-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V0e/yfVDXteCz87r6/4j2TZ2Sh3rJmAJZ7Xo8DnmgNfoNbcj9v2D8VBaiGX+YMPN 80sFgN/CZRB7vdeMTldqYg== 0000712537-98-000008.txt : 19980518 0000712537-98-000008.hdr.sgml : 19980518 ACCESSION NUMBER: 0000712537-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 241428528 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11138 FILM NUMBER: 98623402 BUSINESS ADDRESS: STREET 1: OLD COURTHOUSE SQUARE STREET 2: 22 N SIXTH ST CITY: INDIANA STATE: PA ZIP: 15701 BUSINESS PHONE: 4123497220 MAIL ADDRESS: STREET 1: 22 NORTH SIXTH STREET STREET 2: P.O. BOS 400 CITY: INDIANA STATE: PA ZIP: 15701 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C 20549 ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 May 12, 1998 was 22,096,719. 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 . . . . . . . . . . . . . . . . . . . . . . . . 22 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . 23 Signatures . . . . . . . . . . . . . . . . . . . . Signature Page FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands) March 31, December 31, 1998 1997 ASSETS Cash and due from banks on demand.... $ 73,605 $ 60,109 Interest-bearing deposits with banks. 6,370 4,985 Federal funds sold .................. -0- 2 880 Securities available for sale, at market.............................. 586,472 396,631 Securities held to maturity, at cost, (market value $452,126 in 1998 and $462,086 in 1997).................. 449,992 460,063 Loans................................ 1,983,394 1,937,744 Unearned income.................... (13,797) (16,841) Allowance for possible credit losses (20,140) (19,766) Net loans....................... 1,949,457 1,901,137 Property and equipment............... 33,225 32,578 Other real estate owned.............. 1,914 1,788 Other assets......................... 72,441 69,144 TOTAL ASSETS.................... $3,173,476 $2,929,315 LIABILITIES Deposits (all domestic): Noninterest-bearing................ $ 150,170 $ 150,426 Interest-bearing................... 2,100,093 2,092,052 Total deposits.................. 2,250,263 2,242,478 Short-term borrowings................ 243,461 193,918 Other liabilities.................... 30,512 28,031 Long-term debt....................... 374,404 193,054 Total liabilities............... 2,898,640 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; 22,095,035 and 22,046,326 shares outstanding in 1998 and 1997 respectively......... 22,437 22,437 Additional paid-in capital........... 75,854 76,171 Retained earnings.................... 184,093 181,137 Accumulated other comprehensive income 965 1,632 Treasury stock (341,593 shares at March 31, 1998 and 390,302 at December 31, 1997, at cost)........ (6,220) (7,107) Unearned ESOP shares................. (2,293) (2,436) Total shareholders' equity......... 274,836 271,834 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $3,173,476 $2,929,315 The accompanying notes are an integral part of these consolidated financial statements. 3 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands except per share data) For the 3 Months Ended March 31, 1998 1997 Interest Income Interest and fees on loans........ $40,252 $37,518 Interest and dividends on investments: Taxable interest................ 13,171 8,890 Interest exempt from Federal income taxes................... 1,116 898 Dividends....................... 326 350 Interest on Federal funds sold.... 2 3 Interest on bank deposits......... 29 87 Total Interest Income.......... 54,896 47,746 Interest Expense Interest on deposits.............. 23,147 21,399 Interest on short-term borrowings. 2,771 1,602 Interest on long-term debt........ 3,924 655 Total Interest Expense......... 29,842 23,656 Net interest income................. 25,054 24,090 Provision for possible credit losses 1,800 1,241 Net interest income after provision for possible credit losses........ 23,254 22,849 Other Income Net securities gains.............. 982 1,758 Trust income...................... 798 691 Service charges on deposit accounts 1,309 1,397 Other income...................... 1,471 905 Total Other Income............. 4,560 4,751 Other Expenses Salaries and employee benefits.... 9,548 9,291 Net occupancy expense............. 1,313 1,295 Furniture and equipment expense... 1,117 1,224 FDIC expense...................... 74 66 Other operating expenses.......... 4,886 4,630 Total Other Expenses........... 16,938 16,506 Income before taxes................. 10,876 11,094 Applicable income taxes........... 3,058 3,419 Net Income.......................... $ 7,818 $ 7,675 Average Shares Outstanding.......... 21,916,103 21,946,450 Average Shares Outstanding Assuming Dilution........................... 22,123,773 21,977,681 Per Share Data: Basic earnings per share............ $0.36 $0.35 Diluted earnings per share.......... $0.35 $0.35 Cash dividends per share............ $0.22 $0.20 The accompanying notes are an integral part of these consolidated financial statements. 4 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands)
