-----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, VlE0Eo73xwVUOH7FBOAEwvGVPAEHKfXkx6dcht4hWMbmo272gJn6kC8CG5ixnKfM u+1p7Yxfp/7QyahKV1g2Aw== 0000712537-95-000014.txt : 19951109 0000712537-95-000014.hdr.sgml : 19951109 ACCESSION NUMBER: 0000712537-95-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951108 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [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: 95588221 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 September 30, 1995 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) 412-349-7220 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report.) Indicate a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Number of shares outstanding of issuer's common stock, $1.00 Par Value as of November 6, 1995 was 22,371,626. 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 . . . . . . . . 8 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . 18 Signatures . . . . . . . . . . . . . . . . . . . . Signature Page FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands) September 30, December 31, 1995 1994 ASSETS Cash and due from banks.............. $ 63,794 $ 66,055 Interest-bearing bank deposits....... 5,456 13,686 Federal funds sold .................. 18,375 -0- Securities available for sale........ 386,053 443,189 Securities held to maturity (market value $351,738 in 1995 and $348,074 in 1994).................. 355,721 370,498 Loans (all domestic)................. 1,491,398 1,422,320 Less unearned income............... 46,314 44,526 Less reserve for possible loan losses 17,551 17,337 Net loans....................... 1,427,533 1,360,457 Property and equipment............... 28,940 29,196 Other real estate owned.............. 2,235 2,269 Other assets......................... 47,953 49,571 TOTAL ASSETS.................... $2,336,060 $2,334,921 LIABILITIES Deposits (all domestic): Noninterest-bearing................ $ 191,134 $ 199,172 Interest-bearing................... 1,758,447 1,681,888 Total deposits.................. 1,949,581 1,881,060 Short-term borrowings................ 105,897 201,706 Other liabilities.................... 27,522 19,424 Long-term debt....................... 5,609 7,596 Total liabilities............... 2,088,609 2,109,786 SHAREHOLDER'S 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; 22,436,628 issued; 22,373,548 and 22,430,728 shares outstanding in 1995 and 1994, respectively........ 22,437 22,437 Additional paid-in capital........... 77,302 77,964 Retained earnings.................... 155,818 146,814 Unrealized gain (loss) on securities available for sale................. (2,314) (16,802) Treasury stock (63,080 shares at September 30, 1995 and 5,900 at December 31, 1994)................. (899) (82) Unearned ESOP shares................. (4,893) (5,196) Total shareholders' equity......... 247,451 225,135 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $2,336,060 $2,334,921 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, 1995 1994 1995 1994 Interest Income Interest and fees on loans....... $32,733 $28,226 $95,245 $80,486 Interest and dividends on investments: Taxable interest............... 9,938 11,137 31,778 33,133 Interest exempt from federal income taxes.................. 665 835 2,124 2,644 Dividends...................... 246 255 728 787 Interest on federal funds sold... 554 80 724 114 Interest on bank deposits........ 108 142 382 427 Total Interest Income......... 44,244 40,675 130,981 117,591 Interest Expense Interest on deposits............. 19,140 15,473 54,133 45,021 Interest on short-term borrowings 1,314 1,834 6,606 5,124 Interest on long-term debt....... 140 137 468 373 Total Interest Expense........ 20,594 17,444 61,207 50,518 Net interest income................ 23,650 23,231 69,774 67,073 Provision for possible loan losses 815 766 2,445 2,176 Net interest income after provision for possible loan losses......... 22,835 22,465 67,329 64,897 Other Income Security gains (losses).......... -0- (71) (604) 1,728 Trust income..................... 545 537 1,669 1,725 Service charges on deposits...... 1,459 1,383 4,183 3,988 Other income..................... 726 763 2,304 2,454 Total Other Income............ 2,730 2,612 7,552 9,895 Other Expenses Salaries and employee benefits... 7,994 7,485 23,874 22,555 Net occupancy expense............ 1,090 1,034 3,263 3,255 Furniture and equipment expense.. 1,023 951 3,039 2,910 FDIC expense..................... (17) 1,046 2,113 3,105 Other operating expenses......... 