<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 12, 1998 was 22,110,745.
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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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK . . . . . . . . . . . . . . . . . . . . . . . . 24
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . 25
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
June 30, December 31,
1998 1997
ASSETS
Cash and due from banks on demand.... $ 66,524 $ 60,109
Interest-bearing deposits with banks. 7,117 4,985
Federal funds sold .................. 6,200 2,880
Securities available for sale, at
market.............................. 606,996 396,631
Securities held to maturity, at cost,
(market value $454,033 in 1998 and
$462,086 in 1997).................. 451,462 460,063
Loans................................ 1,989,287 1,937,744
Unearned income.................... (11,050) (16,841)
Allowance for possible credit losses (20,822) (19,766)
Net loans....................... 1,957,415 1,901,137
Property and equipment............... 33,965 32,578
Other real estate owned.............. 1,936 1,788
Other assets......................... 71,221 69,144
TOTAL ASSETS.................... $3,202,836 $2,929,315
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 167,326 $ 150,426
Interest-bearing................... 2,112,130 2,092,052
Total deposits.................. 2,279,456 2,242,478
Short-term borrowings................ 244,592 193,918
Other liabilities.................... 26,365 28,031
Long-term debt....................... 373,253 193,054
Total liabilities............... 2,923,666 2,657,481
SHAREHOLDER'S 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; 22,100,633
and 22,046,326 shares outstanding in
1998 and 1997, respectively........ 22,437 22,437
Additional paid-in capital........... 75,738 76,171
Retained earnings.................... 187,422 181,137
Accumulated other comprehensive income 1,841 1,632
Treasury stock (335,995 shares at
June 30, 1998 and 390,302 at
December 31, 1997, at cost)........ (6,118) (7,107)
Unearned ESOP shares................. (2,150) (2,436)
Total shareholders' equity......... 279,170 271,834
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $3,202,836 $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 6 Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans....... $41,110 $38,414 $81,362 $75,932
Interest and dividends on
investments:
Taxable interest............... 14,592 9,254 27,763 18,144
Interest exempt from Federal
income taxes.................. 1,276 922 2,392 1,820
Dividends...................... 478 313 804 663
Interest on Federal funds sold... 3 3 5 6
Interest on bank deposits........ 41 90 70 177
Total interest income......... 57,500 48,996 112,396 96,742
Interest Expense
Interest on deposits............. 23,511 22,486 46,658 43,885
Interest on short-term borrowings 3,237 1,626 6,008 3,228
Interest on long-term debt....... 5,205 726 9,129 1,381
Total interest expense........ 31,953 24,838 61,795 48,494
Net Interest Income................ 25,547 24,158 50,601 48,248
Provision for possible credit
losses.......................... 1,950 1,390 3,750 2,631
Net interest income after provision
for possible credit losses....... 23,597 22,768 46,851 45,617
Other Income
Securities gains................. -0- 1,039 982 2,797
Trust income..................... 907 700 1,705 1,391
Service charges on deposit
accounts........................ 1,414 1,448 2,723 2,845
Other income..................... 1,980 1,165 3,451 2,070
Total other income............ 4,301 4,352 8,861 9,103
Other Expenses
Salaries and employee benefits... 9,145 8,978 18,693 18,269
Net occupancy expense............ 1,241 1,238 2,554 2,533
Furniture and equipment expense.. 1,209 1,207 2,326 2,431
Other operating expenses......... 5,202 5,216 10,162 9,912
Total other expenses.......... 16,797 16,639 33,735 33,145
Income before income taxes......... 11,101 10,481 21,977 21,575
Applicable income taxes.......... 2,911 3,277 5,969 6,696
Net income......................... $ 8,190 $ 7,204 $16,008 $14,879
Average Shares Outstanding.........21,936,311 21,875,647 21,926,263 21,910,853
Average Shares Outstanding
Assuming Dilution................22,114,212 21,932,510 22,118,966 21,954,970
Per Share Data:
Basic earnings per share......... $ 0.37 $ 0.33 $ 0.73 $ 0.68
Diluted earnings per share....... $ 0.37 $ 0.33 $ 0.72 $ 0.68
