<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 September 30, 1998
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)
724-349-7220
(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, 1998 was 22,110,895.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included in Part I of this report: PAGE
First Commonwealth Financial Corporation and
Subsidiaries Consolidated Balance Sheets . . . . . 3
Consolidated Statements of Income. . . . . . . . . 4
Consolidated Statements of Changes in
Shareholders' Equity . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows. . . . . . . 6
Notes to Consolidated Financial Statements . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK . . . . . . . . . . . . . . . . . . . . . . . . 26
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . 27
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
September 30, December 31,
1998 1997
ASSETS
Cash and due from banks on demand.... $ 53,430 $ 60,109
Interest-bearing deposits with banks. 2,374 4,985
Federal funds sold .................. 8,815 2,880
Securities available for sale, at
market.............................. 552,668 396,631
Securities held to maturity, at cost,
(market value $454,325 in 1998 and
$462,086 in 1997).................. 447,729 460,063
Loans................................ 1,943,254 1,937,744
Unearned income.................... (9,086) (16,841)
Allowance for possible credit losses (21,864) (19,766)
Net loans....................... 1,912,304 1,901,137
Property and equipment............... 34,510 32,578
Other real estate owned.............. 2,204 1,788
Other assets......................... 71,724 69,144
TOTAL ASSETS.................... $3,085,758 $2,929,315
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 145,330 $ 150,426
Interest-bearing................... 2,146,137 2,092,052
Total deposits.................. 2,291,467 2,242,478
Short-term borrowings................ 102,488 193,918
Other liabilities.................... 28,408 28,031
Long-term debt....................... 381,622 193,054
Total liabilities............... 2,803,985 2,657,481
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value per
share, 3,000,000 shares authorized,
none issued........................ -0- -0-
Common stock $1 par value per share,
100,000,000 shares authorized;
22,436,628 shares issued; 22,110,895
and 22,046,326 shares outstanding in
1998 and 1997, respectively........ 22,437 22,437
Additional paid-in capital........... 75,440 76,171
Retained earnings.................... 191,776 181,137
Accumulated other comprehensive income 4,058 1,632
Treasury stock (325,733 shares at
September 30, 1998 and 390,302 at
December 31, 1997, at cost)........ (5,931) (7,107)
Unearned ESOP shares................. (6,007) (2,436)
Total shareholders' equity......... 281,773 271,834
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $3,085,758 $2,929,315
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)
<TABLE>
<CAPTION>
For the Quarter For the 9 Months
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans....... $41,038 $39,627 $122,400 $115,559
Interest and dividends on
investments:
Taxable interest............... 14,173 10,068 41,936 28,212
Interest exempt from Federal
income taxes.................. 1,508 966 3,900 2,786
Dividends...................... 513 292 1,317 955
Interest on Federal funds sold... 10 4 15 10
Interest on bank deposits........ 83 36 153 213
Total interest income......... 57,325 50,993 169,721 147,735
Interest Expense
Interest on deposits............. 23,446 23,563 70,104 67,448
Interest on short-term borrowings 2,850 2,083 8,858 5,311
Interest on long-term debt....... 5,336 859 14,465 2,240
Total interest expense........ 31,632 26,505 93,427 74,999
Net Interest Income................ 25,693 24,488 76,294 72,736
Provision for possible credit
losses.......................... 2,183 1,791 5,933 4,422
Net interest income after provision
for possible credit losses....... 23,510 22,697 70,361 68,314
Other Income
Securities gains................. 1,657 3,193 2,639 5,990
Trust income..................... 1,049 670 2,754 2,061
Service charges on deposit
accounts........................ 1,364 1,425 4,087 4,270
Other income..................... 1,926 1,246 5,377 3,316
Total other income............ 5,996 6,534 14,857 15,637
Other Expenses
Salaries and employee benefits... 9,434 8,982 28,127 27,251
Net occupancy expense............ 1,228 1,242 3,782 3,775
Furniture and equipment expense.. 1,091 1,199 3,417 3,630
Other operating expenses......... 5,430 5,108 15,592 15,020
Total other expenses.......... 17,183 16,531 50,918 49,676
Income before income taxes......... 12,323 12,700 34,300 34,275
Applicable income taxes.......... 3,104 3,989 9,073 10,685
Net income......................... $ 9,219 $ 8,711 $25,227 $23,590
Average Shares Outstanding.........21,924,762 21,840,434 21,925,757 21,887,122
Average Shares Outstanding
Assuming Dilution................22,071,237 21,928,117 22,102,882 21,945,921
Per Share Data:
Basic earnings per share......... $ 0.42 $ 0.40 $ 1.15 $ 1.08
Diluted earnings per share....... $ 0.42 $ 0.40 $ 1.14 $ 1.07
Cash dividends per share......... $ 0.22 $ 0.20 $ 0.66 $ 0.60
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
4<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Total
Common Paid-in Retained Comprehensive Treasury ESOP Shareholders'
Stock Capital Earnings Income Stock Shares Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996......$22,437 $76,664 $168,711 $1,309 $(4,289) $(3,474) $261,358
Comprehensive income
Net income...................... -0- -0- 23,590 -0- -0- -0- 23,590
Other comprehensive income, net
of tax: Unrealized holding gains
(losses) on securities arising
during the period............ -0- -0- -0- 3,715 -0- -0- 3,715
Less: reclassification adjust-
ment for gains on securities
included in net income....... -0- -0- -0- (3,894) -0- -0- (3,894)
Total other comprehensive
income....................... -0- -0- -0- (179) -0- -0- (179)
Total comprehensive income...... -0- -0- 23,590 (179) -0- -0- 23,411
Cash dividends declared......... -0- -0- (13,258) -0- -0- -0- (13,258)
Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 831 831
