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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 March 31, 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 May 13, 1997 was 22,105,526.
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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 . . . . . . . . . . . . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
March 31, December 31,
1997 1996
ASSETS
Cash and due from banks on demand.... $ 69,873 $ 69,406
Interest-bearing deposits with banks. 8,632 4,199
Federal funds sold .................. -0- -0-
Securities available for sale, at
market.............................. 240,423 244,415
Securities held to maturity, at cost,
(market value $460,337 in 1997 and
$457,189 in 1996).................. 464,540 459,746
Loans................................ 1,799,170 1,778,130
Unearned income.................... (26,689) (30,795)
Allowance for possible credit losses (19,563) (19,324)
Net loans....................... 1,752,918 1,728,011
Property and equipment............... 32,755 32,590
Other real estate owned.............. 1,817 1,647
Other assets......................... 48,021 44,624
TOTAL ASSETS.................... $2,618,979 $2,584,638
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 202,420 $ 200,473
Interest-bearing................... 1,936,835 1,904,310
Total deposits.................. 2,139,255 2,104,783
Short-term borrowings................ 134,807 187,020
Other liabilities.................... 29,198 27,287
Long-term debt....................... 51,589 4,190
Total liabilities............... 2,354,849 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; 22,184,426
and 22,194,426 shares outstanding in
1997 and 1996 respectively......... 22,437 22,437
Additional paid-in capital........... 76,515 76,664
Retained earnings.................... 171,948 168,711
Unrealized gain (loss) on securities
available for sale, net of taxes... 907 1,309
Treasury stock (252,202 shares at
March 31, 1997 and 242,202 at
December 31, 1996, at cost)........ (4,471) (4,289)
Unearned ESOP shares................. (3,206) (3,474)
Total shareholders' equity......... 264,130 261,358
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $2,618,979 $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 3 Months
Ended March 31,
1997 1996
Interest Income
Interest and fees on loans........ $37,518 $33,097
Interest and dividends on investments:
Taxable interest................ 8,890 9,850
Interest exempt from Federal
income taxes................... 898 798
Dividends....................... 350 331
Interest on Federal funds sold.... 3 60
Interest on bank deposits......... 87 134
Total Interest Income.......... 47,746 44,270
Interest Expense
Interest on deposits.............. 21,399 19,425
Interest on short-term borrowings. 1,602 1,316
Interest on long-term debt........ 655 104
Total Interest Expense......... 23,656 20,845
Net interest income................. 24,090 23,425
Provision for possible credit losses 1,241 900
Net interest income after provision
for possible credit losses........ 22,849 22,525
Other Income
Net securities gains (losses)..... 1,758 8
Trust income...................... 691 616
Service charges on deposit accounts 1,397 1,362
Other income...................... 905 955
Total Other Income............. 4,751 2,941
Other Expenses
Salaries and employee benefits.... 9,291 8,186
Net occupancy expense............. 1,295 1,190
Furniture and equipment expense... 1,224 1,069
FDIC expense...................... 66 72
Other operating expenses.......... 4,630 4,476
Total Other Expenses........... 16,506 14,993
Income before taxes................. 11,094 10,473
Applicable income taxes........... 3,419 3,360
Net Income.......................... $ 7,675 $ 7,113
Average Shares Outstanding.......... 21,946,450 22,004,857
Per Share Data:
Net income.......................... $0.35 $0.32
Cash dividends per share............ $0.20 $0.18
The accompanying notes are an integral part of these consolidated financial
statements.