Cash dividends per share......... $ 0.22 $ 0.20 $ 0.44 $ 0.40
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- 14,879 -0- -0- -0- 14,879
Other comprehensive income, net
of tax: Unrealized holding gains
(losses) on securities arising
during the period............ -0- -0- -0- 2,009 -0- -0- 2,009
Less: reclassification adjust-
ment for gains on securities
included in net income....... -0- -0- -0- (1,818) -0- -0- (1,818)
Total other comprehensive
income....................... -0- -0- -0- 191 -0- -0- 191
Total comprehensive income...... -0- -0- 14,879 191 -0- -0- 15,070
Cash dividends declared......... -0- -0- (8,849) -0- -0- -0- (8,849)
Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 536 536
Discount on dividend reinvestment
plan purchases................ -0- (307) -0- -0- -0- -0- (307)
Treasury stock acquired......... -0- -0- -0- -0- (2,728) -0- (2,728)
Treasury stock reissued......... -0- (28) -0- -0- 41 -0- 13
Balance at June 30, 1997..........$22,437 $76,329 $174,741 $1,500 $(6,976) $(2,938) $265,093
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- 16,008 -0- -0- -0- 16,008
Other comprehensive income, net
of tax: Unrealized holding gains
(losses) on securities arising
during the period............ -0- -0- -0- 831 -0- -0- 831
Less: reclassification adjust-
ment for gains on securities
included in net income....... -0- -0- -0- (622) -0- -0- (622)
Total other comprehensive
income....................... -0- -0- -0- 209 -0- -0- 209
Total comprehensive income...... -0- -0- 16,008 209 -0- -0- 16,217
Cash dividends declared......... -0- -0- (9,723) -0- -0- -0- (9,723)
Decrease in unearned ESOP shares -0- 64 -0- -0- -0- 286 350
Discount on dividend reinvestment
plan purchases................ -0- (444) -0- -0- -0- -0- (444)
Treasury stock reissued......... -0- (53) -0- -0- 989 -0- 936
Balance at June 30, 1998..........$22,437 $75,738 $187,422 $1,841 $(6,118) $(2,150) $279,170
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 6 Months
Ended June 30,
1998 1997
Operating Activities
Net income....................................... $16,008 $14,879
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses............ 3,750 2,631
Depreciation and amortization................. 2,880 2,737
Net gains on sales of assets.................. (1,048) (2,845)
Income from increase in cash surrender value
of bank owned life insurance.................. (770) -0-
Increase in interest receivable............... (2,934) (4,044)
Increase (decrease) in interest payable....... (219) 162
Decrease in income taxes payable.............. (41) (518)
Change in deferred taxes...................... 373 403
Other-net..................................... (1,399) (1,568)
Net cash provided by operating activities... 16,600 11,837
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales........................... -0- -0-
Proceeds from maturities and redemptions...... 88,105 34,422
Purchases..................................... (79,429) (60,078)
Transactions with securities available for sale:
Proceeds from sales........................... 49,036 13,769
Proceeds from maturities and redemptions...... 51,771 20,643
Purchases..................................... (309,944) (45,198)
Proceeds from sales of loans and other assets.... 15,174 6,668
Net increase in time deposits with banks......... (2,132) (1,082)
Net increase in loans............................ (74,998) (86,780)
Purchases of premises and equipment.............. (3,366) (1,915)
Net cash used by investing activities....... (265,783) (119,551)
Financing Activities
Repayments of long-term debt..................... (19,515) (25,392)
Proceeds from issuance of long-term debt......... 200,000 36,999
Discount on dividend reinvestment plan purchases. (444) (306)
Dividends paid................................... (9,711) (8,876)
Net decrease in Federal funds purchased.......... (79,205) (5,750)
Net increase in other short-term borrowings...... 129,879 873
Net increase in deposits......................... 36,978 121,521
Purchase of treasury stock....................... -0- (2,728)
Proceeds from sale of treasury stock............. 936 13
Net cash provided by financing activities... 258,918 116,354
Net increase in cash and cash equivalents... 9,735 8,640
Cash and cash equivalents at January 1............. 62,989 69,406
Cash and cash equivalents at June 30............... $72,724 $78,046
The accompanying notes are an integral part of these consolidated financial
statements.
