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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 11, 1999 was 30,984,815.
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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 . . . . . . . . . . . . . . . . . . . . . . . . 27
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . 28
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
June 30, December 31,
1999 1998
ASSETS
Cash and due from banks on demand.... $ 83,709 $ 96,615
Interest-bearing deposits with banks. 500 1,914
Federal funds sold .................. 0 1,000
Securities available for sale, at
market.............................. 1,155,808 1,042,636
Securities held to maturity, at cost,
(Market value $452,452 in 1999 and
$486,185 in 1998).................. 458,761 482,696
Loans................................ 2,374,977 2,382,229
Unearned income.................... (5,072) (7,379)
Allowance for credit losses........ (33,644) (32,304)
Net loans....................... 2,336,261 2,342,546
Property and equipment............... 40,839 41,929
Other real estate owned.............. 1,808 2,370
Other assets......................... 125,517 85,083
TOTAL ASSETS.................... $4,203,203 $4,096,789
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 242,964 $ 264,082
Interest-bearing................... 2,722,169 2,667,049
Total deposits.................. 2,965,133 2,931,131
Short-term borrowings................ 223,831 140,547
Other liabilities.................... 36,534 38,856
Long-term debt....................... 638,525 630,850
Total liabilities............... 3,864,023 3,741,384
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;
31,262,706 shares issued; 30,976,379
and 30,937,973 shares outstanding in
1999 and 1998, respectively........ 31,263 31,263
Additional paid-in capital........... 99,716 100,240
Retained earnings.................... 247,283 235,623
Accumulated other comprehensive income (26,715) 2,199
Treasury stock (286,327 shares at
June 30, 1999 and 324,733 at
December 31, 1998, at cost)........ (5,213) (5,913)
Unearned ESOP shares................. (7,154) (8,007)
Total shareholders' equity......... 339,180 355,405
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $4,203,203 $4,096,789
The accompanying notes are an integral part of these consolidated financial
statements.
3
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands except per share data)
For the Quarter For the 6 Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
Interest Income
Interest and fees on loans....... $48,419 $51,694 $96,692 $102,651
Interest and dividends on
investments:
Taxable interest............... 22,095 17,737 42,560 33,027
Interest exempt from Federal
income taxes.................. 2,348 1,541 4,597 2,915
Dividends...................... 734 544 1,438 915
Interest on Federal funds sold... 10 458 59 886
Interest on bank deposits........ 30 42 91 72
Total interest income......... 73,636 72,016 145,437 140,466
Interest Expense
Interest on deposits............. 25,573 28,795 51,440 57,180
Interest on short-term borrowings 2,852 3,361 5,281 6,253
Interest on long-term debt....... 8,564 5,867 17,008 9,791
Total interest expense........ 36,989 38,023 73,729 73,224
Net Interest Income................ 36,647 33,993 71,708 67,242
Provision for credit losses...... 2,337 2,625 4,550 5,100
Net interest income after provision
for possible credit losses....... 34,310 31,368 67,158 62,142
Other Income
Securities gains................. -0- -0- 563 982
Trust income..................... 1,209 1,354 3,023 2,628
Service charges on deposit
accounts........................ 2,233 2,103 4,291 4,064
Gain on sale of loans............ 3,978 56 4,902 93
Other income..................... 2,524 2,320 5,047 4,104
Total other income............ 9,944 5,833 17,826 11,871
Other Expenses
Salaries and employee benefits... 12,520 12,014 25,598 24,477
Net occupancy expense............ 1,609 1,698 3,365 3,459
Furniture and equipment expense.. 1,477 1,541 2,968 2,999
Data processing expense.......... 816 798 1,664 1,549
Pennsylvania shares tax expense.. 883 813 1,730 1,596
Other operating expenses......... 6,185 5,979 12,356 11,693
Total other expenses.......... 23,490 22,843 47,681 45,773
Income before income taxes......... 20,764 14,358 37,303 28,240
Applicable income taxes.......... 5,938 3,864 10,472 7,764
Net income......................... $14,826 $10,494 $26,831 $20,476
Average Shares Outstanding.........30,601,694 30,772,797 30,589,094 30,788,301
Average Shares Outstanding
Assuming Dilution................30,688,466 30,950,698 30,702,299 30,981,004
Per Share Data:
Basic earnings per share......... $ 0.48 $ 0.34 $ 0.88 $ 0.67
Diluted earnings per share....... $ 0.48 $ 0.34 $ 0.87 $ 0.66
Cash dividends per share......... $ 0.26 $ 0.22 $ 0.49 $ 0.44
The accompanying notes are an integral part of these consolidated financial
statements.
