-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, SVjx8rpq+0HszDp4fEM2NNU7Rn8Kl1/rFL3XeEfQvfbYOYwMeFQ/a2Cxk4vWuCqg hJpdYKHFZwjGEp0nCBpAhg== 0000712537-94-000029.txt : 19941116 0000712537-94-000029.hdr.sgml : 19941116 ACCESSION NUMBER: 0000712537-94-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 241428528 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11138 FILM NUMBER: 94559124 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 For the Quarter ended September 30, 1994 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 (I.R.S. Employer Identification No.) of incorporation or organization) 22 NORTH SIXTH STREET INDIANA, PA 15701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (412) 349-7220 Indicate by checkmark 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 XX No . Indicate the number of shares outstanding of each of the issuer's classes of common stock. CLASS OUTSTANDING AT November 1, 1994 Common Stock, $1 Par Value 22,436,587 Shares FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Included in Part I of this report: PAGE First Commonwealth Financial Corporation and Subsidiaries Consolidated Balance Sheets . . . . . 3 Consolidated Statements of Income. . . . . . . . . 4 Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows. . . . . . . 6 Notes to Consolidated Financial Statements . . . . 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 10 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . 20 Signatures . . . . . . . . . . . . . . . . . . . . Signature Page FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands) September 30, December 31, 1994 1993 ASSETS Cash and due from banks.............. $ 66,156 $ 55,767 Interest-bearing bank deposits....... 9,352 20,534 Federal funds sold................... 4,750 1,600 Securities available for sale........ 468,041 465,224 Investment securities (Market Value $364,531 in 1994 and $451,421 in 1993).................. 380,603 443,942 Loans (all domestic)................. 1,377,060 1,248,934 Less unearned income............... 43,024 37,825 Less reserve for possible loan losses 17,324 16,483 Net loans....................... 1,316,712 1,194,626 Property and equipment............... 27,868 27,000 Other real estate owned.............. 2,903 5,590 Other assets......................... 48,931 38,553 TOTAL ASSETS.................... $2,325,316 $2,252,836 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits (all domestic): Noninterest-bearing................ $ 202,374 $ 181,024 Interest-bearing................... 1,691,841 1,641,061 Total deposits.................. 1,894,215 1,822,085 Short-term borrowings................ 176,405 176,184 Other liabilities.................... 20,426 18,294 Long-term debt....................... 7,368 7,363 Total liabilities............... 2,098,414 2,023,926 SHAREHOLDERS' EQUITY Preferred stock, $1 par value per share, 3,000,000 shares authorized and unissued....................... -0- -0- Common stock $1 par value per share, 100,000,000 shares authorized and 22,436,586 and 22,516,705 shares issued and outstanding in 1994 and 1993, respectively................. 22,437 22,517 Additional paid-in capital........... 78,015 79,094 Retained earnings.................... 140,927 131,380 Unrealized gain (loss) on securities available for sale................. (10,013) 1,584 Treasury stock (98,208 shares at December 31, 1993)................. -0- (1,216) Deferred compensation................ (4,464) (4,449) Total shareholders' equity......... 226,902 228,910 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $2,325,316 $2,252,836 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 Quarter For the 9 Months Ended September 30, Ended September 30, 1994 1993 1994 1993 Interest Income Interest and fees on loans........ $28,226 $26,058 $80,486 $79,391 Interest and dividends on investments: Taxable interest................ 11,137 10,602 33,133 32,239 Interest exempt from federal income taxes................... 835 1,070 2,644 2,707 Dividends....................... 255 219 787 624 Interest on federal funds sold.... 80 75 114 248 Interest on bank deposits......... 142 268 427 1,104 Total Interest Income.......... 40,675 38,292 117,591 116,313 Interest Expense Interest on deposits.............. 15,473 15,652 45,021 47,712 Interest on short-term borrowings. 1,834 849 5,124 2,459 Interest on long-term debt........ 137 113 373 341 Total Interest Expense......... 17,444 16,614 50,518 50,512 Net interest income................. 23,231 21,678 67,073 65,801 Provision for possible loan losses 766 659 2,176 2,021 Net interest income after provision for possible loan losses.......... 