6<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 1998 and the results of
operations for the three month and six month periods ended
June 30, 1998 and 1997, and statements of cash flows and changes
in shareholders' equity for the six month periods ended June 30,
1998 and 1997. The results of the three and six months ended
June 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 six
months of the year for:
Interest $62,014 $48,332
Income Taxes $ 5,520 $ 6,600
Noncash investing and financing
activities:
ESOP loan reductions $ 286 $ 536
Gross increase in market value
adjustment to securities
available for sale pursuant
to FAS No. 115 $ 322 $ 293
Loans transferred to other real
estate owned and repossessed
assets $ 1,954 $ 2,589
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
June 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 as required has reclassified comparative
financial statements 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>
June 30, 1998 June 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 $1,279 $(448) $ 831 $3,090 $(1,082) $2,009
Less: reclassification adjustment for
gains realized in net income (957) 335 (622) (2,797) 979 (1,818)
Net unrealized gains 322 (113) 209 293 (103) 191
Other comprehensive income $ 322 $(113) $ 209 $ 293 $( 103) $ 191
</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. 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>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Six Months of 1998 as Compared to the First Six Months of
1997 (Continued)
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.
Net income in the six months of 1998 was $16.0 million reflecting
an increase of $1.1 million over 1997 results of $14.9 million.
Net income excluding the impact of securities transactions
reflected an increase of $2.3 million or 17.7% when comparing the
six months of 1998 to the same period of 1997. Changes in net
interest income increased earnings by $0.11 per share during 1998
while the impact of net securities transactions decreased
earnings per share $0.08 in 1998. Return on average assets was
1.04% and return on average equity was 11.57% during the 1998
period, compared to 1.15% and 11.29%, 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
$50.6 million for the six months of 1998 compared to $48.2
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 3.61%, reflecting
a decrease of 44 basis points (0.44%) from 4.05% reported in
1997.
Interest and fees on loans increased $5.4 million for 1998 over
1997 levels reflecting volume increases in all loan categories as
average total loans for the six months of 1998 increased $180.3
million over 1997 averages. The most notable components of loan
growth for 1998 were an increase in average mortgage loans of
$68.3 million and an increase in average time and demand loans of
$58.7 million over 1997 averages. The increase in interest and
fees on loans for 1998 included increases due to volume of $6.2
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 Six Months of 1998 as Compared to the First Six Months of
1997 (Continued)
million which were partially offset by decreases due to rate of
$723 thousand. Yields on loans for the six months of 1998
decreased by 21 basis points (0.21%) when compared to 1997
yields, as yields on mortgage loans and installment loans
decreased by 35 basis points (0.35%) and 40 basis points (0.40%),
respectively. 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. Installment loan yields
declined during the six months of 1998 compared to the
corresponding 1997 period primarily as a result of increased
utilization of indirect automobile lending.
Interest income on investments increased $10.3 million for the
six months of 1998 compared to the corresponding period of 1997
primarily as result of increases due to volume of $9.5 million
and increases due to rate of $1.1 million in U.S. government
agency securities. Average balances of U.S. government agency
securities for the first half of 1998 increased $293.1 million
over 1997 averages primarily as part of a 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 38
basis points (0.38%) over 1997 yields and included an increase in
yields on U.S. government agencies of 41 basis points (0.41%) for
the six months of 1998 compared to the six months of 1997.
Interest on deposits increased $2.8 million for the 1998 period
compared to 1997, and included increases in interest on time
deposits of $1.5 million and increases in interest on total
savings deposits of $1.3 million. Volume increases have been
achieved through competitive rates and aggressive marketing
programs. Total cost of deposits for 1998 increased 5 basis
points (0.05%) over the 1997 level and included cost increases of
14 basis points (0.14%) for total savings deposits and cost
increases of 6 basis points (0.06%) for time deposits compared to
the six months of 1997. Rate increases for savings can primarily
be attributed to 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.
10<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
First Six Months of 1998 as Compared to the First Six Months of
1997 (Continued)
Interest expense on short-term borrowings increased $2.8 million
for the first half of 1998 compared to the first half of 1997 as
average Federal Funds purchased increased $75.3 million over 1997
averages. Interest expense on long-term debt increased $7.7
million compared to the 1997 period as average long-term debt for
the six months of 1998 increased $291.7 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
leveraging strategy. The average spread of this leverage
strategy was 1.33% during the 1998 period.