Discount on dividend reinvestment
plan purchases................ -0- (488) -0- -0- -0- -0- (488)
Treasury stock acquired......... -0- -0- -0- -0- (2,759) -0- (2,759)
Treasury stock reissued......... -0- (32) -0- -0- 47 -0- 15
Balance at September 30, 1997.....$22,437 $76,144 $179,043 $1,130 $(7,001) $(2,643) $269,110
Balance at December 31, 1997......$22,437 $76,171 $181,137 $1,632 $(7,107) $(2,436) $271,834
Comprehensive income
Net income...................... -0- -0- 25,227 -0- -0- -0- 25,227
Other comprehensive income, net
of tax: Unrealized holding gains
(losses) on securities arising
during the period............ -0- -0- -0- 4,125 -0- -0- 4,125
Less: reclassification adjust-
ment for gains on securities
included in net income....... -0- -0- -0- (1,699) -0- -0- (1,699)
Total other comprehensive
income....................... -0- -0- -0- 2,426 -0- -0- 2,426
Total comprehensive income...... -0- -0- 25,227 2,426 -0- -0- 27,653
Cash dividends declared......... -0- -0- (14,588) -0- -0- -0- (14,588)
Decrease in unearned ESOP shares -0- 64 -0- -0- -0- (3,571) (3,507)
Discount on dividend reinvestment
plan purchases................ -0- (757) -0- -0- -0- -0- (757)
Treasury stock acquired......... -0- -0- -0- -0- (1,061) -0- (1,061)
Treasury stock reissued......... -0- (38) -0- -0- 2,237 -0- 2,199
Balance at September 30, 1998.....$22,437 $75,440 $191,776 $4,058 $(5,931) $(6,007) $281,773
</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 9 Months
Ended Sept. 30,
1998 1997
Operating Activities
Net income....................................... $25,227 $23,590
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses............ 5,933 4,422
Depreciation and amortization................. 4,280 4,127
Net gains on sales of assets.................. (2,673) (6,158)
Income from increase in cash surrender value
of bank owned life insurance.................. (1,044) -0-
Increase in interest receivable............... (2,606) (5,646)
Increase in interest payable.................. 52 1,323
Increase in income taxes payable.............. 462 1,515
Change in deferred taxes...................... 466 -0-
Other-net..................................... (2,526) (1,808)
Net cash provided by operating activities... 27,571 21,365
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales........................... -0- -0-
Proceeds from maturities and redemptions...... 138,510 75,599
Purchases..................................... (126,081) (105,542)
Transactions with securities available for sale:
Proceeds from sales........................... 139,831 24,266
Proceeds from maturities and redemptions...... 86,586 39,204
Purchases..................................... (376,177) (80,373)
Proceeds from sales of loans and other assets.... 29,235 14,705
Net decrease in time deposits with banks......... 2,612 2,374
Net increase in loans............................ (46,246) (153,840)
Purchases of premises and equipment.............. (4,948) (2,574)
Net cash used by investing activities....... (156,678) (186,181)
Financing Activities
Repayments of long-term debt..................... (19,804) (51,169)
Proceeds from issuance of long-term debt......... 204,800 71,788
Discount on dividend reinvestment plan purchases. (757) (488)
Dividends paid................................... (14,574) (13,286)
Net increase (decrease) in Federal funds purchased (108,650) 35,495
Net increase in other short-term borrowings...... 17,220 4,117
Net increase in deposits......................... 48,990 117,468
Purchase of treasury stock....................... (1,061) (2,759)
Proceeds from sale of treasury stock............. 2,199 15
Net cash provided by financing activities... 128,363 161,181
Net decrease in cash and cash equivalents... (744) (3,635)
Cash and cash equivalents at January 1............. 62,989 69,406
Cash and cash equivalents at September 30.......... $62,245 $65,771
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, 1998
(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, 1998 and the results of
operations for the three month and nine month periods ended
September 30, 1998 and 1997, and statements of cash flows and
changes in shareholders' equity for the nine month periods ended
September 30, 1998 and 1997. The results of the three and nine
months ended September 30, 1998 and 1997 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)
1998 1997
Cash paid during the first nine
months of the year for:
Interest $93,375 $73,675
Income Taxes $ 8,020 $ 8,850
Noncash investing and financing
activities:
ESOP borrowings $ 4,000 $ -0-
ESOP loan reductions $ 429 $ 831
Gross increase (decrease) in
market value adjustment to
securities available for
sale pursuant to FAS No. 115 $ 3,733 $ (277)
Loans transferred to other real
estate owned and repossessed
assets $ 3,196 $ 3,890
NOTE 3 New Accounting Pronouncements
Effective January 1, 1998, the Corporation adopted the Financial
Accounting Standards Board Statement No. 130 "Reporting
Comprehensive Income" ("FAS No. 130"). Comprehensive income is
defined as "the change in equity of a business enterprise during
a period from transactions and other events from nonowner
sources. Comprehensive income includes all changes in equity
except those resulting from investments by owners and
distributions to owners." Comprehensive income includes net
income and other nonowner changes in equity which qualify as
components of comprehensive income but bypass a statement of
income and are reported in a separate component of equity in a
balance sheet. FAS No. 130 does not change the calculation of
net income or earnings per share but requires companies to
provide additional disclosures for comprehensive income and its
components in financial statements for fiscal years beginning
after December 15, 1997, including interim periods.
7<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
NOTE 3 New Accounting Pronouncements (Continued)
The Corporation has elected, as permitted under FAS No. 130, to
report comprehensive income in the Statement of Changes in
Shareholders' Equity and has reclassified comparative financial
statements to conform to the required presentation under FAS No.