22,465 21,019 64,897 63,780 Other Income Security gains (losses)........... (71) 666 1,728 2,417 Trust income...................... 537 589 1,725 1,821 Service charges on deposits....... 1,383 1,450 3,988 3,875 Other income...................... 763 573 2,454 2,437 Total Other Income............. 2,612 3,278 9,895 10,550 Other Expenses Salaries and employee benefits.... 7,485 7,272 22,555 21,764 Net occupancy expense............. 1,034 1,039 3,255 3,181 Furniture and equipment expense... 951 888 2,910 2,734 FDIC expense...................... 1,046 1,014 3,105 3,029 Other operating expenses.......... 5,221 4,473 14,212 13,572 Total Other Expenses........... 15,737 14,686 46,037 44,280 Income before taxes and cumulative effect of change in accounting method............................ 9,340 9,611 28,755 30,050 Applicable income taxes........... 2,999 3,172 9,415 9,362 Net income before cumulative effect of change of accounting method....... 6,341 6,439 19,340 20,688 Cumulative effect of change in accounting method................. -0- -0- -0- 500 Net Income.......................... $ 6,341 $ 6,439 $19,340 $21,188 Per Share Data: Net income before effect of change in accounting method............ $0.28 $0.29 $0.86 $0.92 Cumulative effect of change in accounting method............... 0.00 0.00 0.00 0.02 Net income........................ 0.28 0.29 0.86 0.94 Cash dividends per share.......... 0.140 0.125 0.420 0.375 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)
Unrealized Gain (loss) Additional on Securities Total Common Paid-in Retained Available Deferred Treasury Shareholders' Stock Capital Earnings For Sale Compensation Stock Equity Balance at December 31, 1992....$22,517 $79,253 $114,277 $ -0- $(4,913) $ (447) $210,687 Net income.................... -0- -0- 21,188 -0- -0- -0- 21,188 Cash dividends declared....... -0- -0- (8,071) -0- -0- -0- (8,071) Increase in unrealized loss on equity securities........... -0- -0- -0- -0- -0- -0- -0- Tax benefit on ESOP dividends. -0- -0- -0- -0- -0- -0- -0- Decrease in deferred compensation................ -0- -0- -0- -0- 535 -0- 535 Discount on dividend reinvestment plan purchases.............. -0- (123) -0- -0- -0- -0- (123) Treasury stock acquired....... -0- -0- -0- -0- -0- (973) (973) Treasury stock reissued....... -0- -0- (91) -0- -0- 204 113 Balance at September 30, 1993...$22,517 $79,130 $127,303 $ -0- $(4,378) $(1,216) $223,356 Balance at December 31, 1993....$22,517 $79,094 $131,380 $1,584 $(4,449) $(1,216) $228,910 Net income.................... -0- -0- 19,340 -0- -0- -0- 19,340 Cash dividends declared....... -0- -0- (9,688) -0- -0- -0- (9,688) Change in unrealized gain (loss) on securities available for sale, net of tax effect.... -0- -0- -0- (11,597) -0- -0- (11,597) Tax benefit on ESOP dividends. -0- -0- -0- -0- -0- -0- -0- Decrease in deferred Compensation................ -0- -0- -0- -0- (15) -0- (15) Discount on dividend reinvestment plan purchases.............. -0- (161) -0- -0- -0- -0- (161) Treasury stock reissued....... -0- -0- (105) -0- -0- 218 113 Treasury stock cancelled in merger...................... (80) (918) -0- -0- -0- 998 -0- Balance at September 30, 1994...$22,437 $78,015 $140,927 $(10,013) $(4,464) $ -0- $226,902
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 9 Months Ended September 30, 1994 1993 Operating Activities Net income....................................... $19,340 $21,188 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses............ 2,176 2,021 Depreciation and amortization................. 3,897 3,855 Net gains on sales of assets.................. (1,777) (2,386) Increase in interest receivable............... (1,449) (529) Increase (decrease) in interest payable....... 930 (369) Increase in income taxes payable.............. 1,084 103 Provision for deferred taxes.................. (77) (739) Other - net................................... (2,236) (1,111) Net cash provided by operating activities... 21,888 22,033 Investing Activities Investment securities transactions: Proceeds from sales........................... 7,476 87,020 Proceeds from maturities and redemptions...... 88,917 254,080 Purchases..................................... (64,364) (489,738) Transactions with securities available for sale: Proceeds from sales........................... 46,962 -0- Proceeds from maturities and redemptions...... 57,077 -0- Purchases..................................... (91,701) -0- Proceeds from sales of loans and other assets.... 8,342 16,822 Net decrease in time deposits with banks......... 11,182 30,812 Net increase in loans............................ (131,186) (49,030) Purchase of premises and equipment............... (4,370) (3,137) Net cash used by investing activities.......... (71,665) (153,171) Financing Activities Repayments of long-term debt..................... (11) -0- Proceeds from issuance of long-term debt......... -0- 202 Discount on dividend reinvestment plan purchases. (161) (123) Dividends paid................................... (7,736) (6,428) Dividends paid by subsidiary prior to merger..... (1,328) (1,516) Net increase in deposits......................... 72,218 33,548 Net increase (decrease) in federal funds purchased...................................... (5,505) 24,610 Net increase in other short-term borrowings...... 5,726 37,859 Proceeds from sale of treasury stock............. 113 113 Purchase of treasury stock....................... -0- (973) Net cash provided by financing activities... 63,316 87,292 Net increase decrease) in cash and cash equivalents.............................. 13,539 (43,846) Cash and cash equivalents at January 1............. 57,367 98,422 Cash and cash equivalents at September 30.......... $70,906 $ 54,576 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 September 30, 1994 (Unaudited) NOTE 1 Management Representation In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of financial position as of September 30, 1994 and the results of operations for the three and nine month periods ended September 30, 1994 and 1993, and statements of cash flows and changes in shareholders' equity for the three and nine month periods ended September 30, 1994 and 1993. The results of the three and nine months ended September 30, 1994 and 1993 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 Reserve For Possible Loan Losses (in thousands) 1994 1993 Reserve balance January 1.................. $16,483 $15,828 Additions: Provision charged to operating expenses 2,176 2,021 Recoveries of previously charged off loans................................ 863 1,283 Deductions: Loans charged off...................... 2,198 2,628 Reserve balance September 30............... $17,324 $16,504 NOTE 3 Cash Flow Disclosures (dollar amounts in thousands) Cash paid during the first nine months of the year for interest and income taxes were as follows: 1994 1993 Interest $49,587 $50,881 Income Taxes $14,295 $ 9,998 During 1994 the Corporation borrowed $730 and concurrently loaned this amount to the ESOP Trust on identical terms. ESOP loan payments of $714 and $535 were made by the ESOP Trust during the respective 1994 and 1993 periods, thereby resulting in outstanding amounts related to deferred compensation of $4,464 at September 30, 1994 and $4,378 at September 30, 1993. 7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 1994 (Unaudited) NOTE 4 Change of Accounting Method The Corporation adopted Statement of Financial Accounting Standards No. 109 ("FAS No. 109"), "Accounting for Income Taxes", effective January 1, 1993. FAS No. 109 is an asset and liability approach for financial accounting and reporting for income taxes. The effect of adopting FAS No. 109 resulted in a cumulative benefit of $500 thousand in the first quarter of 1993. NOTE 5 Business Combinations On September 27, 1994, the registrant acquired United National Bancorporation ("United") and its wholly-owned subsidiaries Unitas National Bank ("Unitas Bank") and Unitas Mortgage Corporation ("Unitas Mortgage"). United was a Pennsylvania- chartered bank holding company headquartered in Chambersburg, Pennsylvania. Unitas Bank is a nationally chartered, federally insured commercial bank also headquartered in Chambersburg, Pennsylvania. Unitas Mortgage, headquartered in Carlisle, Pennsylvania engages in the origination of mortgages for sale in the secondary mortgage market. The merger was consummated pursuant to the Agreement and Plan of Reorganization dated March 25, 1994 between the registrant and United, which was approved by the shareholders of Reliable at a special meeting held September 29, 1994. Each issued and outstanding share of United common stock was converted into 2 shares of the registrant's common stock. The aggregate number of shares of the registrant's common stock issued in the merger was 1,538,294. On September 29, 1994 the registrant acquired Reliable Financial Corporation ("Reliable") and its wholly-owned subsidiary Reliable Savings Bank, PaSA ("Reliable Savings Bank"). Reliable was a savings and loan holding company with its principal office in Bridgeville, Pennsylvania. Reliable Savings Bank is a Pennsylvania-chartered, federally insured savings association. The merger was consummated pursuant to the Agreement and Plan of Reorganization dated April 21, 1994 between the registrant and Reliable, which was approved by the shareholders of Reliable at a special meeting held September 29, 1994. Each issued and outstanding share of Reliable common stock was converted into 1.6 shares of the registrant's common stock. The aggregate number of shares of the registrant's common stock issued in the merger was approximately 2,256,269. Both transactions were accounted for as poolings of interests and accordingly, all financial statements were restated as though the companies had been combined as of the beginning of the beginning of each period presented. 