4
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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, 1997......$31,661 $106,659 $228,230 $ 2,156 $(11,947) $(2,436) $354,323
Comprehensive income
Net income...................... -0- -0- 20,476 -0- -0- -0- 20,476
Other comprehensive income, net
of tax: Unrealized holding gains
on securities arising during
the period................... -0- -0- -0- 1,089 -0- -0- 1,089
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- 467 -0- -0- 467
Total comprehensive income...... -0- -0- 20,476 467 -0- -0- 20,943
Cash dividends declared......... -0- -0- (11,859) -0- -0- -0- (11,859)
Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 286 286
Discount on dividend reinvestment
plan purchases................ -0- (444) -0- -0- -0- -0- (444)
Treasury stock acquired......... -0- -0- -0- -0- (1,062) -0- (1,062)
Treasury stock reissued......... -0- 11 -0- -0- 989 -0- 1,000
Balance at June 30, 1998..........$31,661 $106,226 $236,847 $ 2,623 $(12,020) $(2,150) $363,187
Balance at December 31, 1998......$31,263 $100,240 $235,623 $ 2,199 $ (5,913) $(8,007) $355,405
Comprehensive income
Net income...................... -0- -0- 26,831 -0- -0- -0- 26,831
Other comprehensive income, net
of tax: Unrealized holding gains
(losses) on securities arising
during the period............ -0- -0- -0- (28,548) -0- -0- (28,548)
Less: reclassification adjust-
ment for gains on securities
included in net income....... -0- -0- -0- (366) -0- -0- (366)
Total other comprehensive
income....................... -0- -0- -0- (28,914) -0- -0- (28,914)
Total comprehensive income...... -0- -0- 26,831 (28,914) -0- -0- (2,083)
Cash dividends declared......... -0- -0- (15,171) -0- -0- -0- (15,171)
Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 853 853
Discount on dividend reinvestment
plan purchases................ -0- (233) -0- -0- -0- -0- (233)
Treasury stock acquired......... -0- -0- -0- -0- -0- -0- -0-
Treasury stock reissued......... -0- (291) -0- -0- 700 -0- 409
Balance at June 30, 1999..........$31,263 $ 99,716 $247,283 $(26,715) $ (5,213) $(7,154) $339,180
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 6 Months
Ended June 30,
1999 1998
Operating Activities
Net income....................................... $26,831 $20,476
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses................... 4,550 5,100
Depreciation and amortization................. 4,048 3,537
Net gains on sales of assets.................. (5,194) (1,051)
Income from increase in cash surrender value
of bank owned life insurance................. (1,056) (770)
Increase in interest receivable............... (635) (3,428)
Increase (decrease) in interest payable....... (3,134) 387
Increase (decrease) in income taxes payable... 1,870 (349)
Change in deferred taxes...................... (1,902) 467
Other-net..................................... (7,794) (2,479)
Net cash provided by operating activities... 17,584 21,890
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales........................... -0- -0-
Proceeds from maturities and redemptions...... 69,747 103,100
Purchases..................................... (45,777) (79,429)
Transactions with securities available for sale:
Proceeds from sales........................... 38,484 49,036
Proceeds from maturities and redemptions...... 113,743 82,760
Purchases..................................... (309,355) (474,532)
Proceeds from sales of loans and other assets.... 86,485 15,710
Sale of subsidiary............................... (2,396) -0-
Investment in bank owned life insurance.......... (20,000) -0-
Net decrease (increase) in time deposits with
banks........................................... 1,408 (2,134)
Net increase in loans............................ (79,422) (50,595)
Purchases of premises and equipment.............. (2,192) (4,222)
Net cash used by investing activities....... (149,275) (360,306)
Financing Activities
Repayments of long-term debt..................... (110) (19,515)
Proceeds from issuance of long-term debt......... 9,000 300,000
Discount on dividend reinvestment plan purchases. (233) (444)
Dividends paid................................... (12,202) (11,849)
Net increase (decrease) in Federal funds
purchased....................................... 9,925 (79,205)
Net increase in other short-term borrowings...... 73,359 126,144
Net increase in deposits......................... 37,637 40,749
Purchase of treasury stock....................... -0- (1,062)
Proceeds from sale of treasury stock............. 409 936
Net cash provided by financing activities... 117,785 355,754
Net increase (decrease) in cash and cash
equivalents................................ (13,906) 17,338
Cash and cash equivalents at January 1............. 97,615 112,380
Cash and cash equivalents at June 30............... $83,709 $129,718
The accompanying notes are an integral part of these consolidated financial
statements.