130 for comprehensive income. For all periods presented, "other
comprehensive income" (comprehensive income excluding net income)
includes only one component, which is the change in unrealized
holding gains and losses on available for sale securities. The
following table identifies the related tax effects allocated to
each component of other comprehensive income in the Statements of
Changes in Shareholders' Equity (dollar amounts in thousands).
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
Tax Net of Tax Net of
Pre-tax (Expense) Tax Pre-tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $6,346 $(2,221) $4,125 $5,714 $(2,000) $3,714
Less: reclassification adjustment for
gains realized in net income (2,614) 915 (1,699) (5,990) 2,097 (3,893)
Net unrealized gains 3,732 (1,306) 2,426 (276) 97 (179)
Other comprehensive income $3,732 $(1,306) $2,426 $ (276) $ 97 $ (179)
</TABLE>
The adoption of FAS No. 130 did not have a material impact on the
Corporation's financial condition or results of operations.
In June 1997, The Financial Accounting Standards Board ("FASB")
issued Statement No 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS No. 131") which is
effective for financial statements for periods beginning after
December 15, 1997. FAS No. 131 redefines how operating segments
are determined and requires disclosures of certain financial and
descriptive information about a company's operating segments.
The disclosures of FAS No. 131 are not required for interim
periods in the initial year of application. Management's
determination is that, under current conditions, the Corporation
will report one business segment.
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
("FAS No. 132") which is effective for years beginning after
December 15, 1997. FAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans but does not
change the measurement or recognition of those plans. In June
1998, the FASB issued statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS No. 133")
which is effective for the first quarter of years beginning after
June 15, 1999. FAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities
which require that an entity recognize all derivatives as either
assets or liabilities in a balance sheet and measure those
instruments at fair value. Management believes that adoption of
FAS No. 132 and FAS No. 133 will not have a material impact on
the Corporation's financial condition or results of operations.
8<PAGE>
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
NOTE 3 New Accounting Pronouncements (Continued)
In October 1998, the FASB issued Statement No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("FAS No. 134") which is effective for quarters beginning after
December 15, 1998. FAS No. 134 amends FASB statement No. 65
"Accounting for Certain Mortgage Banking Activities" (FAS No.
65). FAS No. 65 required that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed
securities as trading securities while FAS No. 134 requires the
resulting mortgage-backed securities or other retained interests
to be classified based on the entity's ability and intent to sell
or hold those investments. On the date FAS No. 134 is initially
applied, an enterprise may reclassify mortgage backed securities
and other beneficial interests retained after the securitization
of mortgage loans held for sale from the trading category, except
for those with sales commitments in place. Management believes
that adoption of FAS No. 134 will not have a material impact on
the Corporation's financial condition or results of operations.
NOTE 4 Pending Business Combination
On July 15, 1998, the Corporation entered into a definitive
agreement to acquire Southwest National Corporation
("Southwest"). Southwest is a Pennsylvania-chartered bank
holding company headquartered in Greensburg, Pennsylvania.
Southwest has total assets of approximately $837 million,
deposits of $640 million and equity of $86 million at
September 30, 1998. The agreement provides for the issuance of
2.9 shares of First Commonwealth Financial Corporation ("First
Commonwealth") common stock for each Southwest common share. The
transaction has been structured to be a tax-free reorganization
accounted for as a pooling of interests.
Regulatory approvals for the proposed merger were received from
the Federal Reserve Bank and the PA Department of Banking on
November 2, 1998 and November 4, 1998, respectively. Subject to
approval from First Commonwealth and Southwest shareholders at
shareholder meetings scheduled for December 15, 1998, the merger
will be completed by December 31, 1998. It is anticipated that
the merger will be accretive to earnings per share in 1999, the
first full year of combined operations.
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
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 this
"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.
RESULTS OF OPERATIONS
First Nine Months of 1998 as Compared to the First Nine Months of
1997
Net income in the nine months of 1998 was $25.2 million
reflecting an increase of $1.6 million over 1997 results of $23.6
million. Net income excluding the impact of securities
transactions reflected an increase of $3.8 million or 19% when
comparing the nine months of 1998 to the same period of 1997.
Changes in net interest income increased earnings by $0.16 per
share during 1998 while the impact of net securities transactions
decreased earnings per share $0.15 in 1998. Trust revenues
generated an increase of $0.03 per share for the nine months of
1998 compared to 1997. Return on average assets was 1.08% and
return on average equity was 12.02% during the 1998 period,
compared to 1.19% and 11.81%, respectively during the same period
of 1997.
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
$76.3 million for the nine months of 1998 compared to $72.8
million for the same period of 1997. Net interest margin (net
interest income, on a tax-equivalent basis, as a percentage of
average earning assets) for the 1998 period was 3.60%, reflecting
a decrease of 39 basis points (0.39%) from 3.99% reported in
1997.
Interest and fees on loans increased $6.8 million for 1998 over
1997 as average total loans for the nine months of 1998 increased
$157.9 million over 1997 averages. The most notable components
of loan growth for 1998 were an increase in average mortgage
loans of $60.8 million and an increase in average municipal loans
of $22.5 million over 1997 averages. The increase in mortgage
loans for the 1998 period occurred primarily in loans secured by
residential real estate.
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)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 1998 as Compared to the First Nine Months of
1997 (Continued)
The increase in interest and fees on loans for 1998 included
increases due to volume of $8.1 million and decreases due to rate
of $1.3 million. The mortgage portfolio continues to be impacted
by loan refinancings and loans maturing at higher interest rates
than current market rates as well as loan origination during 1998
of innovative loan products introduced during 1995 which bear
lower introductory interest rates. Loan yields on these products
are expected to increase as these products age and introductory
interest rates are no longer offered.
