 and December 31, 1996.
June 30, 1997
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 718,844 $137,973 $213,861 $1,070,678
Investments.............. 59,404 40,905 98,769 199,078
Other interest-earning
assets.................. 105,869 3,963 9,280 119,112
Total interest-sensitive
assets................ 884,117 182,841 321,910 1,388,868
Certificates of deposits. 208,260 147,492 263,961 619,713
Other deposits........... 749,733 -0- -0- 749,733
Borrowings............... 162,894 1,939 24,822 189,655
Total interest-sensitive
liabilities........... 1,120,887 149,431 288,783 1,559,101
GAP....................$ (236,770) $ 33,410 $ 33,127 $ (170,233)
ISA/ISL.................. 0.79 1.22 1.11 0.89
Gap/Total assets......... 8.72% 1.23% 1.22% 6.27%
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.
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, 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 June 30,
1997 1996
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 8,691 $ 7,920
Past due loans 10,903 10,467
Renegotiated loans 276 286
Total nonperforming loans $ 19,870 $ 18,673
Other real estate owned $ 1,980 $ 1,495
Loans outstanding at end of period $1,824,070 $1,593,512
Average loans outstanding (year-to-date) $1,782,888 $1,527,493
Nonperforming loans as percent of
total loans 1.09% 1.17%
Provision for possible credit losses $ 2,631 $ 1,950
Net charge-offs $ 3,042 $ 1,236
Net charge-offs as percent of
average loans 0.17% 0.08%
Provision for possible credit losses as
percent of net charge-offs 86.49% 157.77%
Allowance for possible credit losses as
percent of average loans outstanding 1.06% 1.24%
Allowance for possible credit losses as
percent of nonperforming loans 95.18% 101.03%
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 repayment terms. Additionally,
the portfolio is well diversified and as of June 30, 1997, there
were no significant concentrations of credit.
Nonperforming loans at June 30, 1997 increased $1.2 million over
1996 levels and included increases in nonaccrual loans of $771
thousand and increases in past due loans of $436 thousand.
Nonaccrual loans reflected increases in commercial loans not
secured by real estate of $1.1 million which were partially off-
set by decreases in commercial loans secured by real estate.
Past due loans reflected increases in residential loans secured
by real estate of $1.4 million and unsecured loans to individuals
of $468 thousand which were partially off-set by decreases in
commercial loans secured by real estate of $1.4 million when
compared to 1996. Past due loans have increased during 1997 in
the loan categories which reflected the largest growth, as the
outstanding balances of residential loans secured by real estate
increased by $117.9 million while consumer installment and
revolving credit loans increased by $24.7 million compared to
June 1996. Although the dollar amount of nonperforming loans has
increased, nonperforming loans as a percentage of total loans has
not increased above historic levels.
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 June 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 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.
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)
As of June 30, 1997 and 1996 the Corporation had a recorded
investment in impaired loans of $9.0 million and $8.2 million
respectively. Impaired loans include loans on a nonaccrual basis
and renegotiated loans. The average balance of impaired loans
for the six month periods ending June 30, 1997 and 1996 were $8.4
million and $8.3 million, respectively. An allocation of the
allowance for possible credit losses in the amount of $1.9
million relates to $5.4 million of the impaired loans at June 30,
1997. 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 at June 30, 1996. Impaired loans totalling $3.6
million and $3.4 million at June 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 three months of 1997 was $59 thousand compared
to $53 thousand for the related 1996 period.
CAPITAL RESOURCES
Equity capital increased $3.7 million in the first six months of
1997. Dividends declared reduced equity by $4.4 million over the
1997 period, while earnings retention was $8.8 million,
representing an earnings retention rate of 40.5%. The retained
net income remains in permanent capital to fund future growth and
expansion. Payments by the Corporation's Employee Stock
Ownership Plan (the "ESOP") to reduce debt it incurred to acquire
the Corporation's common stock for future distribution as
employee compensation, net of fair value adjustments to Unearned
ESOP shares, increased equity by $536 thousand. Amounts paid to
fund the discount on reinvested dividends and optional cash
payments reduced equity by $307 thousand. The market value
adjustment to securities available for sale increased equity by
$191 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.
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 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
June 30, 1997:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $251,712 14.4%
Risk-Based Requirement 69,895 4.0
Total Capital 270,625 15.5
Risk-Based Requirement 139,790 8.0
Minimum Leverage Capital 251,712 9.6
Minimum Leverage Requirement 105,181 4.0
At June 30, 1997 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
None
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 14, 1997 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: AUGUST 14, 1997 /S/ John J. Dolan
John J. Dolan, Sr. Vice President,
Comptroller, and Chief Financial
Officer
22
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 78,046
<INT-BEARING-DEPOSITS> 5,281
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 258,242
<INVESTMENTS-CARRYING> 485,481
<INVESTMENTS-MARKET> 484,364
<LOANS> 1,847,774
<ALLOWANCE> 18,913
<TOTAL-ASSETS> 2,716,105
<DEPOSITS> 2,226,294
<SHORT-TERM> 145,453
<LIABILITIES-OTHER> 27,315
<LONG-TERM> 51,950
0
0
<COMMON> 22,437
<OTHER-SE> 242,656
<TOTAL-LIABILITIES-AND-EQUITY> 2,716,105
<INTEREST-LOAN> 38,414
<INTEREST-INVEST> 10,489
<INTEREST-OTHER> 93
<INTEREST-TOTAL> 48,996
<INTEREST-DEPOSIT> 22,486
<INTEREST-EXPENSE> 24,838
<INTEREST-INCOME-NET> 24,158
<LOAN-LOSSES> 1,390
<SECURITIES-GAINS> 1,039
<EXPENSE-OTHER> 16,639
<INCOME-PRETAX> 10,481
<INCOME-PRE-EXTRAORDINARY> 7,204
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,204
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<YIELD-ACTUAL> 3.99
<LOANS-NON> 8,691
<LOANS-PAST> 10,903
<LOANS-TROUBLED> 276
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,324
<CHARGE-OFFS> 3,459
<RECOVERIES> 417
<ALLOWANCE-CLOSE> 18,913
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