The provision for possible credit losses was $3.8 million for the
six month period of 1998 compared to $2.6 million during the 1997
period. Net charge-offs against the allowance for possible
credit losses were $2.7 million in the 1998 period and $3.0
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 six months of 1998 were partially offset by
increases in net chargeoffs of auto leases which corresponds to
growth of the lease portfolio which increased 26% in actual
outstandings since June 1997. Most of the chargeoffs of auto
leases for the 1998 period occurred in the first quarter. See
the "Credit Review" section for an analysis of the quality of the
loan portfolio.
11<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
First Six Months of 1998 as Compared to the First Six Months of
1997 (Continued)
Below is an analysis of the consolidated allowance for possible
credit losses for the six month periods ended June 30, 1998 and
1997.
1998 1997
(Amounts in thousands)
Balance January 1, $19,766 $19,324
Loans charged off:
Commercial, financial and
agricultural 234 778
Real estate-construction -0- -0-
Real estate-commercial 542 85
Real estate-residential 82 303
Loans to individuals 2,232 2,293
Lease financing receivables 268 -0-
Total loans charged off 3,358 3,459
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 311 118
Real estate-construction -0- -0-
Real estate-commercial 26 13
Real estate-residential 41 14
Loans to individuals 284 261
Lease financing receivables 2 11
Total recoveries 664 417
Net charge offs 2,694 3,042
Provision charged to operations 3,750 2,631
Balance June 30, $20,822 $18,913
Net securities gains decreased $1.8 million during the 1998
period from $2.8 million reported in 1997. The security gains
during 1998 resulted primarily from the 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 from the sale of investments in Pennsylvania bank
stocks classified as equity securities "available for sale"
having a book value of $8.8 million.
Total other operating income, excluding securities gains
increased $1.6 million during the first six months of 1998
compared to the first six months of 1997. Trust income reflected
an increase for the 1998 period of $314 thousand, as the book
value of assets managed increased over 1997 levels. The most
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)
First Six Months of 1998 as Compared to the First Six Months of
1997 (Continued)
notable components of the $1.4 million increase in other income
for the six months of 1998 compared to 1997 were increases in the
cash surrender value of bank owned life insurance of $770
thousand and increases in fees from noncustomer use of the
corporation's ATMs of $254 thousand.
Noninterest expense was $33.7 million for the six months of 1998
reflecting an increase of $590 thousand over the 1997 level of
$33.1 million. Although total noninterest expense for 1998
increased over 1997 levels, total noninterest expense as a
percent of average assets declined from 2.56% for the six months
of 1997 to 2.19% for the same period of 1998. Employee costs
were $18.7 million in 1998, representing 1.21% of average assets
on an annualized basis compared to $18.3 million and 1.41% of
average assets on an annualized basis for 1997. Salary and
benefit costs increased only 2.3% even though there was an
increase in the number of full-time equivalent employees for 1998
and an increase in health insurance costs resulting from a rate
increase. The increase in full-time equivalent employees for
1998 included staffing of First Commonwealth Insurance Agency
which began operations in January of 1998.
The decrease in furniture and equipment expense for the first six
months of 1998 compared to the 1997 period was primarily the
result of a decrease in equipment repairs for the six months of
1998. Other operating expenses increased $250 thousand in 1998
to $10.2 million. Advertising and charge card interchange fees
reflected decreases of $416 thousand and $201 thousand for the
six months of 1998 compared to the corresponding period of 1997.
Lease residual insurance costs, Pennsylvania capital stock and
shares taxes, and loan processing fees for 1998 reflected
increases of $135 thousand, $125 thousand and $225 thousand
respectively over 1997 levels.
Income tax expense was $6.0 million for the six months of 1998
compared to $6.7 million for the same period of 1997. The
Corporation's effective tax rate was 27.2% for the 1998 period
and compared to 31.0% for 1997, reflecting an increase in tax-
free income including income from bank-owned life insurance.
Three Months ended June 30, 1998 as Compared to the Three Months
Ended June 30, 1997
Net income was $8.2 million for the second quarter of 1998, an
increase of $986 thousand over the same quarter of 1997. Basic
earnings per share was $0.37 during the 1998 quarter and can be
compared to $0.33 for the same period of 1997. Net income
excluding the impact of securities transactions reflected an
increase of $1.7 million or 25% when comparing the second quarter
of 1998 to the second quarter of 1997. There were no security
gains during the 1998 quarter while net security gains were $1.0
million during the 1997 period. The securities gains during 1997
13<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Three Months ended June 30, 1998 as Compared to the Three Months
Ended June 30, 1997 (Continued)
resulted from the sale of investments in Pennsylvania bank stock
classified as equity securities "available for sale" having a
book value of $2.9 million.