Interest income on investments increased $15.2 million for the
nine months of 1998 compared to the corresponding period of 1997
primarily as result of increases due to volume of $14.1 million
and increases due to rate of $1.5 million in U.S. government
agency securities. Average balances of U.S. government agency
securities for the nine months of 1998 increased $291.3 million
over 1997 averages as part of a capital management leveraging
strategy whereby borrowings from the Federal Home Loan Bank
classified as long-term debt were invested in U.S. government
agencies. Yields on investments for the 1998 period reflected an
increase of 33 basis points (0.33%) over 1997 yields and included
an increase in yields on U.S. government agencies of 36 basis
points (0.36%) for the nine months of 1998 compared to the nine
months of 1997.
Interest on deposits increased $2.7 million for the 1998 period
compared to 1997, and included increases in interest on time
deposits of $655 thousand and increases in interest on total
savings deposits of $2.0 million. Interest expense on total
savings deposits has increased during the nine months of 1998
compared to 1997 primarily as a result of increased utilization
by customers of savings products bearing higher interest rates
than standard savings accounts. These 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. Volume increases have been
achieved through competitive rates and aggressive marketing
programs.
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)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 1998 as Compared to the First Nine Months of
1997 (Continued)
Interest expense on short-term borrowings increased $3.5 million
for the first nine months of 1998 compared to the first nine
months of 1997 as average Federal Funds purchased increased $41.9
million over 1997 averages. Additional increases in short-term
borrowings during the nine months of 1998 occurred in repurchase
agreements with original maturities greater than one day but less
than one year. Interest expense on long-term debt increased
$12.2 million compared to the 1997 period as average long-term
debt for the nine months of 1998 increased $301.2 million over
1997 averages. The long-term debt increase for 1998 was a result
of borrowings from the Federal Home Loan Bank with maturities of
up to 10 years to be utilized as part of the above mentioned
capital management leveraging strategy. The average spread of
this leverage strategy was approximately 1.36% during the 1998
period.
The provision for possible credit losses was $5.9 million for the
nine month period of 1998 compared to $4.4 million during the
1997 period. Net charge-offs against the allowance for possible
credit losses were $3.8 million in the 1998 period and $4.3
million in the 1997 period. The 1998 decrease in net charge-offs
included decreases in net charge-offs for loans secured by
residential real estate and net charge-offs for commercial loans
not secured by real estate compared to 1997. The decrease in net
charge-offs for the nine months of 1998 were partially offset by
increases in net chargeoffs of commercial loans secured by real
estate. See the "Credit Review" section for an analysis of the
quality of the loan portfolio.
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)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 1998 as Compared to the First Nine Months of
1997 (Continued)
Below is an analysis of the consolidated allowance for possible
credit losses for the nine month periods ended September 30, 1998
and 1997.
1998 1997
(Amounts in thousands)
Balance January 1, $19,766 $19,324
Loans charged off:
Commercial, financial and
agricultural 316 820
Real estate-construction -0- -0-
Real estate-commercial 648 200
Real estate-residential 241 601
Loans to individuals 3,205 3,370
Lease financing receivables 298 -0-
Total loans charged off 4,708 4,991
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 348 122
Real estate-construction -0- -0-
Real estate-commercial 26 13
Real estate-residential 66 22
Loans to individuals 431 485
Lease financing receivables 2 12
Total recoveries 873 654
Net charge offs 3,835 4,337
Provision charged to operations 5,933 4,422
Balance September 30, $21,864 $19,409
Net securities gains decreased $3.4 million during the 1998
period from $6.0 million reported in 1997. The security gains
during 1998 resulted in part from the third quarter sale of
floating collateralized mortgage obligations classified as
securities "available for sale" having a book value of $87.9
million. These securities were sold to reduce the exposure to
accelerated prepayments as interest rates were expected to fall.
The $89.6 million proceeds from the sale of securities in the
third quarter of 1998 were used to reduce outstanding Federal
Funds Purchased. The 1998 securities gains also included the
first quarter sale of U.S. Treasury securities classified as
securities "available for sale" having a book value of $45.8
million with the proceeds being reinvested in mortgage backed and
other U.S. government agency securities with similar average
expected maturities. The securities gains during 1997 resulted
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)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 1998 as Compared to the First Nine Months of
1997 (Continued)
from the sale of investments in Pennsylvania bank stocks
classified as equity securities "available for sale" having a
book value of $16.1 million.
Total other operating income, excluding securities gains
increased $2.6 million during the first nine months of 1998
compared to the first nine months of 1997. Trust income
reflected an increase for the 1998 period of $693 thousand
primarily as a result of increases in mutual fund referral fees
and income from personal trusts and agency/custodial accounts.
The most notable components of the $2.1 million increase in other
income for the nine months of 1998 compared to 1997 were
increases in the cash surrender value of bank owned life
insurance of $1.0 million, increases in insurance commissions of
$230 thousand, increases in merchant discount of $277 thousand
and increases in fees from noncustomer use of the Corporation's
ATMs of $402 thousand.
Noninterest expense was $50.9 million for the nine months of 1998
reflecting an increase of $1.2 million over the 1997 level of
$49.7 million. Although total noninterest expense for 1998
increased over 1997 levels, total noninterest expense as a
percent of average assets declined from 2.50% for the nine months
of 1997 to 2.18% for the same period of 1998. Employee costs
were $28.1 million in 1998, representing 1.20% of average assets
on an annualized basis compared to $27.3 million and 1.37% of
average assets on an annualized basis for 1997. Salary and
benefits increased only 3.2% for 1998 over the corresponding
period of 1997, primarily as a result of attrition management
which helped maintain the reduction in the number of full-time
equivalent employees for 1998 even after staffing of First
Commonwealth Insurance Agency which began operations in January
of 1998. The most notable increase in employee benefit costs for
the nine months of 1998 compared to 1997 was an increase in
health insurance costs resulting from a rate increase.