4<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (loss)
Additional on Securities Unearned Total
Common Paid-in Retained Available ESOP Treasury Shareholders'
Stock Capital Earnings For Sale Shares Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... $22,437 $77,226 $157,576 $ 511 $(4,545) $ (929) $252,276
Net income.................... -0- -0- 7,113 -0- -0- -0- 7,113
Cash dividends declared....... -0- -0- (4,007) -0- -0- -0- (4,007)
Change in market value of
securities available for sale,
net of tax effect........... -0- -0- -0- (524) -0- -0- (524)
Decrease in unearned ESOP shares -0- 10 -0- -0- 268 -0- 278
Discount on dividend reinvestment
plan purchases.............. -0- (120) -0- -0- -0- -0- (120)
Treasury stock acquired....... -0- -0- -0- -0- -0- (2,099) (2,099)
Treasury stock reissued....... -0- (43) -0- -0- -0- 66 23
Balance at March 31, 1996....... $22,437 $77,073 $160,682 $ (13) $(4,277) $(2,962) $252,940
Balance at December 31, 1996.... $22,437 $76,664 $168,711 $1,309 $(3,474) $(4,289) $261,358
Net income.................... -0- -0- 7,675 -0- -0- -0- 7,675
Cash dividends declared....... -0- -0- (4,438) -0- -0- -0- (4,438)
Change in market value of
securities available for sale,
net of tax effect........... -0- -0- -0- (402) -0- -0- (402)
Decrease in unearned ESOP shares -0- -0- -0- -0- 268 -0- 268
Discount on dividend reinvestment
plan purchases.............. -0- (149) -0- -0- -0- -0- (149)
Treasury stock acquired....... -0- -0- -0- -0- -0- (182) (182)
Balance at March 31, 1997....... $22,437 $76,515 $171,948 $ 907 $(3,206) $(4,471) $264,130
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 3 Months
Ended March 31,
1997 1996
Operating Activities
Net income....................................... $ 7,675 $ 7,113
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses............ 1,241 900
Depreciation and amortization................. 1,365 1,018
Net gains on sales of assets.................. (1,779) (263)
Increase in interest receivable............... (1,727) (293)
Increase in interest payable.................. 18 657
Increase in income taxes payable.............. 2,381 3,458
Change in deferred taxes...................... 755 (124)
Other-net..................................... (2,835) (3,194)
Net cash provided by operating activities... 7,094 9,272
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales........................... -0- -0-
Proceeds from Maturities and redemptions...... 12,436 27,860
Purchases..................................... (17,206) (19,541)
Transactions with securities available for sale:
Proceeds from Sales........................... 7,792 -0-
Proceeds from Maturities and redemptions...... 8,681 21,574
Purchases..................................... (11,368) (22,519)
Proceeds from sales of loans and other assets.... 3,282 5,805
Changes net of acquisitions:
Net decrease in time deposits with banks......... (4,433) (761)
Net increase in loans............................ (29,873) (31,948)
Purchases of premises and equipment.............. (1,100) (1,429)
Net cash used by investing activities.......... (31,789) (20,959)
Financing Activities
Repayments of long-term debt..................... (25,288) -0-
Proceeds from issuance of long-term debt......... 36,265 -0-
Discount on dividend reinvestment plan purchases. (148) (120)
Dividends paid................................... (4,439) (4,027)
Net decrease in Federal funds purchased.......... (26,075) (31,235)
Net increase in other short-term borrowings...... 10,552 10,704
Changes net of acquisitions:
Net increase in deposits......................... 34,477 35,552
Purchase of treasury stock....................... (182) (2,099)
Proceeds from sale of treasury stock............. -0- 23
Net cash provided by financing activities... 25,162 8,798
Net increase (decrease) in cash and cash
equivalents............................... 467 (2,889)
Cash and cash equivalents at January 1............. 69,406 67,181
Cash and cash equivalents at March 31.............. $69,873 $64,292
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
March 31, 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 March 31, 1997 and the results of
operations for the three month periods ended March 31, 1997 and
1996, and statements of cash flows and changes in shareholders'
equity for the three month periods ended March 31, 1997 and 1996.
The results of the three months ended March 31, 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 three
months of the year for:
Interest $23,638 $20,188
Income Taxes $ 250 $ -0-
Noncash investing and financing
activities:
ESOP loan reductions $ 268 $ 267
Gross increase (decrease) in
market value adjustment to
securities available for sale
pursuant to FAS No. 115 $ (618) $ (807)
Loans transferred to other real
estate owned and repossessed
assets $ 1,530 $ 454
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>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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.