6
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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, 1999 and the results of
operations for the three month and six month periods ended June
30, 1999 and 1998, and statements of cash flows and changes in
shareholders' equity for the six month periods ended June 30,
1999 and 1998. The results of the three and six months ended
June 30, 1999 and 1998 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)
1999 1998
Cash paid during the first six
months of the year for:
Interest $76,862 $69,158
Income Taxes $10,450 $ 7,654
Noncash investing and financing
activities:
ESOP loan reductions $ 853 $ 286
Loans transferred to other real
estate owned and repossessed
assets $ 2,463 $ 3,017
NOTE 3 Comprehensive Income Disclosures
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, 1999 June 30, 1998
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 $(43,920) $15,372 $(28,548) $1,675 $(586) $1,089
Less: reclassification adjustment for
gains realized in net income (563) 197 (366) (957) 335 (622)
Net unrealized gains (44,483) 15,569 (28,914) 718 (251) 467
Other comprehensive income $(44,483) $15,569 $(28,914) $ 718 $(251) $ 467
</TABLE>
7
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
NOTE 4 New Accounting Pronouncements
Effective January 1, 1999, the Corporation adopted the Financial
Accounting Standards Board 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"). FAS No. 134 amends FAS No. 65 "Accounting for
Certain Mortgage Banking Activities". FAS No. 65 requires 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 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. The Corporation currently holds no
mortgage backed securities or other beneficial interests retained
after the securitization of mortgage loans held for sale. The
adoption of FAS No. 134 did not have a material impact on the
Corporation's financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB")
issued statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS No. 133"). 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. FAS No. 133 was
amended by FASB statement No. 137 in June 1999. FAS No. 137
delays the effective date of FAS No. 133 to the first quarter of
years beginning after June 15, 2000. Management believes that
adoption of FAS No. 133 will not have a material impact on the
Corporation's financial condition or results of operations.
NOTE 5 Sale of Subsidiary
Effective April 1, 1999 the Corporation sold all of the
outstanding common stock of BSI Financial Services Inc. ("BSI"),
a wholly-owned subsidiary of the Corporation, to First Bank
Richmond headquartered in Richmond, Indiana. The resulting loss
on sale of $167 thousand is reflected in the financial statements
for the second quarter of 1999. BSI provided mortgage banking,
loan servicing and collection services to the Corporation's
subsidiary banks and unaffiliated organizations. Services
performed by BSI for the subsidiary banks have been transferred
to the subsidiary banks or other nonbank subsidiaries of the
Corporation.
8
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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
NOTE 6 Stock Buyback
On July 13, 1999 the Corporation's Board of Directors authorized
the buyback of up to two million shares of common stock. The
buyback if fully completed would reduce the number of outstanding
shares by approximately 6.5%.
RESULTS OF OPERATIONS
First Six Months of 1999 as Compared to the First Six Months of
1998
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 1999 was $26.8 million reflecting
an increase of $6.3 million over 1998 results of $20.5 million.
Net income excluding the impact of securities transactions and
loan sales reflected an increase of $3.5 million or 18% when
comparing the six months of 1999 to the same period of 1998.
Basic earnings per share of $0.88 for the six months of 1999
increased $0.21 per share over basic earnings per share of $0.67
for the six months of 1998. Changes in net interest income
increased earnings by $0.16 per share during 1999 while the
impact of loan sales increased earnings per share $0.16 during
1999. Mortgage loans with a book value of $42.2 million were
sold during the first quarter of 1999 resulting in a gain on sale
of $890 thousand. Retail credit card loans with a book value of
$20.4 million were sold during the second quarter of 1999
resulting in a gain on sale of $4.0 million. Return on average
assets was 1.29% and return on average equity was 14.95% during
the 1999 period, compared to 1.07% and 11.41%, respectively
during the same period of 1998.
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
$71.7 million for the six months of 1999 compared to $67.2
million for the same period of 1998. Net interest margin (net
interest income, on a tax-equivalent basis, as a percentage of
9
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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 (Continued)
First Six Months of 1999 as Compared to the First Six Months of
1998 (Continued)
average earning assets) was 3.83%, for both the 1999 and 1998
periods.
The following table shows the effect of changes in volumes and
rates on interest income and interest expense.
Analysis of Changes in Net Interest Income
(dollar amounts in thousands)
1999 Change from 1998
Total Change Due Change Due
Change To Volume To Rate
Interest-earning assets:
Time deposits with banks $ 19 $ (27) $ 46
Securities 11,738 12,196 (458)
Federal funds sold (827) (818) (9)
Loans (5,959) (2,959) (3,000)
Total interest income 4,971 8,392 (3,421)
Interest-bearing liabilities:
Deposits (5,740) 1,845 (7,585)
Short-term borrowings (972) (291) (681)
Long-term debt 7,217 7,796 (579)
Total interest expense 505 9,350 (8,845)
Net interest income $ 4,466 $ (958) $ 5,424
Interest and fees on loans decreased $6.0 million for 1999 over
1998 levels including decreases in interest on mortgage loans of
$3.2 million and decreases in interest on indirect auto loans of
$1.3 million. Average loans for the first half of 1999 decreased
$81.2 million compared to averages for the first half of 1998,
primarily in residential mortgage loans and indirect auto loans.
The decrease in residential mortgage loans for the 1999 period
resulted from the sale of $52.5 million and $42.2 million of 1-4
family residential mortgage loans in the fourth quarter of 1998
and the first quarter of 1999, respectively. The average balance
of indirect auto loans for the six months of 1999 reflected a
decrease of $23.2 million over 1998 averages. The total yield on
loans decreased 21 basis points (0.21%) for the six months of
1999 compared to the six months of 1998 reflecting decreased
yields in all loan categories as short-term interest rates were
lower in the 1999 period.