Accumulated Additional Other Unearned Total Common Paid-in Retained Comprehensive Treasury ESOP Shareholders' Stock Capital Earnings Income Stock Shares Equity 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- 7,675 -0- -0- -0- 7,675 Other comprehensive income, net of tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period....................... -0- -0- -0- 741 -0- -0- 741 Less: reclassification adjust- ment for gains included in net income....................... -0- -0- -0- (1,143) -0- -0- (1,143) Total other comprehensive income....................... -0- -0- -0- (402) -0- -0- (402) Total comprehensive income.... -0- -0- 7,675 (402) -0- -0- 7,273 Cash dividends declared....... -0- -0- (4,438) -0- -0- -0- (4,438) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 268 268 Discount on dividend reinvestment plan purchases.............. -0- (149) -0- -0- -0- -0- (149) Treasury stock acquired....... -0- -0- -0- -0- (182) -0- (182) Balance at March 31, 1997....... $22,437 $76,515 $171,948 $ 907 $(4,471) $(3,206) $264,130 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- 7,818 -0- -0- -0- 7,818 Other comprehensive income, net of tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period..................... -0- -0- -0- (45) -0- -0- (45) Less: reclassification adjust- ment for gains included in net income..................... -0- -0- -0- (622) -0- -0- (622) Total other comprehensive income..................... -0- -0- -0- (667) -0- -0- (667) Total comprehensive income.... -0- -0- 7,818 (667) -0- -0- 7,151 Cash dividends declared....... -0- -0- (4,862) -0- -0- -0- (4,862) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 143 143 Discount on dividend reinvestment plan purchases.............. -0- (262) -0- -0- -0- -0- (262) Treasury stock reissued....... -0- (55) -0- -0- 887 -0- 832 Balance at March 31, 1998....... $22,437 $75,854 $184,093 $ 965 $(6,220) $(2,293) $274,836
The accompanying notes are an integral part of these consolidated financial statements. 5 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the 3 Months Ended March 31, 1998 1997 Operating Activities Net income....................................... $ 7,818 $ 7,675 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses............ 1,800 1,241 Depreciation and amortization................. 1,410 1,365 Net gains on sales of assets.................. (1,004) (1,779) Increase in cash surrender value of bank owned life insurance............................... (323) -0- Increase in interest receivable............... (1,302) (1,727) Increase in interest payable.................. 165 18 Increase in income taxes payable.............. 2,832 2,381 Change in deferred taxes...................... 130 755 Other-net..................................... (2,373) (2,835) Net cash provided by operating activities... 9,153 7,094 Investing Activities Transactions with securities held to maturity: Proceeds from sales........................... -0- -0- Proceeds from Maturities and redemptions...... 33,223 12,436 Purchases..................................... (23,090) (17,206) Transactions with securities available for sale: Proceeds from Sales........................... 48,638 7,792 Proceeds from Maturities and redemptions...... 26,754 8,681 Purchases..................................... (265,340) (11,368) Proceeds from sales of loans and other assets.... 5,685 3,282 Changes net of acquisitions: Net decrease in time deposits with banks......... (1,385) (4,433) Net increase in loans............................ (55,967) (29,873) Purchases of premises and equipment.............. (1,596) (1,100) Net cash used by investing activities.......... (233,078) (31,789) Financing Activities Repayments of long-term debt..................... (18,507) (25,288) Proceeds from issuance of long-term debt......... 200,000 36,265 Discount on dividend reinvestment plan purchases. (262) (148) Dividends paid................................... (4,850) (4,439) Net increase (decrease) in Federal funds purchased....................................... 64,600 (26,075) Net increase (decrease) in other short-term borrowings...................................... (15,057) 10,552 Changes net of acquisitions: Net increase in deposits......................... 7,785 34,477 Purchase of treasury stock....................... -0- (182) Proceeds from sale of treasury stock............. 832 -0- Net cash provided by financing activities... 234,541 25,162 Net increase in cash and cash equivalents.. 10,616 467 Cash and cash equivalents at January 1............. 62,989 69,406 Cash and cash equivalents at March 31.............. $73,605 $69,873 The accompanying notes are an integral part of these consolidated financial statements. 