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 Three Months of 1997 as Compared to the First Three Months
of 1997
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 three months of 1997 was $7.7 million and can
be compared to $7.1 million for the three months of 1996.
Earnings per share was $0.35 for the three months of 1997
reflecting an increase of $0.03 over the 1996 level of $0.32.
The impact of net securities transactions increased earnings per
share $0.08 in 1997 while changes in net interest income
increased earnings by $0.03 per share during 1997. Salary and
benefit costs reduced earnings per share by $0.05 during 1997.
Return on average assets was 1.21% and return on average equity
was 11.72% during the 1997 period, compared to 1.21% and 11.20%,
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
$24.1 million for the three months of 1997 compared to $23.4
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 4.10%, reflecting
a decrease of 20 basis points (0.20%) from 4.30% reported in
1996.
Interest and fees on loans increased $4.4 million for 1997 over
1996 levels reflecting volume increase in all loan categories as
average total loans for the three months of 1997 increased $264.9
million over 1996 averages. The most notable components of loan
growth for 1997 were an increase in average mortgage loans of
$122.9 million and an increase in average installment loans of
$60.1 million over 1996 averages. The increase in interest and
fees on loans for 1997 included increases due to volume of $5.4
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 Three Months of 1997 as Compared to the First Three Months
of 1997 (Continued)
million and decreases due to rate of $923 thousand. Yields on
loans for the three months of 1997 decreased by 28 basis points
(0.28%) when compared to 1996 yields, as yields on installment
loans and time and demand loans decreased by 41 basis points
(0.41%) and 26 basis points (0.26%), respectively. The decline
in installment loan yields is primarily the result of increased
utilization of indirect automobile lending while the decline in
time and demand loan yields can mainly be attributed to the
repricing of prime and other variable rate loans at lower rates
during 1997 than the rates for the corresponding 1996 period.
Interest income on investments decreased $841 thousand when
compared to the corresponding period of 1996 primarily as a
result of decreases due to volume which amounted to $724
thousand. Yields on investments remained stable for the 1997
period reflecting a decline of 5 basis points (0.05%) over 1996
yields.
Interest on deposits increased $2.0 million for the 1997 period
compared to 1996, and included increases in interest on time
deposits of $1.3 million. The most notable increase in time
deposit interest occurred in the 36 - 59 month maturity range
which increased by $1.2 million over 1996 levels as a result of
volume increases. Average time deposits in the 36-59 month
maturity range increased $81.4 million for the three months of
1997 compared to 1996 averages as competitive rates and
aggressive marketing programs generated results. Total cost of
deposits increased 14 basis points (0.14%) over the 1996 level
and included increases of 34 basis points (0.34%) for total
savings deposits which were partially offset by cost decreases of
5 basis points (0.05%) for time 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 establish and
reward 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 $551 thousand
compared to the 1996 period as average long-term debt for the
three months of 1997 increased $15.8 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.
Average interest-earning assets were 95.6% of average total
assets in the 1997 period and 95.8% during the 1996 time frame.
Average interest-bearing liabilities increased as a percentage of
average total assets to 81.1% for the 1997 period compared to
80.3% during the related 1996 period. The change in this mix had
a negative impact on net interest income.
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 Three Months of 1997 as Compared to the First Three Months
of 1996 (Continued)
The provision for possible credit losses was $1.2 million for the
three month period of 1997 compared to $900 thousand during the
1996 period. Net charge-offs against the allowance for possible
credit losses were $1.0 million in the 1997 period and $577
thousand in the 1996 period. The 1997 increase in net charge-
offs included a decline in net charge-offs for commercial loans
not secured by real estate of $110 thousand and an increase in
net charge-offs for loans to individuals of $515 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.
Below is an analysis of the consolidated allowance for possible
credit losses for the three month periods ended March 31, 1997
and 1996.