4,291 5,221 13,214 14,212 Total Other Expenses.......... 14,381 15,737 45,503 46,037 Income before taxes................ 11,184 9,340 29,378 28,755 Applicable income taxes.......... 3,729 2,999 9,638 9,415 Net Income......................... $ 7,455 $ 6,341 $19,740 $19,340 Average Shares Outstanding.........22,020,631 22,436,628 21,994,259 22,430,784 Per Share Data: Net income....................... $ 0.34 $ 0.28 $ 0.90 $ 0.86 Cash dividends per share......... $ 0.16 $ 0.14 $ 0.48 $ 0.42 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 Unearned Total Common Paid-in Retained Available ESOP Treasury Shareholders' Stock Capital Earnings For Sale Shares Stock Equity 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- (8,360) -0- -0- -0- (8,360) Cash dividends declared by pooled subsidiaries prior to merger...................... -0- -0- (1,328) -0- -0- -0- (1,328) Change in unrealized gain (loss) on securities available for sale, net of tax effect..... -0- -0- -0- (11,597) -0- -0- (11,597) Increase in unearned ESOP shares -0- -0- -0- -0- (15) -0- (15) Discount on dividend reinvestment plan purchases.............. -0- (161) -0- -0- -0- -0- (161) Treasury stock reissued by pooled subsidiary........... -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 Balance at December 31, 1994.... $22,437 $77,964 $146,814 $(16,802) $(5,196) $ (82) $225,135 Net income.................... -0- -0- 19,740 -0- -0- -0- 19,740 Cash dividends declared....... -0- -0- (10,736) -0- -0- -0- (10,736) Change in unrealized gain (loss) on securities available for sale, net of tax effect..... -0- -0- -0- 14,488 -0- -0- 14,488 Decrease in unearned ESOP shares -0- -0- -0- -0- 303 -0- 303 Discount on dividend reinvestment plan purchases.............. -0- (242) -0- -0- -0- -0- (242) Treasury stock acquired....... -0- -0- -0- -0- -0- (1,552) (1,552) Treasury stock reissued....... -0- (420) -0- -0- -0- 735 315 Balance at September 30, 1995... $22,437 $77,302 $155,818 $ (2,314) $(4,893) $ (899) $247,451
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, 1995 1994 Operating Activities Net income....................................... $19,740 $19,340 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses............. 2,445 2,176 Depreciation and amortization.................. 3,793 3,897 Net losses (gains) on sales of assets.......... 468 (1,777) Increase in interest receivable................ (655) (1,449) Increase in interest payable................... 3,836 930 Increase (decrease) in income taxes payable.... (446) 1,084 Change in deferred taxes....................... (375) (77) Other - net.................................... (1,941) (4,906) Net cash provided by operating activities.... 26,865 19,218 Investing Activities Transactions with securities held to maturity: Proceeds from sales........................... -0- 7,476 Proceeds from maturities and redemptions...... 31,935 88,917 Purchases..................................... (17,118) (64,364) Transactions with securities available for sale: Proceeds from sales........................... 76,330 46,962 Proceeds from maturities and redemptions...... 39,865 57,077 Purchases..................................... (37,414) (91,701) Proceeds from sales of loans and other assets..... 16,623 11,632 Net decrease in time deposits with banks.......... 8,231 11,182 Net increase in loans............................. (85,388) (132,951) Purchase of premises and equipment................ (2,670) (3,225) Net cash provided (used) by investing activities 30,394 (68,995) Financing Activities Repayments of long-term debt..................... (1,684) (11) Discount on dividend reinvestment plan purchases. (242) (161) Dividends paid................................... (10,746) (7,736) Dividends paid by subsidiary prior to merger..... -0- (1,328) Net increase in deposits......................... 68,574 72,218 Net decrease in federal funds purchased.......... (56,700) (5,505) Net increase (decrease) in other short-term borrowings..................................... (39,110) 5,726 Purchase of treasury stock....................... (1,552) 113 Proceeds from sale of treasury stock............. 315 -0- Net cash provided by financing activities... (41,145) 63,316 Net increase in cash and cash equivalents... 16,114 13,539 Cash and cash equivalents at January 1............. 