6 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 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 March 31, 1998 and the results of operations for the three month periods ended March 31, 1998 and 1997, and statements of cash flows and changes in shareholders' equity for the three month periods ended March 31, 1998 and 1997. The results of the three months ended March 31, 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 three months of the year for: Interest $29,677 $23,638 Income Taxes $ -0- $ 250 Noncash investing and financing activities: ESOP loan reductions $ 143 $ 268 Gross decrease in market value adjustment to securities available for sale pursuant to FAS No. 115 $(1,027) $ (618) Loans transferred to other real estate owned and repossessed assets $ 1,098 $ 1,530 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, as defined and its components in financial statements for fiscal years beginning after December 15, 1997, including interim 7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 (Unaudited) NOTE 3 New Accounting Pronouncements (Continued) periods. 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 Shareholder's Equity:
March 31, 1998 March 31, 1997 Tax Net of Tax Net of Pre-tax (Expense) Tax Pre-tax (Expense) Tax Amount Benefit Amount Amount Benefit Amount Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period ($70) $25 ($45) $1,140 ($399) $741 Less: reclassification adjustment for gains realized in net income (957) 335 (622) (1,758) 615 (1,143) Net unrealized gains (1,027) 360 (667) (618) 216 (402) Other comprehensive income ($1,027) $360 $(667) ($618) $216 ($402)
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. 8 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS First Three Months of 1998 as Compared to the First Three Months of 1997 This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and results of operations of First Commonwealth Financial Corporation (the "Corporation") including its subsidiaries. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in 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 of circumstances that arise after the date hereof. Net income in the three months of 1998 was $7.8 million reflecting an increase of $143 thousand over 1997 results of $7.7 million. Net income excluding the impact of securities transactions reflected an increase of $647 thousand or 9.9% when comparing the three months of 1998 to the same period of 1997. Changes in net interest income increased earnings by $0.05 per share during 1998 while the impact of net securities transactions decreased earnings per share $0.04 in 1998. Return on average assets was 1.05% and return on average equity was 11.44% during the 1998 period, compared to 1.21% and 11.72%, 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 $25.1 million for the three months of 1998 compared to $24.1 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 3.68%, reflecting a decrease of 42 basis points (0.42%) from 4.10% reported in 1997. Interest and fees on loans increased $2.7 million for 1998 over 1997 levels reflecting volume increases in all loan categories as average total loans for the three months of 1998 increased $182.7 million over 1997 averages. The most notable components of loan growth for 1998 were an increase in average mortgage loans of $72.6 million and an increase in average time and demand loans of $56.4 million over 1997 averages. The increase in interest and fees on loans for 1998 included increases due to volume of $3.1 9 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS First Three Months of 1998 as Compared to the First Three Months of 1997 (Continued) million and decreases due to rate of $337 thousand. Yields on loans for the three months of 1998 decreased by 23 basis points (0.23%) when compared to 1997 yields, as yields on mortgage loans and installment loans decreased by 51 basis points (0.51%) and 34 basis points (0.34%), 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 three 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 $4.5 million for the three months of 1998 compared to the corresponding period of 1997 primarily as a result of increases due to volume of $3.7 million and increases due to rate of $610 thousand in U.S. government agency securities. Average balances of U.S. government agency securities for the first quarter of 1998 increased $231.4 million over 1997 averages 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 43 basis points (0.43%) over 1997 yields and included an increase in yields on U.S. government agencies of 47 basis points (0.47%) for the three months of 1998 compared to the three months of 1997. Interest on deposits increased $1.7 million for the 1998 period compared to 1997, and included increases in interest on time deposits of $1.1 million and increases in interest on total savings deposits of $627 thousand. The most notable increase in time deposit interest during 1998 occurred in the 24 to 35 month maturity range which increased by $1.3 million over 1997 levels as a result of volume increases. Average time deposits in the 24 to 35 month maturity range increased $89.4 million for the three months of 1998 compared to 1997 averages. Volume increases have