8 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) September 30, 1994 (Unaudited) NOTE 6 Earnings per Common Share Earnings per share have been calculated on the weighted average number of common shares outstanding during each period, restated to reflect pooling of interests. Additionally, average number of shares has been restated to reflect the two-for-one stock split effected in the form of a 100% stock distribution on the corporation's common stock declared on January 18, 1994. The weighted average number of shares outstanding for each period presented was 22,430,784 and 22,418,497 for the nine months ended September 30, 1994 and 1993, respectively, and 22,436,628 and 22,418,497 for the three months ended September 30, 1994 and 1993 respectively. NOTE 7 Reclassifications Certain items of the Consolidated Statements of Income for the three and nine months ended September 30, 1993 have been reclassified to conform with the September 30, 1994 presentations. None of these reclassifications affected net income. 9 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Effective December 31, 1993, the Corporation acquired Peoples Bank of Western Pennsylvania ("PBWPA"). The Corporation acquired United National Bancorporation and its subsidiaries ("United") and Reliable Financial Corporation and its subsidiaries ("Reliable") effective September 27, 1994 and September 29, 1994, respectively. The mergers were accounted for as poolings of interests and accordingly, all financial statements have been restated as though the mergers had occurred at the beginning of the earliest period presented. Average number of shares has been restated for the 1993 periods to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on January 18, 1994. First Nine Months of 1994 as Compared to the First Nine Months of 1993 Net income in the nine months of 1994 was $19.3 million, a decrease of $1.3 million from the 1993 period before the change in the method of accounting for income taxes. The cumulative effect of the change in the method of accounting for income taxes added $500 thousand to the 1993 amount. Merger related costs reduced earnings in 1994 by $1.2 million. Earnings per share was $0.86 during the nine months of 1994 compared to $0.94 during the 1993 period. Earnings per share during the 1993 period was $0.92 before the effect of change in the method of accounting for income taxes. Return on average assets was 1.14% and return on average equity was 11.29% during the 1994 period, compared to 1.33% and 12.94%, respectively during the same period of 1993. The change in accounting method during 1993 added 2 basis points (0.02%) to the return on average assets and 29 basis points (0.29%) to the return on average equity for the 1993 period. 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 for the 1994 period was $67.1 million compared to $65.8 million during the same time period of 1993. Interest income, on a tax- equivalent basis, decreased 42 basis points (0.42%) as a percentage of average earning assets to 7.40% in 1994, from 7.82% in the 1993 period. Although yields have improved each quarter of 1994, they have declined when compared to the nine months of 1993, reflecting interest rates rising during 1994 following declines throughout 1993. Mortgage borrowers refinanced loans during the lower rate environment during the year in 1993 resulting in a decline in yields that carried forward into 1994. Mortgage loan refinancings on a national scale had accelerated the repayments of mortgage backed securities. As proceeds were reinvested in securities yielding lower rates, portfolio yields declined. The recent rise in interest rates has stabilized prepayments of the portfolio and portfolio yields. The cost of funds was 3.66% and 3.90% in the nine months of 1994 and 1993, respectively, as deposit costs, the predominant category, decreased only 28 basis points (0.28%) to 3.25%. This was 10 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) First Nine Months of 1994 as Compared to the First Nine Months of 1993 (Continued) expected as deposit customers tended to extend maturities over the previous two years as interest rates declined, thereby preventing the cost