Interest income on investments increased $11.7 million for the
six months of 1999 compared to the corresponding period of 1998
as average balances of U.S. government agency securities for the
six months of 1999 increased $269.8 million over 1998 averages,
and average balances of asset backed securities increased $65.4
million over the same time period. These securities purchases
were 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 agency securities and
10
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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 (Continued)
First Six Months of 1999 as Compared to the First Six Months of
1998 (Continued)
mortgage backed securities. Yields on investments for the 1999
period were comparable to the 1998 period.
Interest on deposits decreased $5.7 million for the 1999 period
compared to 1998, and included decreases in interest on time
deposits of $4.1 million and decreases in interest on total
savings deposits of $1.6 million primarily as a result of active
interest rate management. Cost of total savings deposits
decreased 46 basis points (0.46%) and cost of time deposits
decreased 38 basis points (0.38%) for the six months of 1999
compared to the six months of 1998.
Interest expense on short-term borrowings decreased $972 thousand
for the first six months of 1999 compared to the first six months
of 1998 as average Federal Funds purchased decreased $25.1
million over 1998 averages. Additionally, the cost of short-term
borrowings for the first half of 1999 decreased 71 basis points
(0.71%) compared to the first half of 1998. Interest expense on
long-term debt increased $7.2 million compared to the 1998 period
as average long-term debt for the six months of 1999 increased
$279.9 million over 1998 averages. The long-term debt increase
for 1999 was primarily 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 1.23% during the 1999
period.
The provision for credit losses was $4.6 million for the six
month period of 1999 compared to $5.1 million during the 1998
period. Net charge-offs against the allowance for credit losses
were $3.2 million in the 1999 period and $4.1 million in the 1998
period reflecting a decrease of $936 thousand. The 1999 decrease
in net charge-offs included decreases in net charge-offs for non-
real estate consumer loans compared to 1998 charge-offs. The
decreases in net charge-offs for the six months of 1999 were
partially offset by increases in net charge-offs of loans secured
by residential real estate. See the "Credit Review" section for
an analysis of the quality of the loan portfolio.
11
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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 (Continued)
First Six Months of 1999 as Compared to the First Six Months of
1998 (Continued)
Below is an analysis of the consolidated allowance for credit
losses for the six month periods ended June 30, 1999 and 1998.
1999 1998
(Amounts in thousands)
Balance January 1, $32,304 $25,932
Loans charged off:
Commercial, financial and
agricultural 201 483
Real estate-construction -0- -0-
Real estate-commercial 67 542
Real estate-residential 625 120
Loans to individuals 2,972 3,766
Lease financing receivables 26 268
Total loans charged off 3,891 5,179
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 143 325
Real estate-construction -0- -0-
Real estate-commercial -0- 26
Real estate-residential 10 47
Loans to individuals 527 633
Lease financing receivables 1 2
Total recoveries 681 1,033
Net charge offs 3,210 4,146
Provision charged to operations 4,550 5,100
Balance June 30, $33,644 $26,886
Net securities gains decreased $419 thousand during the 1999
period from $982 thousand reported in 1998. The security gains
during 1999 resulted in part from the sales of fixed rate U.S.
government agency securities and U.S. Treasury securities
classified as securities "available for sale" having book values
of $15.0 million and $21.9 million, respectively, which resulted
in security gains of $167 thousand and $317 thousand,
respectively. Proceeds from the sale of U.S. Treasury Securities
in 1999 were the primary funding source for the acquisition of
$20 million of bank owned life insurance. The securities 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.
12
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<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 Six Months of 1999 as Compared to the First Six Months of
1998 (Continued)
Trust income reflected an increase for the 1999 period of $395
thousand compared to the corresponding period of 1998. During
the six months of 1999 gains on the sale of loans were $4.9
million compared to gains on sale of loans of $93 thousand for
the first half of 1998. Gains on sale of loans for the 1999
period resulted primarily from the sale of residential mortgage
loans and consumer credit card loans during 1999 which generated
gains of $890 thousand and $4.0 million respectively. Other
income for the first six months of 1999 was $5.0 million
representing an increase of $943 thousand compared to the first
six months of 1998. Other income for the first half of 1999
compared to the first half of 1998 reflected increases in the
cash surrender value of bank owned life insurance of $287
thousand and insurance commissions of $418 thousand. Additional
increases included in other income for the six months of 1999
over the 1998 period occurred in merchant discount and ATM fees.
Noninterest expense was $47.7 million for the six months of 1999
reflecting an increase of $1.9 million over the 1998 level of
$45.8 million. Although total noninterest expense for 1999
increased over 1998 levels, total noninterest expense as a
percent of average assets declined from 2.36% for the six months
of 1998 to 2.28% for the same period of 1999. Employee costs
were $25.6 million in 1999, representing 1.23% of average assets
on an annualized basis compared to $24.5 million and 1.27% of
average assets on an annualized basis for 1998. Salary and
benefit costs increased 4.6% for 1999 over the corresponding
period of 1998 but will be favorably impacted during the second
half of 1999 by the early retirement plan offered to employees
during the fourth quarter of 1998. The success of the early
retirement plan accelerated the process of right-sizing the
Corporation beyond normal attrition management by adjusting
employment levels quickly while continuing the Corporation's
tradition of not laying off employees due to merger activity.