been achieved through competitive rates and aggressive marketing programs. Total cost of deposits for 1998 increased 10 basis points (0.10%) over the 1997 level and included cost increases of 17 basis points (0.17%) for total savings deposits and cost increases of 10 basis points (0.10%) for time deposits compared to the three 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 10 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) First Three Months of 1998 as Compared to the First Three Months of 1997 (Continued) build long-term customer relationships and are intended to produce a favorable impact on the Corporation's net interest margin over the long-term. Interest expense on short-term borrowings increased $1.2 million for the first quarter of 1998 compared to the first quarter of 1997 as average Federal Funds purchased increased $91.9 million over 1997 averages. Interest expense on long-term debt increased $3.3 million compared to the 1997 period as average long-term debt for the three months of 1998 increased $233.7 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 provision for possible credit losses was $1.8 million for the three month period of 1998 compared to $1.2 million during the 1997 period. Net charge-offs against the allowance for possible credit losses were $1.4 million in the 1998 period and $1.0 million in the 1997 period. The 1998 increase in net charge-offs included increases in net charge-offs for commercial loans secured by real estate and net charge-offs for auto leases compared to 1997. See the "Credit Review" section for an analysis of the quality of the loan portfolio. 11 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) First Three Months of 1998 as Compared to the First Three Months of 1997 (Continued) Below is an analysis of the consolidated allowance for possible credit losses for the three month periods ended March 31, 1998 and 1997. 1998 1997 Balance January 1, $19,766 $19,324 Loans charged off: Commercial, financial and agricultural 176 6 Real estate-construction -0- -0- Real estate-commercial 301 19 Real estate-residential 25 52 Loans to individuals 1,159 1,121 Lease financing receivables 229 -0- Total loans charged off 1,890 1,198 Recoveries of previously charged off loans: Commercial, financial and agricultural 297 41 Real estate-construction -0- -0- Real estate-commercial 26 13 Real estate-residential 3 4 Loans to individuals 137 129 Lease financing receivables 1 9 Total recoveries 464 196 Net charge offs 1,426 1,002 Provision charged to operations 1,800 1,241 Balance March 31, 1998 $20,140 $19,563 Total other operating income, excluding securities gains increased $585 thousand during the first quarter of 1998 compared to the 1997 quarter. Net securities gains decreased $776 thousand during the 1998 period from $1.8 million reported in 1997. 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. The securities gains during 1997 resulted from the sale of investments in Pennsylvania bank stocks classified as equity securities "available for sale" having a book value of $5.9 million. Trust income reflected an increase for the 1998 period of $107 thousand, as the book value of assets managed increased over 1997 levels. Other income increased $566 thousand for the three months of 1998 compared to 1997 including increases in the cash surrender value of bank owned life insurance of $323 thousand and increases in fees from noncustomer use of the Corporation's ATMs of $122 thousand. 12 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) First Three Months of 1998 as Compared to the First Three Months of 1997 (Continued) Noninterest expense was $16.9 million for the three months of 1998 reflecting an increase of $432 thousand over the 1997 level of $16.5 million. Although total noninterest expense for 1998 increased over 1997 levels total noninterest expense as a percent of average assets declined from 2.59% for the three months of 1997 to 2.27% for the same period of 1998. Employee costs were $9.5 million in 1998, representing 1.28% of average assets on an annualized basis compared to $9.3 million and 1.46% of average assets on an annualized basis for 1997. Salary and benefit increases can be attributed to 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 quarter of 1998 compared to the 1997 quarter was primarily the result of a decrease in equipment repairs for the three months of 1998. Other operating expenses increased $256 thousand in 1998 to $4.9 million. Advertising and printing costs reflected decreases of $217 thousand and $47 thousand, respectively for the three 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 $124 thousand, $72 thousand and $173 thousand respectively over 1997 levels. Additional increases for 1998 totalling $137 thousand compared to 1997 levels occurred in software maintenance, stationery and supplies and postage expense. Income tax expense was $3.1 million for the three months of 1998 compared to $3.4 million for the same period of 1997. The Corporation's effective tax rate was 28.1% for the 1998 period and compared to 30.8% for 1997, reflecting an increase in tax- free income. 