1997 1996
Balance January 1, $19,324 $18,152
Loans charged off:
Commercial, financial and
agricultural 6 94
Real estate-construction -0- -0-
Real estate-commercial 19 -0-
Real estate-residential 52 30
Loans to individuals 1,121 599
Lease financing receivables -0- 21
Total loans charged off 1,198 744
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 41 21
Real estate-construction -0- 17
Real estate-commercial 13 -0-
Real estate-residential 4 9
Loans to individuals 129 119
Lease financing receivables 9 1
Total recoveries 196 167
Net charge offs 1,002 577
Provision charged to operations 1,241 900
Balance March 31, $19,563 $18,475
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 Three Months of 1997 as Compared to the First Three Months
of 1996 (Continued)
Total other operating income increased $1.8 million in 1997 to
$4.8 million. Net securities gains were $1.8 million during the
1997 period compared to securities gains of $8 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 $5.9 million. Although other income showed a
decrease of $50 thousand for 1997 compared to 1996, growth of the
credit card portfolio generated an increase in charge user fees
of $120 thousand over 1996 levels.
Noninterest expense was $16.5 million for the three months of
1997 which reflected an increase of $1.5 million over the 1996
level of $15.0 million. Total noninterest expense was 2.59% of
average assets during the 1997 period compared to 2.56% for the
1996 related time frame. Employee costs were $9.3 million in
1997, representing 1.44% of average assets on an annualized basis
compared to $8.2 million and 1.39% of average assets on an
annualized basis for 1996. Inclusion of BSI in the 1997 period
accounted for $261 thousand of the $1.1 million total increase in
employee costs for the 1997 period. 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 $105
thousand and $155 thousand respectively for 1997 when compared to
1996 primarily as a result of additional branches. Other
operating expenses increased $154 thousand in 1997 to $4.6
million. Telephone cost increases of $85 thousand reflected
usage increases for both voice and data lines. Aggressive
marketing of innovative new products and services resulted in an
increase of $87 thousand in advertising expenses for the three
months of 1997. Loan collection and repossession expenses
decreased $187 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 $3.4 million for both the 1997 and 1996
periods. Income before taxes increased $620 thousand in the 1997
period to $11.1 million. The Corporation's effective tax rate
was 30.8% for the 1997 period and compared to 32.1% for 1996,
reflecting an increase in tax-free 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)
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 $24.9 million in the first three months of
1997 as specialized loan products and target marketing strategies
generated results. Residential mortgages increased by $13.9
million during the three months of 1997 while municipal loans
increased by $11.9 million. The Corporation's FlexLease product
introduced in 1996 continued to generate strong growth reflecting
an increase of $5.1 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 $34.5
million and reflected increases in time deposits of $30.7 million
combined with increases in both demand deposits and savings of
$1.9 million since year-end 1996. Time deposits grew $27.8
million in the 36 - 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.
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
March 31, 1997 securities available for sale had an amortized
cost of $239.0 million and an approximate fair value of $240.4
million.
13<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
LIQUIDITY (Continued)
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.
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)
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 March 31, 1997 and December 31, 1996.
March 31, 1997
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans.................... $ 684,640 $ 84,320 $229,755 $ 998,715
Investments.............. 30,805 44,546 84,582 159,933
Other interest-earning
assets.................. 106,508 9,463 6,470 122,441
Total interest-sensitive
assets................ 821,953 138,329 320,807 1,281,089
Certificates of deposits. 237,507 117,195 281,706 636,408
Other deposits........... 702,306 -0- -0- 702,306
Borrowings............... 152,408 5,013 21,187 178,608
Total interest-sensitive
liabilities........... 1,092,221 122,208 302,893 1,517,322
GAP....................$ (270,268) $ 16,121 $ 17,914 $ (236,233)
ISA/ISL.................. 0.75 1.13 1.06 0.84
Gap/Total assets......... 10.32% 0.62% 0.68% 9.02%
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.