Net interest income for the second quarter of 1998 of $25.5
million represented an increase of $1.4 million over the second
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 3.55%, reflecting a decrease of 44 basis
points (0.44%) from 3.99% reported in 1997.
Total interest and fees on loans for the three months ending
June 30, 1998 increased $2.7 million compared to the three months
ending June 30, 1997, reflecting increases due to volume of $3.1
million and decreases due to rate of $386 thousand. Average
loans outstanding for the second quarter of 1998 were $178.0
million higher than average loans outstanding for the second
quarter of 1997. The most notable components of loan growth for
the 1998 quarter were an increase in average mortgages and an
increase in average commercial loans not secured by real estate.
The total yield on loans (including fees on loans) for the three
months ended June 30, 1998 was 8.45%, a decrease of 19 basis
points (0.19%) over yields for the three months ended June 30,
1997. Installment loans reflected a decrease of 47 basis points
(0.47%) and mortgage loans reflected a decrease of 20 basis
points (0.20%) when comparing the second quarter of 1998 to the
related 1997 period. These yield decreases were primarily the
result of the maturity of loans bearing interest rates which were
higher than current market rates combined with the Corporation's
pricing strategies which offer highly competitive rates.
Interest income on investments for the three months ended
June 30, 1998 was $16.3 million, reflecting an increase of $5.9
million over the three months ended June 30, 1997. Interest on
U.S. government agency securities increased $6.2 million for the
second quarter of 1998 compared to the 1997 quarter and included
increases due to volume of $5.7 million and increases due to rate
of $488 thousand. The increase in interest income on U.S.
government agency securities due to volume for the second quarter
of 1998 was primarily a result of a leveraging strategy whereby
borrowings from the Federal Home Loan Bank classified as long-
term debt were invested in U.S. government agency securities.
Yields on investments for the 1998 quarter increased 33 basis
points (0.33%) compared to yields for the 1997 quarter, primarily
as a result of an increase in yields on U.S. government agency
securities of 37 basis points (0.37%).
Interest on deposits for the second quarter of 1998 increased by
$1.0 million compared to the second quarter of 1997 and included
increases due to volume of $3.3 million which were partially
offset by decreases due to rate of $2.3 million. Interest on
total savings deposits for the three months ended June 30, 1998
increased by $614 thousand compared to the three months ended
14<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Three Months ended June 30, 1998 as Compared to the Three Months
Ended June 30, 1997 (Continued)
June 30, 1997 and contained increases due to volume of $980
thousand (primarily N.O.W. accounts) and decreases due to rate of
$366. Interest on time deposits for the second quarter of 1998
increased by $411 thousand compared to the second quarter of 1997
and included increases due to volume of $2.3 million and
decreases due to rate of $1.9 million. Total cost of deposits
for the second quarter of 1998 included increases in the cost of
total savings deposits of 11 basis points (0.11%) compared to the
second quarter of 1997.
Interest on short-term borrowings for the second quarter of 1998
increased $1.6 million compared to the second 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 June 30, 1998 increased $4.5 million over the three
month ending June 30, 1997, primarily as a result of increases in
average long term debt of $322.0 million for the second quarter
of 1998 compared to the 1997 quarter. Long term debt increases
were borrowings from the Federal Home Loan Bank with maturities
of up to ten years to be utilized as part of the previously
discussed leveraging strategy. Net interest margin was 3.55% for
the second quarter of 1998 compared to 3.99% during the 1997
period.
Provision for possible credit losses was $2.0 million for the
three months ended June 30, 1998 compared to $1.4 million for the
three months ended June 30, 1997. Net loans charged off in the
second quarter of 1998 were $1.3 million, a decrease of $772
thousand from net charge-offs of $2.0 million reported for the
corresponding period of 1997. Net charge-offs of loans secured
by 1-4 family residential properties, commercial loans not
secured by real estate and loans to individuals decreased by $231
thousand, $661 thousand and $178 thousand respectively when
comparing the second quarter of 1998 to the second quarter of
1997. The decreases in net charge-offs for the second quarter of
1998 compared to the 1997 quarter were partially offset by an
increase in net charge-offs of commercial loans secured by real
estate of $175 thousand.