13 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY Liquidity is a measure of the Corporation's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from deposits (primary source), and maturity or repayment of earning assets, such as securities and loans. As an additional secondary source, short-term liquidity needs may be provided through the use of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements, and borrowings from the Federal Reserve Bank. Additionally, the banking subsidiaries are members of the Federal Home Loan Bank and may borrow under overnight and term borrowing arrangements. The sale of earning assets may also provide an additional source of liquidity. Net loans increased $48.3 million in the first three months of 1998. Municipal loans accounted for over sixty percent of the increase by generating growth of $32.4 million since year-end 1997. Municipal growth for 1998 occurred primarily in short-term tax anticipation notes. Residential mortgages increased by $6.3 million during the three months of 1998 while commercial loans secured by real estate increased by $7.7 million. The growth in residential mortgages for 1998 was primarily the result of an increase in outstanding home equity lines of credit. 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 Federal funds purchased which increased by $64.6 million since year-end 1997. Increases in total savings deposits of 14.9 million during the first quarter of 1998 were partially offset by decreases of $6.9 million in time deposits. Included in total savings deposit growth for the three months of 1998 was growth of $107.8 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. Decreases of $25.8 million in time deposits with maturities exceeding 36 months were partially offset by increases in shorter term time deposits and time deposits greater than $100 thousand with maturities greater than one year. Time deposits greater than $100 thousand with maturities exceeding one year increased by $14.8 million during the first three months of 1998. Marketable securities that the Corporation holds in its investment portfolio are an additional source of liquidity. These securities are classified as "securities available for sale" and while the Corporation does not have specific intentions to sell these securities they have been designated as "available for sale" because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of March 31, 1998 securities available for sale had an amortized cost of $584.8 million and an approximate fair value of $586.5 14 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY (Continued) million. Growth of the available for sale portfolio during the first three 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. The primary components of ISA include adjustable rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and short-term borrowings. 15 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY (Continued) Interest Sensitivity (Continued) The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated as of March 31, 1998 and December 31, 1997. March 31, 1998 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 821,089 $139,182 $257,032 $1,217,303 Investments.............. 66,200 66,671 86,723 219,594 Other interest-earning assets.................. 127,174 8,261 5,512 140,947 Total interest-sensitive assets................ 1,014,463 214,114 349,267 1,577,844 Certificates of deposits. 229,600 149,575 258,779 637,954 Other deposits........... 819,620 -0- -0- 819,620 Borrowings............... 239,893 521 2,560 242,974 Total interest-sensitive liabilities........... 1,289,113 150,096 261,339 1,700,548 GAP....................$ (274,650) $ 64,018 $ 87,928 $ (122,704) ISA/ISL.................. 0.79 1.43 1.34 0.93 Gap/Total assets......... 8.65% 2.02% 2.77% 3.87% 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% 16 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 March 31, 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. 17 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 had been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower and are in compliance with the restructured terms. Loans on a nonaccrual basis include impaired loans (see description below). At March 31, 1997 1996 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ 8,865 $ 7,975 Past due loans 12,573 11,553 Renegotiated loans 55 277 Total nonperforming loans $ 21,493 $ 19,805 Other real estate owned $ 1,914 $ 1,817 Loans outstanding at end of period $1,969,597 $1,772,481 Average loans outstanding (year-to-date) $1,946,080 $1,763,331 Nonperforming loans as percent of total loans 1.09% 1.12% Provision for possible credit losses $ 1,800 $ 1,241 Net charge-offs $ 1,426 $ 1,002 Net charge-offs as percent of average loans 0.07% 0.06% Provision for possible credit losses as percent of net charge-offs 126.23% 