66,055 57,367 Cash and cash equivalents at September 30.......... $ 82,169 $70,906 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, 1995 (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, 1995 and the results of operations for the three and nine month periods ended September 30, 1995 and 1994, and statements of cash flows and changes in shareholders' equity for the nine month periods ended September 30, 1995 and 1994. The results of the three and nine months ended September 30, 1995 and 1994 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) Cash paid during the first nine months of the year for interest and income taxes were as follows: 1995 1994 Interest $57,371 $49,587 Income Taxes $10,298 $14,295 The Corporation borrowed $500 and $730 in the first nine months of 1995 and 1994, respectively, and concurrently loaned these amounts to the ESOP Trust on identical terms. ESOP loan payments of $803 and $714 were made by the ESOP Trust during the respective 1995 and 1994 periods, thereby resulting in outstanding amounts related to unearned ESOP shares of $4,893 at September 30, 1995 and $4,464 at September 30, 1994. 1995 1994 Loans transferred to Other real estate owned and Repossessed assets $ 2,354 $ 1,943 Change in Market value adjustment to securities available for sale pursuant to FAS 115 $22,290 $(17,834) NOTE 3 Business Combination Effective September 29, 1994 the Corporation acquired all of the outstanding common shares of Reliable Financial Corporation ("Reliable"), a savings and loan holding company headquartered in Bridgeville, Pennsylvania. Each of the 1,410,194 outstanding shares were exchanged for 1.6 shares of the Corporation's common stock. Effective September 27, 1994 the Corporation acquired all of the outstanding common shares of United National Bancorporation ("United"), a bank holding company headquartered in Chambersburg, Pennsylvania. Each of the 769,147 outstanding shares were exchanged for two shares of the Corporation's common stock. The mergers were accounted for as poolings of interests, and accordingly, all financial statements were restated as though the mergers had occurred at the beginning of the earliest period presented. 7 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Corporation acquired United National Bancorporation and its subsidiaries ("United") and Reliable Financial Corporation and its subsidiary ("Reliable") effective September 29, 1994 and September 27, 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. First Nine Months of 1995 as Compared to the First Nine Months of 1994 Net income in the nine months of 1995 was $19.7 million, an increase of $400 thousand from the 1994 period. Earnings per share was $0.90 during the nine months of 1995 compared to $0.86 during the 1994 period. Return on average assets was 1.14% and return on average equity was 11.07% during the 1995 period, compared to 1.14% and 11.29%, respectively during the same period of 1994. During September 1995, the FDIC rebated deposit insurance premiums collected in excess of the regulatory cap. This rebate increased pre-tax earnings of the Corporation by $1.1 million for the 1995 period. During the 1994 period net securities gains were $1.8 million compared to a net loss of $604 thousand during the 1995 period. The 1994 period also included $1.2 million merger costs. The FDIC insurance savings is expected to be ongoing. The securities losses during 1995 resulted from the sale of $76.2 million of securities, primarily U.S. Treasury securities, classified as "available for sale" having an average yield of 4.91% and an average remaining life of about 17 months. The proceeds were used to pay off short-term borrowings costing 6.00% (subsequently would have been reduced to 5.75%). This transaction is expected to result in a net improvement in net interest income over the original remaining maturity in excess of the net loss on the sale. Since the short-term borrowings were variable rate, the exact benefit is not determinable until after the securities would have matured, but at current interest rates the net benefit is expected to exceed $250 thousand. The sale occurred in June resulting in a pre-tax benefit of approximately $191 thousand during the reporting period. The securities gains experienced during the 1994 period were primarily marketable equity securities, which represented $1.5 million of the net gain. Additionally, during the 1994 period U.S. Treasury securities and U.S. Government agency securities with short-term maturities were sold and reinvested in similar securities with maturities of 3-5 years. All of the "held to maturity" securities sold during 1994 were within the exception parameters specified in FAS 115. 