of funds from declining as fast as asset yields. Although interest yields and costs of funds were lower during the first nine months of 1994 when compared to the first nine months of 1993, the cost of funds has remained stable during the 1994 period. Net interest margin (net interest income, on a tax-equivalent basis as a percentage of average earning assets) was 4.28% of earning assets during 1994, compared to 4.50% in the 1993 related period. Average earning assets were 95.1% of average total assets in the 1994 period and 95.0% during the 1993 time frame. Average interest-bearing liabilities increased as a percentage of average total assets to 81.1% in the nine months of 1994 and during the 1993 period. Provision for possible loan losses was $2.2 million for the nine month period of 1994 compared to $2.0 million during the 1993 period. Net charge-offs against the reserve for possible loan losses were $1.3 million in the 1994 period and the 1993 period. Below is an analysis of the consolidated reserve for possible loan losses for the nine month periods ended September 30, 1994 and 1993. 1994 1993 Balance January 1, $16,483 $15,828 Loans charged off: Commercial, financial and agricultural 790 379 Real estate-construction -0- -0- Real estate-commercial 23 520 Real estate-residential 172 304 Loans to individuals 1,184 1,327 Lease financing receivables 29 98 Total loans charged off 2,198 2,628 Recoveries of previously charged off loans: Commercial, financial and agricultural 171 458 Real estate-construction -0- -0- Real estate-commercial 241 267 Real estate-residential 43 132 Loans to individuals 398 419 Lease financing receivables 10 7 Total recoveries 863 1,283 Net charge offs 1,335 1,345 Provision charged to operations 2,176 2,021 Balance September 30, $17,324 $16,504 11 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) First Nine Months of 1994 as Compared to the First Nine Months of 1993 (Continued) Other operating income decreased $656 thousand in 1994 to $9.9 million. Net security gains decreased $688 thousand, primarily U.S. Treasury Securities and U.S. Government Agency Securities totaling $52.7 million were sold and reinvested in similar securities with maturities of 3-5 years. Of these securities $45.3 million were classified as "securities available for sale" and $7.4 million were classified as "securities held to maturity" but were called and sold within three months of the call date or have had a significant deterioration in the issuer's creditworthiness, which allowed them to be sold in accordance with Financial Accounting Standards Board Statement No. 115. Trust income declined $97 thousand in the 1994 period primarily as a result of higher nonrecurring income during the 1993 period. Service charges on deposits increased $112 thousand in the 1994 period primarily as deposits increased. Noninterest expense was $46.0 million in the nine months of 1994 which reflected an increase of $1.8 million over the 1993 period. Merger related costs added $1.2 million to the 1994 period. Employee costs were $22.6 million in 1994, an increase of $792 thousand over the 1993 related period. Employee costs (annualized) as a percentage of average assets was 1.33% in the 1994 period, reduced from 1.36% (annualized) in the 1993 period. Furniture and equipment expense increased $176 thousand as a result of increased depreciation on computer equipment acquired to automate new customer loan and deposit processes. Other operating expenses, excluding merger costs decreased $492 thousand in the nine months of 1994 when compared to the 1993 related period as loan collection costs and professional fees decreased. The amortization of core deposit intangibles decreased $324 thousand during the 1994 period as the intangibles related to the Deposit Bank merger in 1984 became fully amortized and will result in a $51 thousand savings per month for the remainder of 1994. Loan collection costs should continue to be favorable throughout the remainder of the year. The loss on the disposition of real estate and repossessed assets increased $130 thousand. Income tax expense was $9.4 million during the nine months of 1994 and 1993. Income before taxes decreased $1.3 million in the 1994 period when compared to the same time period of 1993. Taxable income decreased only $654 thousand since merger costs were nondeductible and tax-free income decreased. Three Months ended September 30, 1994 as Compared to the Three Months Ended September 30, 1993 Net income was $6.3 million for the third quarter of 1994, which compared to $6.4 million in the same quarter of 1993. Merger related expenses were $774 thousand in the 1994 quarter. Earnings per share