Employee benefit costs for the first half of 1999 reflected
increases of $404 thousand over the first half of 1998 and
included increases in disability and health insurance of $112
thousand, increases in the cost of the employee stock ownership
plan of $119 thousand and increases in the cost of the 401(k)
plan of $128 thousand.
13
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<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 Six Months of 1999 as Compared to the First Six Months of
1998 (Continued)
Outside data processing expenses for the first half of 1999
increased $115 thousand over the first half of 1998 and will
continue to be controlled in future periods through centralized
management of these costs by the Corporation's data processing
subsidiary. Other operating expenses for the 1999 period were
$12.4 million reflecting an increase of $663 thousand over the
1998 amount of $11.7 million. Other operating expenses for the
first half of 1999 included an increase in the write-down of
mortgage servicing rights in the amount of $336 thousand related
to the disposition of BSI. The disposition of BSI in the second
quarter of 1999 also resulted in a loss on sale of $167 thousand.
Advertising and filing and recording fees reflected increases for
the first six months of 1999 of $264 thousand and $126 thousand,
respectively compared to the 1998 period. Other professional
fees for the first half of 1999 decreased compared to 1998 levels
as outside professionals contracted during 1998 under limited
engagements to review the Corporation's asset/liability
management model, analyze fee structures, and provide research
and consulting services for marketing, customer profitability
analysis and branch automation initiatives were not extended into
the 1999 period.
Income tax expense was $10.5 million for the six months of 1999
compared to $7.8 million for the same period of 1998. The
Corporation's effective tax rate was 28.1% for the 1999 period
compared to 27.5% for the 1998 period.
Three Months ended June 30, 1999 as Compared to the Three Months
Ended June 30, 1998
Net income was $14.8 million for the second quarter of 1999, an
increase of $4.3 million over 1998 results of $10.5 million.
Basic earnings per share was $0.48 during the 1999 quarter
compared to $0.34 for the same period of 1998. Net income
excluding the impact of loan sales reflected an increase of $1.8
million or 17% when comparing the second quarter of 1999 to the
second quarter of 1998. Basic earnings per share excluding the
impact of loan sales was $0.40 during the 1999 quarter compared
to $0.34 for the same period of 1998, reflecting an increase of
18%. Gains on sale of loans for the second quarter of 1999
resulted primarily from the sale of retail credit card loans as
previously mentioned. Return on average assets was 1.41% and
return on average equity was 16.42% during the 1999 quarter,
compared to 1.06% and 11.56%, respectively during the 1998
quarter.
14
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<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 June 30, 1999 as Compared to the Three Months
Ended June 30, 1998 (Continued)
Net interest income for the second quarter of 1999 of $36.6
million represented an increase of $2.7 million over the second
quarter of 1998. Net interest margin (net interest income, on a
tax-equivalent basis, as a percentage of average earning assets)
for the 1999 period was 3.86%, reflecting an increase of 10 basis
points (0.10%) from 3.76% reported in 1998.
Total interest and fees on loans for the three months ended
June 30, 1999 decreased $3.3 million compared to the three months
ended June 30, 1998. The decrease in interest and fees on loans
for the second quarter of 1999 compared to the 1998 quarter was
equally attributable to volume decreases and rate decreases.
Average loans outstanding for the second quarter of 1999 were
$94.4 million lower than average loans outstanding for the second
quarter of 1998. This decrease resulted from the sale of $52.5
million and $42.2 million of 1-4 family residential mortgage
loans in the fourth quarter of 1998 and the first quarter of
1999, respectively. The total yield on loans (including fees on
loans) for the three months ended June 30, 1999 was 8.28%, a
decrease of 21 basis points (0.21%) over yields for the three
months ended June 30, 1998 as all loan categories reflected
decreases reflecting lower short-term market interest rates.
Interest income on investments for the three months ended
June 30, 1999 was $25.2 million, reflecting an increase of $5.4
million over the three months ended June 30, 1998. The primary
factor which generated an increase in interest income was the
increased average asset related to the capital management
leverage strategy as previously described. Yields on investments
for the 1999 quarter were 6.48% compared to 6.46% for the same
period of 1998.
Interest on deposits for the second quarter of 1999 was $25.6
million reflecting a decrease of $3.2 million compared to the
second quarter of 1998. Interest on total savings deposits for
the three months ended June 30, 1999 decreased $1.1 million
compared to the same period of 1998, primarily as a result of
rate decreases. The cost of total savings deposits decreased 54
basis points (0.54%) for the second quarter of 1999 compared to
the second quarter of 1998. Interest on time deposits for the
1999 quarter decreased $2.2 million over 1998 levels as decreases
due to rate of $3.7 million were partially offset by increases
due to volume of $1.5 million. The cost of time deposits
decreased 46 basis points (0.46%) for the second quarter of 1999
compared to the second quarter of 1998. Total cost of deposits
for the second quarter of 1999 was 3.47% compared to 3.96% for
the second quarter of 1998, a decrease of 50 basis points
(0.50%).