The decrease in furniture and equipment expense for the first
nine months of 1998 compared to the 1997 period was primarily the
result of a decrease in equipment repairs for the nine months of
1998. Other operating expenses increased $572 thousand in 1998
to $15.6 million. Advertising costs and Director's fees
reflected decreases of $484 thousand and $122 thousand,
respectively for the nine months of 1998 compared to the
corresponding period of 1997. Loan processing fees, lease
residual insurance costs and Pennsylvania capital stock and
shares taxes for 1998 reflected increases of $319 thousand, $166
thousand and $160 thousand respectively over 1997 levels. The
1998 period also included an increase in other professional fees
of $246 thousand which was due in part to the inclusion of First
Commonwealth Insurance Agency expenses of $119 thousand during
the 1998 period.
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)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 1998 as Compared to the First Nine Months of
1997 (Continued)
Income tax expense was $9.1 million for the nine months of 1998
compared to $10.7 million for the same period of 1997. The
Corporation's effective tax rate was 26.5% for the 1998 period
compared to 31.2% for 1997, reflecting an increase in tax-free
income including income from tax-free investment securities and
bank-owned life insurance.
Three Months ended September 30, 1998 as Compared to the Three
Months Ended September 30, 1997
Net income was $9.2 million for the third quarter of 1998, an
increase of $508 thousand over the same quarter of 1997. Basic
earnings per share was $0.42 during the 1998 quarter compared to
$0.40 for the same period of 1997. Net income excluding the
impact of securities transactions reflected an increase of $1.5
million or 23% when comparing the third quarter of 1998 to the
third quarter of 1997. Net securities gains decreased $1.6
million during the 1998 quarter from $3.2 million reported in
1997.
Net interest income for the third quarter of 1998 of $25.7
million represented an increase of $1.2 million compared to the
third quarter of 1997. Net interest margin (net interest income,
on a tax-equivalent basis, as a percentage of average earnings
assets) for the 1998 period was 3.57%, reflecting a decrease of
30 basis points (0.30%) from 3.87% reported in 1997.
Total interest and fees on loans for the three months ending
September 30, 1998 increased $1.4 million over the three months
ending September 30, 1997, reflecting increases due to volume of
$2.0 million and decreases due to rate of $568 thousand. Average
loans outstanding for the third quarter of 1998 were $113.7
million higher than average loans outstanding for the third
quarter of 1997. The most notable components of loan growth for
the 1998 quarter were an increase in average mortgage loans of
$46.2 million and an increase in average municipal loans of $20.1
million.
The total yield on loans (including fees on loans) for the three
months ended September 30, 1998 was 8.42%, a decrease of 18 basis
points (0.18%) over yields for the three months ended
September 30, 1997. Installment loans reflected a decrease of 44
basis points (0.44%) for the third quarter of 1998 compared to
1997, primarily as a result of increased utilization of indirect
auto lending. Yields on mortgage loans for the three months of
1998 reflected a decrease of 4 basis points (0.04%) compared to
the same three months of 1997 as maturities and refinancings of
loans bearing higher interest rates than current market rates
occurred. These lower yields were partially offset by rate
increases for loan products which originally bore lower
introductory rates.
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)
RESULTS OF OPERATIONS (Continued)
Three Months ended September 30, 1998 as Compared to the Three
Months Ended September 30, 1997 (Continued)
Interest income on investments for the three months ended
September 30, 1998 was $16.2 million, reflecting an increase of
$4.9 million over the three months ended September 30, 1997.
Interest on U.S. government agency securities increased $5.0
million for the third quarter of 1998 compared to the 1997
quarter and included increases due to volume of $4.6 million and
increases due to rate of $356 thousand. Average U.S. government
agency securities for the third quarter of 1998 increased $288
million over averages for the third quarter of 1997 primarily as
a result of a capital management leveraging strategy whereby
borrowings from the Federal Home Loan Bank classified as long-
term debt were invested in U.S. government agency securities.
Average U.S. government agency securities for the third quarter
of 1998 also increased as a result of the sale of U.S. Treasury
securities in the first quarter of 1998 whereby the proceeds were
reinvested in U.S. government agency securities. Yields on
investments for the 1998 quarter increased 23 basis points
(0.23%) compared to yields for the 1997 quarter, primarily as a
result of an increase in yields on U.S. government agency
securities of 25 basis points (0.25%).
Interest on deposits for the third quarter of 1998 decreased by
$117 thousand compared to the third quarter of 1997 as decreases
in interest on time deposits were partially offset by increases
in interest on savings deposits. Interest on total savings
deposits for the three months ended September 30, 1998 increased
primarily as a result of volume increases while interest on time
deposits decreased primarily as a result of rate decreases
compared to the three months ended September 30, 1997. Total
cost of deposits for the third quarter of 1998 included increases
in the cost of total savings deposits of 8 basis points (0.08%)
and decreases in the cost of time deposits of 8 basis points
(0.08%) compared to the third quarter of 1997.
Interest on short-term borrowings for the third quarter of 1998
increased $767 thousand compared to the third quarter of 1997 as
quarter to date average balances increased over averages for the
same period of 1997. Interest on long-term debt for the three
months ending September 30, 1998 increased $4.5 million over the
three month ending September 30, 1997, primarily as a result of
increases in average long term debt of $319.8 million for the
third quarter of 1998 compared to the 1997 quarter. Long-term
debt increases were primarily borrowings from the Federal Home
Loan Bank with maturities of up to ten years to be utilized as
part of the previously discussed capital management leveraging
strategy. Net interest margin was 3.57% for the third quarter of
1998 compared to 3.87% during the 1997 period.