was $0.28 during the 1994 quarter and $0.29 during the related quarter of 1993. Net interest income 12 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Three Months ended September 30, 1994 as Compared to the Three Months Ended September 30, 1993 (Continued) increased $155 thousand to $23.2 million in the third quarter of 1994 when compared to the related 1993 quarter. Interest income increased $2.4 million as average earning assets increased $116 million. Yields increased 4 basis points (0.04%) as yields on variable rate loans and investments improved as interest rates began to rise in 1994. Refinancings of the fixed rate instruments declined to normal levels during the 1994 quarter as a result of the recent rise in interest rates. The yield on average interest earning assets was 7.52% in the 1994 quarter, and compared to 7.48% in the related 1993 quarter. Interest expense increased $829 thousand in the 1994 quarter as average interest-bearing liabilities increased $101 million and the cost of these funds decreased 3 basis points (0.03%). The cost of funds decreased from 3.75% in the 1993 quarter to 3.72% in the third quarter of 1994. The decline in deposit rates occurred in most categories except money market accounts and short-term certificates of deposit. Provision for possible loan losses was $767 thousand in the 1994 quarter or $107 thousand more than the 1993 period. Net loans charged off in the third quarter of 1994 were $682 thousand and can be compared to $364 thousand in the related 1993 quarter. The third quarter of 1993 includes a significant recovery not included in the 1994 period. Any additional increase during the 1994 period does not appear to indicate a trend. Noninterest income decreased $766 thousand in the third quarter of 1994 to $2.6 million. Net security gains decreased $736 thousand while other income increased $190 thousand in the 1994 quarter when compared to the third quarter of 1993. The 1994 period included an increase of $74 thousand income from credit life insurance activities. Noninterest expense was $15.7 million in the three month period ended September 30, 1994 compared to $14.7 million in the 1993 related period, reflecting a increase of $1.1 million. Merger related costs for the 1994 quarter were $774 thousand. Salaries and employee benefits increased $214 thousand to $6.4 million in the third quarter of 1994. Net occupancy expense and furniture and equipment expense remained stable in the 1994 quarter when compared to the 1993 related period. Other operating expenses decreased $252 thousand excluding merger costs. Core deposit amortization decreased by $160 thousand in the 1994 period. Income taxes decreased $173 thousand primarily because the 1993 period included a retroactive tax rate adjustment in the amount of $188 thousand due to the enactment of the Omnibus Budget Reconciliation Act of 1993. 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 meet normal cash flow requirements of both borrowers and depositors efficiently. 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 and borrowings from the Federal Reserve Bank. Additionally, each of the subsidiary banks are members of the Federal Home Loan Bank and may borrow up to ten percent of their total assets at any one time. Net loans increased $122.0 million in the first nine months of 1994 as all major categories of loans increased. Consumer demand resulted in $92.4 million of growth in consumer mortgages and loans to individuals for personal and household purposes. Total deposits grew $72.1 million as all deposit categories increased. The growth is primarily from core customer deposit relationships. Investment securities held to maturity declined $63.3 million while interest-bearing bank deposits declined $11.1 million and Federal funds sold increased nearly $3.2 million since December 31, 1993. An additional source of liquidity is certain marketable securities that the Corporation holds in its investment portfolio. These securities are classified as "securities available for sale". While the Corporation does not have specific intentions to sell these securities, they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of September 30, 1994 securities available for sale had an amortized cost of $483.6 million and an approximate market value of $468.0 million. As interest rates rose since the end of 1993, the market value securities available for sale declined $11.6 million. This is not of major concern to management since the average life of the entire portfolio is just over five years. 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. 