15
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<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 June 30, 1999 as Compared to the Three Months
Ended June 30, 1998 (Continued)
Interest on short-term borrowings for the second quarter of 1999
decreased $509 thousand compared to the second quarter of 1998 as
the cost of borrowings decreased 70 basis points (0.70%) for the
1999 period compared to the 1998 period. Interest on long-term
debt for the three months ended June 30, 1999 increased $2.7
million over the three months ended June 30, 1998, primarily as a
result of increases in average long-term debt of $212.5 million
for the second quarter of 1999 compared to the 1998 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.
Provision for credit losses was $2.3 million for the three months
ended June 30, 1999 compared to $2.6 million for the three months
ended June 30, 1998. Net loans charged offs in the second
quarter of 1999 were $1.8 million, a decrease of $174 thousand
from net charge-offs of $2.0 million reported for the
corresponding period of 1998. Net charge-offs of commercial
loans, both secured by real estate and not secured by real
estate, decreased and were partially offset by an increase in net
charge-offs of loans secured by 1-4 family residential properties
in the 1999 quarter.
Total other operating income, increased $4.1 million for the
three months ended June 30, 1999, compared to the three months
ended June 30, 1998. Gains on sale of loans for the second
quarter of 1999 of $4.0 million compared to gains of $56 thousand
for the second quarter of 1998. Gains on sale of loans for the
second quarter of 1999 resulted from the sale of consumer credit
card loans. Other income for the 1999 period also included
increases in insurance commissions of $255 thousand, over 1998
amounts.
Total noninterest expense for the three months ending June 30,
1999 was $23.5 million reflecting an increase of $647 thousand
over the $22.8 million that was reported for the corresponding
period of 1998. Employee costs were $12.5 million during the
second quarter of 1999 reflecting an increase of $506 thousand
over 1998 levels of $12.0 million. Salary expense for the second
quarter of 1999 compared to the 1998 quarter was positively
impacted by the sale of BSI in the second quarter of 1999 and the
early retirement plan offered to employees. Employee benefit
costs increased $344 thousand for the second quarter of 1999
16
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<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 June 30, 1999 as Compared to the Three Months
Ended June 30, 1998 (Continued)
compared to the second quarter of 1998. Benefit cost increases
for the 1999 period occurred primarily in hospitalization,
employee stock ownership plan expenses and 401(k) expenses.
Other operating expenses for the three months ended June 30, 1999
included increases in advertising expense, filing and recording
fees, and losses on the sale of assets which were partially
offset by decreases in legal fees and other professional fees.
The increase in loss on sale of assets for the second quarter of
1999 was due in part to the sale of BSI which resulted in a loss
on sale of $167 thousand. Income taxes increased $2.1 million
for the second quarter of 1999 compared to the 1998 quarter. The
Corporation's effective tax rate was 28.6% for the 1999 period
compared to 26.9% for the 1998 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 the 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 decreased by $6.3 million in the first six months of
1999 as decreases in loans secured by residential real estate of
$39.1 million and decreases in loans to individuals of $20.9
million were partially offset by increases in all other loan
types, including an increase in commercial loans secured by real
estate of $25.4 million. The reduction in residential mortgage
loans was primarily the result of the sale of $42.2 million of
residential mortgages in March of 1999. The mortgage loans were
sold to reduce the Corporation's prepayment risk and to shorten
the average life of the fixed rate loan portfolio. The reduction
in loans to individuals was primarily the result of the sale of
$20.4 million of consumer credit card loans.
17
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<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)
Total deposits decreased $34.0 million during the first half of
1999 and included decreases in noninterest bearing demand
deposits of $21.1 million and increases in total savings deposits
and time deposits of $40.0 million and $15.1 million,
respectively. The increase in total savings deposits for the
first half of 1999 resulted primarily from increases in the
Corporation's American Dream savings product. Customers continue
to reinvest traditional savings dollars in this 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.
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, 1999 securities available for sale had an amortized cost
of $1,196.8 million and an approximate fair value of $1,155.8
million. Growth of the available for sale portfolio during the
first six months of 1999 in the amount of $113.2 million was
funded primarily by short-term borrowings. The investment in
bank owned life insurance during the first quarter of 1999 was
funded primarily from the liquidation of U.S. government agencies
and U.S. treasury securities.
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.
18
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<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)
A positive gap tends to indicate that earnings will be impacted
favorably if interest rates rise during the period and negatively
when interest rates fall during the time period. A negative gap
tends to indicate that earnings will be affected inversely to
interest rate changes. In other words, as interest rates fall, a
negative gap should tend to produce a positive effect on
earnings, and when interest rates rise, a negative gap should
tend to affect earnings negatively.
The primary components of ISA include adjustable rate loans and
investments, loan repayments, investment maturities and money
market investments. The primary components of ISL include
maturing certificates of deposit, money market deposits, savings
deposits, NOW accounts and short-term borrowings.