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)
RESULTS OF OPERATIONS (Continued)
Three Months ended September 30, 1998 as Compared to the Three
Months Ended September 30, 1997 (Continued)
Provision for possible credit losses was $2.2 million for the
three months ended September 30, 1998 compared to $1.8 million
for the three months ended September 30, 1997. Net loans charged
off in the third quarter of 1998 were $1.1 million, a decrease of
$154 thousand from net charge-offs of $1.3 million reported for
the corresponding period of 1997. Net charge-offs of loans
secured by 1-4 family residential properties decreased by $173
thousand when comparing the third quarter of 1998 to the third
quarter of 1997. The decreases in net charge-offs for the third
quarter of 1998 compared to the 1997 quarter were partially
offset by an increase in net charge-offs of credit card
outstandings and auto leases.
Securities gains were $1.7 million for the third quarter of 1998
reflecting a decrease of $1.5 million compared to third quarter
1997 gains of $3.2 million. The securities gains during the
three months of 1998 resulted from the sale of floating
collateralized mortgage obligations classified as securities
"available for sale" having a book value of $87.9 million. The
$89.6 million proceeds from the sale of securities in the third
quarter of 1998 were used to reduce outstanding Federal funds
purchased. 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.
Total other operating income, excluding securities gains
increased $998 thousand for the three months ended September 30,
1998, compared to the three months ended September 30, 1997.
Included in the increase in other income for the third quarter of
1998 compared to the third quarter of 1997 were increases in the
cash surrender value of bank owned life insurance of $274
thousand, increases in noncustomer use of the Corporation's ATMs
of $147 thousand, increases in insurance commissions of $211
thousand and increases in merchant discount of $154 thousand.
Trust income for the three months ended September 30, 1998
increased $379 thousand over the three months ended September 30,
1997 primarily as a result of increases in mutual fund referral
fees and income from employee benefit and agency accounts.
Total noninterest expense for the three months ending
September 30, 1998 was $17.2 million reflecting an increase of
$652 thousand over the $16.5 million that was reported for the
corresponding period of 1997. Employee costs were $9.4 million
during the third quarter of 1998 reflecting an increase of $452
thousand over 1997 levels of $9.0 million. Other operating
expenses for the three months ended September 30, 1998 included
increases in filing and recording fees, other professional fees
and losses on the sale of assets which were partially offset by
decreases in advertising, director's fees and stationery and
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)
RESULTS OF OPERATIONS (Continued)
Three Months ended September 30, 1998 as Compared to the Three
Months Ended September 30, 1997 (Continued)
supplies expenses compared to the three months ended
September 30, 1997. Income taxes decreased $885 thousand for the
third quarter of 1998 compared to the 1997 quarter as a result of
an increase in tax free income, including income from increases
in cash surrender value of bank owned life insurance. The
Corporation's effective tax rate was 25.2% for the 1998 period
compared to 31.4% for the 1997 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 subsidiary is a member 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 by only
$11.2 million in the first nine months of 1998 as increases in
loans secured by residential real estate and municipal loans were
partially offset by decreases in consumer installment and
revolving credit loans. Municipal loan growth for 1998 occurred
primarily in short-term tax anticipation notes.
Increases in total savings deposits of $79.8 million during the
first nine months of 1998 were partially offset by decreases of
$25.7 million in time deposits. Included in total savings
deposits growth for the nine months of 1998 was growth of $60.0
million in the Corporation's American Dream Savings product as
customers reinvested traditional savings dollars in this
innovative product which offers higher interest rates than
traditional savings accounts. This product was designed to build
long-term customer relationships and is intended to produce a
favorable impact on the Corporation's net interest margin over
the long-term.
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)
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
September 30, 1998 securities available for sale had an amortized
cost of $546.3 million and an approximate fair value of $552.7
million. Growth of the available for sale portfolio during the
first nine months of 1998 was funded by borrowings from the
Federal Home Loan Bank with maturities of up to ten years which
are classified as long-term debt and the sale of U.S. treasury
securities classified as "securities available for sale".
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.
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)
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, 1998 and December 31, 1997.
September 30, 1998
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans....................$ 521,512 $143,976 $276,597 $ 942,085
Investments.............. 59,495 43,830 126,728 230,053
Other interest-earning
assets.................. 37,936 3,653 3,324 44,913
Total interest-sensitive
assets................ 618,943 191,459 406,649 1,217,051
Certificates of deposits. 324,395 197,393 335,364 857,152
Other deposits........... 819,063 -0- -0- 819,063
Borrowings............... 102,875 1,369 1,203 105,447
Total interest-sensitive
liabilities........... 1,246,333 198,762 336,567 1,781,662
GAP....................$ (627,390) $ (7,303) $ 70,082 $ (564,611)
ISA/ISL.................. 0.50 0.96 1.21 0.68
Gap/Total assets......... 20.33% 0.24% 2.27% 18.30%
December 31, 1997
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans....................$ 799,956 $125,950 $250,725 $1,176,631
Investments.............. 51,528 63,717 102,631 217,876
Other interest-earning
assets.................. 130,666 5,214 10,043 145,923
Total interest-sensitive
assets................ 982,150 194,881 363,399 1,540,430
Certificates of deposits. 252,652 161,264 225,113 639,029
Other deposits........... 804,672 -0- -0- 804,672
Borrowings............... 207,190 1,441 1,725 210,356
Total interest-sensitive
liabilities........... 1,264,514 162,705 226,838 1,654,057
GAP....................$ (282,364) $ 32,176 $136,561 $ (113,627)
ISA/ISL.................. 0.78 1.20 1.60 0.93
Gap/Total assets......... 9.64% 1.10% 4.66% 3.88%
20
<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Sensitivity (continued)
Although the periodic gap analysis provides management with a
method of measuring current interest rate risk, it only measures
rate sensitivity at a specific point in time. 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 income simulation model used by the Corporation
captures all assets, liabilities, and off-balance sheet financial
instruments, accounting for significant variables that are
believed to be affected by interest rates. These variables
include prepayment speeds on mortgage loans and mortgage backed
securities, cash flows from loans, deposits and investments and
balance sheet growth assumptions. The model also captures
embedded options, such as interest rate caps/floors or call
options, and accounts for changes in rate relationships as
various rate indices lead or lag changes in market rates. 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 Corporation's asset/liability management policy guidelines
limit interest rate risk exposure for the succeeding twenty-four
month period. Simulations are prepared under the base case where
interest rates remain flat and most likely case where interest
rates are defined using projections of economic factors.