14 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) 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") exceeds interest-sensitive liabilities ("ISL") during a 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 rates 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) 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 September 30, 1994 and December 31, 1993. September 30, 1994 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans.................... $ 430,581 $ 93,289 $177,238 $ 701,108 Investments.............. 43,109 18,041 51,660 112,810 Other interest-earning assets.................. 83,268 6,301 8,801 98,370 Total interest-sensitive assets................ 556,958 117,631 237,699 912,288 Certificates of deposits. 155,760 119,211 126,070 401,041 Other deposits........... 727,219 -0- -0- 727,219 Borrowings............... 159,283 1,750 7,814 168,847 Total interest-sensitive liabilities........... 1,042,262 120,961 133,884 1,297,107 GAP.................... (485,304) (3,330) 103,815 (384,819) Gap/Total assets......... 20.83% 0.14% 4.46% 16.51% ISA/ISL.................. 0.53 0.97 1.78 0.70 December 31, 1993 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans.................... $ 419,308 $ 86,025 $151,115 $ 656,448 Investments.............. 188,531 57,063 80,883 326,477 Other interest-earning assets.................. 3,607 198 297 4,102 Total interest-sensitive assets................ 611,446 143,286 232,295 987,027 Certificates of deposits. 183,780 133,953 138,774 456,507 Other deposits........... 584,845 13,994 16,092 614,931 Borrowings............... 160,205 9,578 3,707 173,490 Total interest-sensitive liabilities........... 928,830 157,525 158,573 1,244,928 GAP.................... (317,384) (14,239) 73,722 (257,901) Gap/Total assets......... 14.09% 0.63% 3.27% 11.45% ISA/ISL.................. 0.66 0.91 1.46 0.79 The Corporation has not experienced the kind of earnings volatility indicated from the gap analysis. This is because assets and liabilities with similar contractual repricing characteristics may not reprice at the same time or to the same degree. 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) Therefore, to more precisely measure the impact of interest rate changes on the Corporation's net interest income, management simulates the potential effects of changing interest rates through computer modeling. The Corporation is then better able to implement strategies which would include an acceleration of a deposit rate reduction or a lag in a deposit rate increase. The repricing strategies for loans would be inversely related. The analysis at September 30, 1994, indicated that a 200 basis point (2.00%) movement in interest rates in either direction over the next twelve months would not have a significant impact on the Corporation's anticipated net interest income over that time frame. Credit Quality Risk The following table identifies amounts of loan losses and nonperforming loans. Past due loans are those which were contractually past due 90 days or more as to interest or principal payments but were well secured and in the process of collection. Renegotiated loans are those which terms had been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower and are in compliance with the restructured terms. At September 30, 1994 1993 (amounts in thousands) Nonperforming Loans: Loans in nonaccural basis $ 9,400 $ 10,716 Past due loans 8,421 6,327 Renegotiated loans 753 760 Total nonperforming loans $ 18,581 $ 17,803 Other real estate owned (including in-substance foreclosures) $ 2,903 $ 4,155 Loans outstanding at end of period $1,334,035 $1,197,791 Average loans outstanding (year-to-date) $1,260,655 $1,182,859 Nonperforming loans as percent of total loans 1.39% 1.49% Provision for possible loan losses $ 2,176 $ 2,021 Net charge-offs $ 1,335 $ 1,345 Net charge-offs as percent of average loans 0.11% 0.11% Provision for possible loan losses as percent of net charge-offs 163.00% 150.26% Reserve for possible loan losses as percent of average loans outstanding 1.37% 1.40% Reserve for possible loan losses as percent of nonperforming loans 93.24% 92.70% 17 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Credit Quality Risk (Continued) Other than those described above, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. Additionally, the portfolio is well diversified and as of September 30, 1994, there were no significant concentrations of credit. Although the ratio of the reserve for possible loan losses as a percentage of nonperforming loans is lower than the Corporation's peers, other factors should be considered such as historical loan losses, and nonperforming loan levels. These were favorable when compared to peer group levels over the past five