19
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<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 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, 1999 and December 31, 1998
(Dollar amounts in thousands):
June 30, 1999
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans....................$ 741,189 $148,504 $235,378 $1,125,071
Investments.............. 61,302 59,340 103,861 224,503
Other interest-earning
assets.................. 11,824 1,609 5,170 18,603
Total interest-sensitive
assets................ 814,315 209,453 344,409 1,368,177
Certificates of deposits. 442,298 156,159 372,860 971,317
Other deposits........... 1,127,148 -0- -0- 1,127,148
Borrowings............... 226,919 2,693 27,052 256,664
Total interest-sensitive
liabilities........... 1,796,365 158,852 399,912 2,355,129
GAP....................$ (982,050) $ 50,601 $(55,503) $ (986,952)
ISA/ISL.................. 0.45 1.32 0.86 0.58
Gap/Total assets......... 23.36% 1.20% 1.32% 23.48%
December 31, 1998
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans....................$ 765,948 $168,297 $293,082 $1,227,327
Investments.............. 59,942 87,042 149,497 296,481
Other interest-earning
assets.................. 38,048 4,120 6,207 48,375
Total interest-sensitive
assets................ 863,938 259,459 448,786 1,572,183
Certificates of deposits. 359,487 323,760 318,282 1,001,529
Other deposits........... 1,094,125 -0- -0- 1,094,125
Borrowings............... 142,509 1,085 2,413 146,007
Total interest-sensitive
liabilities........... 1,596,121 324,845 320,695 2,241,661
GAP....................$ (732,183) $(65,386) $128,091 $ (669,478)
ISA/ISL.................. 0.54 0.80 1.40 0.70
Gap/Total assets......... 17.87% 1.60% 3.13% 16.34%
20
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<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 June 30, 1999, 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
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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)
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 are 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.
At June 30,
1999 1998
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 9,869 $ 10,654
Past due loans 12,507 14,106
Renegotiated loans 63 66
Total Nonperforming Loans $ 22,439 $ 24,826
Other real estate owned $ 1,808 $ 2,198
Loans outstanding at end of period $2,369,905 $2,467,764
Average loans outstanding (year-to-date) $2,382,276 $2,463,442
Nonperforming loans as percent of
total loans 0.95% 1.01%
Provision for credit losses $ 4,550 $ 5,100
Net charge-offs $ 3,210 $ 4,146
Net charge-offs as percent of
average loans outstanding 0.13% 0.17%
Provision for credit losses as percent
of net charge-offs 141.74% 123.01%
Allowance for credit losses as percent
of average loans outstanding 1.41% 1.09%
Allowance for credit losses as percent
of end-of-period loans outstanding 1.42% 1.09%
Allowance for credit losses as percent
of nonperforming loans 149.94% 108.30%
22
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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)
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
credit losses at June 30, 1999 and June 30, 1998.
1999 1998
(amounts in thousands)
Recorded investment in impaired loans at end
of period $ 9,932 $10,720
Year to date average balance of impaired loans $10,252 $11,436
Allowance for credit losses related to impaired
loans $ 2,299 $ 1,937
Impaired loans with an allocation of the allowance
for credit losses $ 4,392 $ 4,817
Impaired loans with no allocation of the allowance
for credit losses $ 5,540 $ 5,903
Year to date income recorded on impaired loans on
a cash basis $ 124 $ 167
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, 1999, there
were no significant concentrations of credit.
Nonperforming loans at June 30, 1999 decreased $2.4 million
compared to 1998 levels and included decreases in past due loans
of $1.6 million and decreases in nonaccrual loans of $785
thousand. Past due loans reflected decreases in commercial loans
secured by real estate of $918 thousand, and residential loans
secured by real estate of $1.2 million which were partially
offset by increases in past due loans to individuals of $523
thousand. Nonaccrual loans reflected decreases in commercial
loans not secured by real estate of $376 thousand, loans secured
by residential real estate of $1.4 million and auto leases of
23
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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)
CREDIT REVIEW (Continued)
$209 thousand. Nonaccrual construction loans increased $1.1
million at June 30, 1999 compared to June 30, 1998.
Nonperforming loans as a percent of total loans were 0.95% at
June 30, 1999 compared to 1.01% at June 30, 1998. The allowance
for credit losses as a percent of nonperforming loans at June 30,
1999 has increased over both June 30, 1998 and year-end 1998
levels. Net charge-offs in both dollars and as a percentage of
average loans at June 30, 1999 have decreased over 1998 levels.
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 credit losses and nonperforming loans remain safely
within acceptable levels.
CAPITAL RESOURCES
Equity capital decreased $16.2 million in the first six months of
1999. Dividends declared reduced equity by $15.2 million during
the 1999 period, while earnings retention was $11.7 million,
representing an earnings retention rate of 43.5%. The retained
net income remains in permanent capital to fund future growth and
expansion. Payments by the Corporation's Employee Stock
Ownership Plan ("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 $853 thousand. Amounts paid to fund
the discount on reinvested dividends and optional cash payments
reduced equity by $233 thousand. The market value adjustment to
securities available for sale decreased equity by $28.9 million.