Additional simulations are produced estimating the impact on net
interest income of a 300 basis point (3.00%) movement upward or
downward from the base case scenario. The Corporation's current
asset/liability management policy indicates that a 300 basis
point (3.00%) change in interest rates up or down cannot result
in more than a 7.5% change in net interest income when compared
to a base case without Board approval and a strategy in place to
reduce interest rate risk below the established maximum level.
The analysis at September 30, 1998, 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 nor over the next twenty-four months and the Corporation's
position would remain well within current policy guidelines.
The Corporation's "Asset/Liability Management Committee" ("ALCO")
is responsible for the identification, assessment and management
of interest rate risk exposure, liquidity, capital adequacy and
investment portfolio position. The primary objective of the ALCO
process is to ensure that the Corporation's balance sheet
structure maintains prudent levels of risk within the context of
currently known and forecasted economic conditions and to
establish strategies which provide the Corporation with
appropriate compensation for the assumption of those risks. The
ALCO attempts to mitigate interest rate risk through the use of
strategies such as asset disposition, asset and liability pricing
and matched maturity funding. The ALCO strategies are
established by the Corporation's senior management and are
approved by the Corporation's board of directors.
21<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW
The following table identifies amounts of loan losses and
nonperforming loans. Past due loans are those which were
contractually past due 90 days or more as to interest or
principal payments but were well secured and in the process of
collection. Renegotiated loans are those loans which terms have
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,
1998 1997
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 6,274 $ 7,094
Past due loans 13,618 12,277
Renegotiated loans 65 275
Total Nonperforming Loans $ 19,957 $ 19,646
Other real estate owned $ 2,204 $ 1,802
Loans outstanding at end of period $1,934,168 $1,881,844
Average loans outstanding (year-to-date) $1,963,378 $1,805,487
Nonperforming loans as percent of
total loans 1.03% 1.04%
Provision for possible credit losses $ 5,933 $ 4,422
Net charge-offs $ 3,835 $ 4,337
Net charge-offs as percent of
average loans 0.20% 0.24%
Provision for possible credit losses as
percent of net charge-offs 154.71% 101.96%
Allowance for possible credit losses as
percent of average loans outstanding 1.11% 1.08%
Allowance for possible credit losses as
percent of end-of-period loans
outstanding 1.13% 1.03%
Allowance for possible credit losses as
percent of nonperforming loans 109.56% 98.79%
22<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)
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.
Impaired loans include loans on a nonaccrual basis and
renegotiated loans.
The following table identifies impaired loans, and information
regarding the relationship of impaired loans to the reserve for
possible credit losses at September 30, 1998 and September 30,
1997.
1998 1997
(amounts in thousands)
Recorded investment in impaired loans at end
of period $6,339 $7,369
Year to date average balance of impaired loans $7,995 $8,217
Allowance for possible credit losses related to
impaired loans $1,814 $1,733
Impaired loans with an allocation of the allowance
for possible credit losses $4,924 $3,259
Impaired loans with no allocation of the allowance
for possible credit losses $1,415 $4,110
Year to date income recorded on impaired loans on
a cash basis $ 118 $ 86
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, 1998,
there were no significant concentrations of credit.
Nonperforming loans at September 30, 1998 increased $311 thousand
over 1997 levels and included increases in past due loans of $1.3
million which were partially offset by decreases in nonaccrual
loans of $820 thousand. Past due loans reflected increases in
commercial loans secured by real estate of $1.2 million, and
commercial loans not secured by real estate of $597 thousand
which were partially offset by decreases in past due loans
secured by residential real estate of $773 thousand. Nonaccrual
loans reflected decreases in loans secured by residential real
estate and auto leases of $167 thousand and $495 thousand
respectively. Nonperforming loans as a percent of total loans
23<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)
were 1.03% at September 30, 1998 compared to 1.04% at
September 30, 1997. The allowance for possible credit losses as
a percent of nonperforming loans at September 30, 1998 has
increased over both September 30, 1997 and year end 1997 levels.
Net charge-offs in both dollars and as a percentage of average
loans at September 30, 1998 have decreased over 1997 levels.
Although net charge-offs as a percentage of average loans has
historically been below peer averages, this ratio slightly
exceeded peer averages based on the most recent peer statistics
published which used June 30, 1998 data for both the Corporation
and peer comparisons. The peer group was defined using the
Uniform Bank Holding Company Performance Report published by the
Federal Financial Institutions Examination Council. Management
does not believe that charge-offs are at a level to cause major
concern.
The allowance for possible credit losses as a percent of average
loans outstanding remains below peer levels but has increased
when compared to year end 1997. Since all identified losses are
immediately charged off, no portion of the allowance for possible
credit losses is restricted to any individual credit or groups of
credits and the entire allowance is available to absorb any and
all credit losses. However, for analytical purposes, the
allowance for possible credit losses can be thought to include an
amount allocated to various loan types and an additional
unallocated amount. Based on the analysis of the adequacy of the
allowance for possible credit losses at September 30, 1998, the
unallocated portion of the allowance in dollars has increased
since year end 1997.