123.85% Allowance for possible credit losses as percent of average loans outstanding 1.03% 1.11% Allowance for possible credit losses as percent of nonperforming loans 93.70% 98.78% 18 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 March 31, 1998 and 1997 the Corporation had a recorded investment in impaired loans of $8.9 million and $8.3 million respectively. Impaired loans include loans on a nonaccrual basis and renegotiated loans. The average balance of impaired loans for the three month periods ending March 31, 1998 and 1997 was $8.5 million for both periods. An allocation of the allowance for possible credit losses in the amount of $2.0 million relates to $5.2 million of the impaired loans at March 31, 1998. An allocation of the allowance for possible credit losses in the amount of $1.9 million relates to $4.1 million of the impaired loans at March 31, 1997. Impaired loans totalling $3.7 million and $4.2 million at March 31, 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 three months of 1998 was $115 thousand compared to $13 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 March 31, 1998, there were no significant concentrations of credit. Nonperforming loans at March 31, 1998 increased $1.7 million over 1997 levels and included increases in nonaccrual loans of $890 thousand and increases in past due loans of $1.0 million. Nonaccrual loans reflected increases in commercial loans not secured by real estate of $1.7 million which were partially offset by decreases in commercial loans secured by real estate of $456 thousand and decreases in residential loans secured by real estate of $232 thousand. Past due loans reflected increases in commercial loans secured by real estate of $1.7 million which were partially offset by decreases in commercial loans secured by real estate of $538 thousand and decreases in unsecured loans to individuals of $196 thousand. Nonperforming loans as a percent of total loans were 1.09% at March 31, 1998 compared to 1.12% at March 31, 1997. 19 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 have increased over 1997 levels. Although net charge-offs as a percentage of average loans has historically below peer averages this ratio exceeded peer averages based on the most recent peer statistics published which used December 31 1997 data for both the Corporation and peer comparisons. The peer group was defined using the Uniform Bank Performance Report published by the Federal Financial Institutions Examination Council. The allowance for possible credit losses as a percent of average loans outstanding remains below peer levels and has decreased when compared to March 1997 and 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 March 31, 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 $3.0 million in the first three months of 1998. Dividends declared reduced equity by $4.9 during the 1997 period, while earnings retention was $3.0 million, representing an earnings retention rate of 37.8%. 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 $143 thousand. Amounts paid to fund the discount on reinvested dividends and optional cash payments reduced equity by $262 thousand. The market value adjustment to securities available for sale decreased equity by $667 thousand. Proceeds from the reissuance of treasury shares to provide for stock options exercised increased equity by $832 thousand. 20 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 March 31, 1998: Percent Amount of Adjusted (in thousands) Assets Tier I Capital $262,709 13.8% Risk-Based Requirement 76,136 4.0 Total Capital 282,848 14.9 Risk-Based Requirement 152,272 8.0 Minimum Leverage Capital 262,709 8.7 Minimum Leverage Requirement 120,752 4.0 At March 31, 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 the first quarter of 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. 21 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 March 31, 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. 22 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There were no material legal proceedings to which the Corporation or its subsidiaries are a party, or of which any of their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have a material adverse effect on the consolidated operations or financial position of the Corporation and its subsidiaries. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) DATED: MAY 13, 1998 /S/ Joseph E. O'Dell Joseph E. O'Dell, President and Chief Executive Officer DATED: MAY 13, 1998 /S/ John J. Dolan John J. Dolan, Sr. Vice President, Comptroller, and Chief Financial Officer 24 EX-27 2
9 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 73,605 6,370 0 0 586,472 449,992 452,126 1,983,394 20,140 3,173,476 2,250,263 243,461 30,512 374,404 0 0 22,437 252,399 3,173,476 40,252 14,613 31 54,896 23,147 29,842 25,054 1,800 982 16,938 10,876 7,818 0 0 7,818 0.36 0.35 3.68 8,865 12,573 55 0 19,766 1,890 464 20,140 0 0 0
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