Proceeds from the reissuance of treasury shares to provide for
stock options exercised increased equity by $409 thousand.
A capital base can be considered adequate when it enables the
Corporation to intermediate funds responsibly and provide related
services, while protecting against future uncertainties. The
evaluation of capital adequacy depends on a variety of factors,
including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In
consideration of these factors, management's primary emphasis
with respect to the Corporation's capital position is to maintain
an adequate and stable ratio of equity to assets.
24
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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)
CAPITAL RESOURCES (Continued)
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 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, 1999:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $356,458 14.2%
Risk-Based Requirement 100,536 4.0
Total Capital 387,876 15.4
Risk-Based Requirement 201,073 8.0
Minimum Leverage Capital 356,458 8.4
Minimum Leverage Requirement 126,644 3.0
At June 30, 1999 the Corporation's 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 address year 2000 issues during
the second quarter of 1999. Renovation whereby code
enhancements, hardware and software upgrades and system
replacements are implemented was substantially complete for
mission critical systems as of June 30, 1999. An application is
considered mission critical if it is vital to the successful
continuation of a core business activity. Validation or testing
of all changes to hardware and software components, including
connections with other systems, and implementation of mission
critical systems were also substantially complete by the same
time frame, placing the Corporation within guidelines established
by federal regulatory agencies. Regulatory agencies will
continue to perform quarterly reviews of the Corporation's year
2000 readiness throughout 1999. Outside professionals engaged by
the Corporation during 1998 to provide additional independent
verification and validation processes and to assure the
reliability of internal risk and cost estimates will continue
their engagements during 1999.
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 (Continued)
The Corporation will continue to strengthen its remediation
contingency plan for year 2000 events during the remainder of
1999. The remediation contingency plan addresses major
identifiable internal and external components and identifies
alternative processes in event that a system fails. Third party
vendors have been evaluated and outside sources have been tested
where possible. Contingencies established for critical systems
and processes include manual processing of transactions,
utilization of tape transfer rather than electronic medium, use
of alternate communication lines or methods and the installation
of a generator as a backup power source. Contingencies for
communication with customers include maintaining access to the
Corporation's telephone banking center by relocation of the
center if necessary. Short-term liquidity needs have been
estimated and multiple sources of funds have been identified.
Contingency planning will continue throughout the remainder of
1999. Although all possible problems can not possibly be
anticipated, management believes that potential difficulties
associated with implementation are likely to result in only minor
delays in transaction or information availability.
The Corporation utilized internal resources to evaluate,
reprogram and test software and hardware for year 2000 issues to
the extent possible. Salary and benefit costs related to year
2000 activities were expensed as incurred. External year 2000
expenditures included amounts for capitalized hardware and
software which will be amortized over three years for software
and five years for hardware. Year 2000 expenditures which were
expensed as incurred included the cost of leased off-site testing
of mainframe systems, outside professionals utilized for
independent verification, travel and lodging during off-site
testing and vendor testing. The Corporation's estimates of
additional year 2000 expenditures to be incurred during 1999 are
based on presently available information and estimates. Cash
outlays were funded through operating cash flows. Due to the
Corporation's commitment to mitigate year 2000 risks where
possible, management does not believe the year 2000 problem will
have a material impact on the Corporation's financial condition
or results of operations.
26
<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 following table summarizes year 2000 expenditures incurred
through the end of the second quarter of 1999 and estimated
amounts to be incurred throughout the remainder of 1999. (Dollar
amounts in thousands)
<TABLE>
<CAPTION>
6 Months Estimate 12 Months 12 Months
Ended for Remainder Ended Ended
06/30/99 of 1999 12/31/98 12/31/97
<S> <C> <C> <C> <C>
Capitalized hardware and software $ 81 $ 19 $ 250 $106
Nonemployee expenses including testing 44 105 152 20
Employee related costs 429 427 1,003 163
Subtotal 554 551 1,405 289
Capitalized hardware and software replaced
without acceleration due to year 2000 567 147 2,043 70
Total expenditures $1,121 $ 698 $3,448 $359
</TABLE>
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.
27
<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
On April 26, 1999, the Corporation held its regularly
scheduled annual meeting of shareholders. The following
proposals were considered and acted upon.
Proposal 1
The following directors were elected for terms to expire
in 2002:
Sumner E. Brumbaugh
Ray T. Charley
Edward T. Cote
Clayton C. Dovey, Jr.
Johnston A. Glass
Dale P. Latimer
Joseph E. O'Dell
David R. Tomb, Jr.
Proposal 2
A proposal to amend the Corporation's 1995 Compensatory
Stock Option Plan to allow the participation of non-
employee directors in the plan.
For 18,007,387
Against 2,658,287
Abstain 519,079
Non-voting 9,753,220
ITEM 5. OTHER INFORMATION
Not applicable.
28
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION (Continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
29
<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 12, 1999 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: AUGUST 12, 1999 /S/ John J. Dolan
John J. Dolan, Sr. Vice President
and Chief Financial Officer
30
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<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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0
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