No securities gains were reflected in the second quarter of 1998
while securities gains for the second quarter of 1997 were $1.0
million. Total other operating income, excluding securities
gains increased $988 thousand for the three months ended June 30,
1998, compared to the three months ended June 30, 1997. Included
in the increase in other income for the second quarter of 1998
compared to the second quarter of 1997 were increases in the cash
surrender value of bank owned life insurance of $446 thousand,
increases in noncustomer use of the Corporation's ATMs of $132
thousand and increases in charge card merchant discount of $145
thousand.
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)
Three Months ended June 30, 1998 as Compared to the Three Months
Ended June 30, 1997 (Continued)
Total noninterest expense for the three months ending June 30,
1998 was $16.8 million reflecting an increase of only $158
thousand over the $16.6 million reported for the corresponding
period of 1997. Income taxes decreased $366 thousand for the
second quarter of 1998 compared to the 1997 quarter as a result
of an increase in tax free income including income from bank
owned life insurance. The Corporation's effective tax rate was
26.2% for the 1998 period compared to 31.3% 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 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 $56.2
million in the first six months of 1998. Municipal loans
accounted for over 47 percent of the increase by generating
growth of $26.9 million since year-end 1997. Municipal growth
for 1998 occurred primarily in short-term tax anticipation notes.
Commercial loans not secured by real estate increased by $23.9
million during the six months of 1998 while commercial loans
secured by real estate increased by $16.5 million.
Loan growth for the period was funded primarily by deposit growth
and net short-term borrowings. Short-term funding was obtained
through the use of short-term borrowings from the Federal Home
Loan Bank which increased by $95.9 million since year-end 1997.
Increases in total savings deposits of $57.9 million during the
first six months of 1998 were partially offset by decreases of
$37.8 million in time deposits. Included in total savings
deposit growth for the six months of 1998 was growth of $50.7
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.
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)
LIQUIDITY (Continued)
Marketable securities that the Corporation holds in its
investment portfolio are an additional source of liquidity.
These securities are classified as "securities available for
sale" and while the Corporation does not have specific intentions
to sell these securities they have been designated as "available
for sale" because they may be sold for the purpose of obtaining
future liquidity, for management of interest rate risk or as part
of the implementation of tax management strategies. As of
June 30, 1998 securities available for sale had an amortized cost
of $604.0 million and an approximate fair value of $607.0
million. Growth of the available for sale portfolio during the
first six 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.
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.
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)
LIQUIDITY (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 June 30, 1998 and December 31, 1997.
June 30, 1998
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans....................$ 818,666 $153,046 $218,184 $1,189,896
Investments.............. 71,223 42,785 89,708 203,716
Other interest-earning
assets.................. 138,672 2,218 7,171 148,061
Total interest-sensitive
assets................ 1,028,561 198,049 315,063 1,541,673
Certificates of deposits. 238,252 118,058 402,430 758,740
Other deposits........... 796,281 -0- -0- 796,281
Borrowings............... 240,140 853 2,479 243,472
Total interest-sensitive
liabilities........... 1,274,673 118,911 404,909 1,798,493
GAP....................$ (246,112) $ 79,138 $(89,846) $ (256,820)
ISA/ISL.................. 0.81 1.67 0.78 0.86
Gap/Total assets......... 7.68% 2.47% 2.81% 8.02%
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%
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)
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 of 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 were 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 June 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.
19<PAGE>
<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW
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 June 30,
1998 1997
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 7,972 $ 8,691
Past due loans 11,939 10,903
Renegotiated loans 66 276
Total Nonperforming Loans $ 19,977 $ 19,870
Other real estate owned $ 1,936 $ 1,980
Loans outstanding at end of period $1,978,237 $1,824,070
Average loans outstanding (year-to-date) $1,963,232 $1,782,888
Nonperforming loans as percent of
total loans 1.01% 1.09%
Provision for possible credit losses $ 3,750 $ 2,631
Net charge-offs $ 2,694 $ 3,042
Net charge-offs as percent of
average loans 0.14% 0.17%
Provision for possible credit losses as
percent of net charge-offs 139.20% 86.49%
Allowance for possible credit losses as
percent of average loans outstanding 1.06% 1.06%
Allowance for possible credit losses as
percent of nonperforming loans 104.23% 95.18%
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)
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.