The Corporation's loan portfolio continues to be monitored by
senior management to identify potential portfolio risks and
detect potential credit deterioration in the early stages.
Credit risk is mitigated through the use of sound underwriting
policies and collateral requirements. Management attempts to
minimize loan losses by analyzing and modifying collection
techniques on a periodic basis. Management believes that the
allowance for possible credit losses and nonperforming loans
remain safely within acceptable levels.
CAPITAL RESOURCES
Equity capital increased $9.9 million in the first nine months of
1998. Dividends declared reduced equity by $14.6 million during
the 1998 period, while earnings retention was $10.6 million,
representing an earnings retention rate of 42.2%. The retained
net income remains in permanent capital to fund future growth and
expansion. Debt incurred by the Corporation's Employee Stock
Ownership Plan ("ESOP") to acquire the Corporation's common stock
for future distribution as employee compensation, net of debt
payments and fair value adjustments to Unearned ESOP shares,
decreased equity by $3.5 million. Amounts paid to fund the
discount on reinvested dividends and optional cash payments
24<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CAPITAL RESOURCES (Continued)
reduced equity by $757 thousand. The market value adjustment to
securities available for sale increased equity by $2.4 million.
Proceeds from the reissuance of treasury shares to provide for
stock options exercised increased equity by $2.2 million.
Acquisition of treasury stock decreased equity by $1.1 million.
A capital base can be considered adequate when it enables the
Corporation to intermediate funds responsibly and provide related
services, while protecting against future uncertainties. The
evaluation of capital adequacy depends on a variety of factors,
including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In
consideration of these factors, management's primary emphasis
with respect to the Corporation's capital position is to maintain
an adequate and stable ratio of equity to assets.
The Federal Reserve Board has 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
everage 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, 1998:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $267,004 14.2%
Risk-Based Requirement 75,212 4.0
Total Capital 288,868 15.4
Risk-Based Requirement 150,424 8.0
Minimum Leverage Capital 267,004 9.8
Minimum Leverage Requirement 94,795 3.0
At September 30, 1998 the Corporation and its banking subsidiary
are considered well capitalized as defined by the Federal Deposit
Insurance Corporation Improvement Act of 1991.
25<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000 UPDATE
The Corporation's data processing subsidiary, Commonwealth
Systems Corporation continued to test or validate year 2000
compliance during 1998. Mainframe software systems will be
renovated or replaced throughout 1998 as the systems are
successfully tested for the ability to properly utilize dates
beyond December 31, 1999. Based upon presently available
information and time estimates, the Corporation remains on
schedule to achieve its goal of implementing the majority of the
critical mainframe software systems by December 31, 1998.
The Corporation continues to evaluate significant suppliers and
outside professional service contractors to determine the extent
to which the Corporation is vulnerable to those parties' failure
to remediate their own year 2000 issues. During 1998 the
Corporation has continued to utilize internal resources to
reprogram and test software for year 2000 modifications to the
extent possible. Although the Corporation's estimate for total
year 2000 project costs and estimated times for completion are
subject to certain risks and uncertainties, as of September 30,
1998, the Corporation estimates that expenditures for the year
2000 issue will not have a material impact on the Corporation's
financial condition or results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Information appearing in Item 2 of this report under the caption
"Interest Sensitivity" is incorporated herein by reference in
response to this item.
26<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
Pending Business Combination
On July 15, 1998, the Corporation entered into a
definitive agreement to acquire Southwest National
Corporation ("Southwest"). Southwest is a
Pennsylvania-chartered bank holding company
headquartered in Greensburg, Pennsylvania. Southwest
has total assets of approximately $837 million,
deposits of $640 million and equity of $86 million
at September 30, 1998. The agreement provides for
the issuance of 2.9 shares of First Commonwealth
Financial Corporation ("First Commonwealth") common
stock for each Southwest common share. The
transaction has been structured to be a tax-free
reorganization accounted for as pooling of
interests.
Regulatory approvals for the proposed merger were
received from the Federal Reserve Bank and the PA
Department of Banking on November 2, 1998 and
November 4, 1998, respectively. Subject to approval
from First Commonwealth and Southwest shareholders
at shareholder meetings scheduled for December 15,
1998, the merger will be completed by December 31,
1998. It is anticipated that the merger will be
accretive to earnings per share in 1999, the first
full year of combined operations.
27<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION (Continued)
ITEM 5. OTHER INFORMATION (Continued)
Branch Sale
On October 30, 1998, First Commonwealth Bank, a
wholly-owned subsidiary of the registrant closed on
the sale of two branch offices located in State
College, PA to Nittany Financial Corp., also located
in State College, PA. Nittany Financial Corp.
assumed deposit liabilities of approximately $10.2
million and purchased deposit related loans and
other branch-related assets from First Commonwealth
Bank. The sale resulted in a gain of approximately
$949 thousand which will be included in the
registrant's financial results for the fourth
quarter of 1998.
ESOP Plan Stock Purchase
During the third quarter of 1998 the registrant's
ESOP Plan began buying back the registrant's common
stock. Proceeds from long-term debt incurred by the
ESOP during the third and fourth quarters of 1998 in
the amount of $6 million will be used to fund the
stock purchases which are anticipated to be
completed by November 30, 1998. Shares are expected
to be distributed to employees over the next seven
years and be included in compensation cost by the
registrant at the shares fair value at the time of
allocation to the employees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8k dated July 15, 1998, reporting the
Corporation entered into a definitive agreement
to acquire Southwest National Corporation.
28<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, 1998 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: NOVEMBER 13, 1998 /S/ John J. Dolan
John J. Dolan, Sr. Vice President
and Chief Financial
Officer
29
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