years. Management believes that the reserve for possible loan losses and nonperforming loans remain safely within acceptable levels during 1994. The Corporation will be required to adopt Financial Accounting Standards Board Statement No. 114 "Accounting by Creditors for Impairment of a Loan", effective January 1, 1995. This statement addresses the accounting by creditors, such as banks, for the impairment of certain loans. It requires that impaired loans that are within the scope of this statement be 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 loans' observable market price or the fair value of the collateral if the loan is collateral dependent. The adoption of this statement is not anticipated to have a material effect on the Corporation's financial position, liquidity or results of operations. Capital Resources Equity capital decreased $2.0 million in 1994. Earnings retention was $9.7 million, representing an earnings retention rate of 49.9%. The retained net income remains in permanent capital to fund future growth and expansion. Stock purchased by the Employee Stock Ownership Plan (the "ESOP"), subject to the debt of the Corporation, reduced equity by $730 thousand while the loan repayment by the ESOP of debt guaranteed by the Corporation increased equity by $715 thousand while amounts paid to fund the discount on reinvested dividends reduced equity by $160 thousand. The market value adjustment to securities available for sale reduced equity by $10.0 million resulting from market values declining as interest rates increased. A capital base can be considered adequate when it enables the Corporation to intermediate funds responsibly and provide related services, while protecting against future uncertainties. The evaluation of capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings history and prospects, internal controls and management caliber. In consideration of these factors, management's primary emphasis with respect to the Corporation's capital position is to maintain an adequate and stable ratio of equity to assets. 18 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 4-5 percent for all but the most highly rated banks, as determined by a regulatory rating system. As of September 30, 1994, the Corporation had a Tier I Capital to risk- weighted assets ratio and total capital to risk-weighted assets ratio of 17.69% and 18.97%, respectively and a minimum leverage ratio of 10.13%. 19 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. 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. The Corporation acquired United National Bancorporation and Reliable Financial Corporation on September 27, 1994 and September 29, 1994, respectively. In connection with pooling-of-interests accounting, Section 201.01 of the Commission's Codification of Financial Reporting Policies provides that the publication of at least 30 days of post-merger combined operations can take the form of a Form 10-Q filing. Accordingly, the combined operations of the Corporation, including these two subsidiaries, for the month of October 1994 generated interest income of $13.8 million, net interest income of $7.7 million and net income of $4.4 million. All results are unaudited and should not be construed as being indicative of the expected results for the remainder of 1994. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (b) Reports on Form 8-K (1) Form 8-K dated July 12, 1994, reporting a change in the Corporation's certifying accountant. (2) Form 8-K dated September 27, 1994 reporting the acquisitions by the Corporation of United National Bancorporation and its subsidiaries and Reliable Financial Corporation and its subsidiary. Filing includes financial statements of businesses acquired and pro forma financial statements. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) DATED: November 14, 1994 /S/ E. James Trimarchi E. James Trimarchi, Chairman of the Board, President and Chief Executive Officer DATED: November 14, 1994 /S/ John J. Dolan John J. Dolan, Sr. Vice President, Comptroller, and Chief Financial Officer EX-27 2
9 1,000 QTR-3 9-MOS DEC-31-1994 DEC-31-1994 SEP-30-1994 SEP-30-1994 66156 66156 9352 9352 4750 4750 0 0 468041 468041 380603 380603 364531 364531 1377060 1377060 17324 17324 2325316 2325316 1894215 1894215 176405 176405 20426 20426 7368 7368 22437 22437 0 0 0 0 204465 204465 2325316 2325316 28226 80486 12227 36564 222 541 40675 117591 15473 45021 17444 50518 23231 67073 766 2176 (71) 1728 15737 46037 9340 28755 6341 19340 0 0 0 0 6341 19340 .28 .86 .28 .86 435 428 9400 9400 8421 8421 753 753 0 0 17239 16483 891 2198 210 863 17324 17324 0 0 0 0 0 0
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