As of June 30, 1998 and 1997 the Corporation had a recorded
investment in impaired loans of $8.0 million and $9.0 million
respectively. Impaired loans include loans on a nonaccrual basis
and renegotiated loans. The average balance of impaired loans
for the six month periods ending June 30, 1998 and 1997 was $8.4
million for both periods. An allocation of the allowance for
possible credit losses in the amount of $1.9 million relates to
$4.0 million of the impaired loans at June 30, 1998. An
allocation of the allowance for possible credit losses in the
amount of $1.9 million relates to $5.4 million of the impaired
loans at June 30, 1997. Impaired loans totalling $4.1 million
and $3.6 million at June 30, 1998 and 1997 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
six months of 1998 was $132 thousand compared to $59 thousand for
the related 1997 period.
Other than those described above, there are no material credits
that management has serious doubts as to the borrower's ability
to comply with the present loan repayment terms. Additionally,
the portfolio is well diversified and as of June 30, 1998, there
were no significant concentrations of credit.
Nonperforming loans at June 30, 1998 increased $107 thousand over
1997 levels and included increases in past due loans of $1.0
million which were partially offset by decreases in nonaccrual
loans of $719 thousand. Past due loans reflected increases in
commercial loans not secured by real estate of $611 thousand, and
loans secured by residential real estate of $452 thousand.
Nonaccrual loans reflected decreases in commercial loans secured
by real estate of $758 thousand and commercial loans not secured
by real estate of $403 thousand which were partially offset by
increases in loans secured by residential real estate of $505
thousand. Nonperforming loans as a percent of total loans were
1.01% at June 30, 1998 compared to 1.09% at June 30, 1997. The
allowance for possible credit losses as a percent of
nonperforming loans at June 30, 1998 has increased over both
June 30, 1997 and year end 1997 levels.
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 (Continued)
Net charge-offs in both dollars and as a percentage of average
loans at June 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 March 31, 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 and has decreased
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
June 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 $7.3 million in the first six months of
1998. Dividends declared reduced equity by $9.7 million during
the 1998 period, while earnings retention was $6.3 million,
representing an earnings retention rate of 39.3%. 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 $350 thousand. Amounts paid to
fund the discount on reinvested dividends and optional cash
payments reduced equity by $444 thousand. The market value
adjustment to securities available for sale increased equity by
$209 thousand. Proceeds from the reissuance of treasury shares
to provide for stock options exercised increased equity by $936
thousand.
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)
CAPITAL RESOURCES (Continued)
A capital base can be considered adequate when it enables the
Corporation to intermediate funds responsibly and provide related
services, while protecting against future uncertainties. The
evaluation of capital adequacy depends on a variety of factors,
including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In
consideration of these factors, management's primary emphasis
with respect to the Corporation's capital position is to maintain
an adequate and stable ratio of equity to assets.
The Federal Reserve Board issued risk-based capital adequacy
guidelines which are designed principally as a measure of credit
risk. These guidelines require: (1) at least 50% of a banking
organization's total capital be common and other "core" equity
capital ("Tier I Capital"); (2) assets and off-balance-sheet
items must be weighted according to risk; (3) the total capital
to risk-weighted assets ratio be at least 8%; and (4) a minimum
leverage ratio of Tier I capital to average total assets. The
minimum leverage ratio is not specifically defined, but is
generally expected to be 3-5 percent for all but the most highly
rated banks, as determined by a regulatory rating system.
The table below presents the Corporation's capital position at
June 30, 1998:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $266,466 13.9%
Risk-Based Requirement 76,657 4.0
Total Capital 287,287 15.0
Risk-Based Requirement 153,314 8.0
Minimum Leverage Capital 266,466 8.4
Minimum Leverage Requirement 95,218 3.0
At June 30, 1998 the Corporation and its banking subsidiaries are
considered well capitalized as defined by the Federal Deposit
Insurance Corporation Improvement Act of 1991.
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.
23<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 (Continued)
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 June 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.
24<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 8k dated July 15, 1998, reporting the
Corporation entered into a definitive agreement
to acquire Southwest National Corporation.
25<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
DATED: AUGUST 13, 1998 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: AUGUST 13, 1998 /S/ John J. Dolan
John J. Dolan, Sr. Vice President
and Chief Financial
Officer
26
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