15<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest Sensitivity (continued)
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 March 31, 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 March 31,
1997 1996
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 7,975 $ 7,761
Past due loans 11,553 7,622
Renegotiated loans 277 288
Total nonperforming loans $ 19,805 $ 15,671
Other real estate owned $ 1,817 $ 1,394
Loans outstanding at end of period $1,772,481 $1,513,624
Average loans outstanding (year-to-date) $1,763,331 $1,498,477
Nonperforming loans as percent of
total loans 1.12% 1.04%
Provision for possible credit losses $ 1,241 $ 900
Net charge-offs $ 1,002 $ 577
Net charge-offs as percent of
average loans 0.06% 0.04%
Provision for possible credit losses as
percent of net charge-offs 123.85% 155.98%
Allowance for possible credit losses as
percent of average loans outstanding 1.11% 1.23%
Allowance for possible credit losses as
percent of nonperforming loans 98.78% 117.89%
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)
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 March 31, 1997, there
were no significant concentrations of credit.
Nonperforming loans at March 31, 1997 increased $4.1 million over
1996 levels and included increases in nonaccrual loans of $214
thousand and increases in past due loans of $3.9 million. The
increase in past due loans for 1997 was primarily the result of
increases in residential loans secured by real estate of $2.3
million and increases in consumer installment and revolving
credit loans of $1.2 million. 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 $140 million while consumer
installment and revolving credit loans increased by $29.9 million
compared to March 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 March 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.
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)
As of March 31, 1997 ad 1996 the Corporation had a recorded
investment in impaired loans of $8.3 million and $8.0 million
respectively. Impaired loans include loans on a nonaccrual basis
and renegotiated loans. The average balance of impaired loans
for the three month periods ending March 31, 1997 and 1996 were
$8.5 million and $8.2 million, respectively. An allocation of
the allowance for possible credit losses in the amount of $1.9
million relates to $4.1 million of the impaired loans at
March 31, 1997. An allocation of the allowance for possible
credit losses in the amount of $665 thousand relates to $4.0
million of the impaired loans at March 31, 1996. Impaired loans
totalling $4.2 million and $4.0 million at March 31, 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 $13
thousand compared to $8 thousand for the related 1996 period.
CAPITAL RESOURCES
Equity capital increased $2.8 million in the first three months
of 1997. Dividends declared reduced equity by $4.4 million over
the 1997 period, while earnings retention was $3.2 million,
representing an earnings retention rate of 42.2%. 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 $268 thousand. Amounts paid to
fund the discount on reinvested dividends and optional cash
payments reduced equity by $149 thousand. The market value
adjustment to securities available for sale decreased equity by
$402 thousand. The cost of purchasing treasury shares net of the
reissuance of treasury shares to provide for stock options
exercised, decreased equity by $182 thousand.
A capital base can be considered adequate when it enables the
Corporation to intermediate funds responsibly and provide related
services, while protecting against future uncertainties. The
evaluation of capital adequacy depends on a variety of factors,
including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In
consideration of these factors, management's primary emphasis
with respect to the Corporation's capital position is to maintain
an adequate and stable ratio of equity to assets.
18<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
March 31, 1997:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $251,018 14.8%
Risk-Based Requirement 68,065 4.0
Total Capital 270,580 15.9
Risk-Based Requirement 136,130 8.0
Minimum Leverage Capital 251,018 9.8
Minimum Leverage Requirement 102,820 4.0
At March 31, 1997 the Corporation and its banking subsidiaries
are considered well capitalized as defined by the Federal Deposit
Insurance Corporation Improvement Act of 1991.
19<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 February 26, 1997 reporting that
the Corporation granted incentive stock options
and intends to buy back shares of its common
stock to be used to cover outstanding options.
20 <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: MAY 14, 1997 /S/ JOSEPH E. O'DELL
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: MAY 14, 1997 /S/ JOHN J. DOLAN
John J. Dolan, Sr. Vice President,
Comptroller, and Chief Financial
Officer
21
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