8 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Nine Months of 1995 as Compared to the First Nine Months of 1994 (Continued) Since the FDIC Bank Insurance Fund has reached its regulatory cap the assessment rate has been reduced for banks to $0.04 per $100 of deposits compared to $0.23 per $100 of deposits previously assessed. This reduction is expected to result in an additional pre-tax savings during the final quarter of 1995 of approximately $800 thousand. However, the Savings and Loan Insurance Fund is still underfunded and there could be an additional one-time pretax assessment against the thrift deposits of the Corporation during the fourth quarter of approximately $1.0 million. The recurring assessment on these funds is expected to be subsequently reduced. 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 1995 period was $69.8 million compared to $67.1 million during the same time period in 1994. Interest income, on a tax- equivalent basis, increased 64 basis points (0.64%) as a percentage of average earning assets to 8.04% in 1995 from 7.40% in the 1994 period. Yields have improved each quarter since the first quarter of 1994, reflecting higher interest rates over that time period. The rise in interest rates stabilized prepayments of the mortgage backed securities portfolio and portfolio yields. Since a majority of the cash flows provided by maturities and repayments of securities were redeployed into loan growth, the improved investment portfolio yields resulted primarily from adjustable rate instruments repricing. The cost of funds was 4.35% and 3.66% in the nine months of 1995 and 1994, respectively, as deposit costs, the predominant category of interest-bearing liabilities, increased 55 basis points (0.55%) to 3.80%. The increase in rates on short-term deposits were partially offset by a stable cost of longer term deposits. As deposit customers tended to extend maturities when interest rates declined in the recent past, the cost of these deposits did not rise as fast as interest rates. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) was 4.33% of earning assets during 1995, compared to 4.28% in the 1994 related period. 9 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Nine Months of 1995 as Compared to the First Nine Months of 1994 (Continued) Provision for possible loan losses was $2.4 million for the nine month period of 1995 compared to $2.2 million in the 1994 period. Net charge-offs against the reserve for possible loan losses were $2.2 million in the 1995 period and $1.3 million in the 1994 period. Management does not feel that the additional charge-offs during the 1995 period indicate a trend. See "Credit Review" section for an analysis of the quality of the loan portfolio. Below is an analysis of the consolidated reserve for possible loan losses for the nine month periods ended September 30, 1995 and 1994. 1995 1994 Balance January 1, $17,337 $16,483 Loans charged off: Commercial, financial and agricultural 831 790 Real estate-construction -0- -0- Real estate-commercial 184 23 Real estate-residential 289 172 Loans to individuals 1,553 1,184 Lease financing receivables 40 29 Total loans charged off 2,897 2,198 Recoveries of previously charged off loans: Commercial, financial and agricultural 114 171 Real estate-construction -0- -0- Real estate-commercial 28 241 Real estate-residential 44 43 Loans to individuals 386 398 Lease financing receivables 94 10 Total recoveries 666 863 Net charge offs 2,231 1,335 Provision charged to operations 2,445 2,176 Balance September 30, $17,551 $17,324 10 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Nine Months of 1995 as Compared to the First Nine Months of 1994 (Continued) Other operating income decreased $2.3 million in 1995 to $7.6 million. Net securities gains decreased $2.3 million as a result of the above mentioned sale of securities. Trust income declined $56 thousand in the 1995 period primarily as a result of higher nonrecurring income, such as estate fees, during the 1994 period. Service charges on deposits increased $195 thousand in the 1995 period primarily as deposits increased. Noninterest expense was $45.5 million in the nine months of 1995 which reflected a decrease of $534 thousand from the 1994 period. Employee costs were $23.9 million in 1995, an increase of $1.3 million over the 1994 related period. Employee costs (annualized) as a percentage of average assets was 1.37% in the 1995 period compared to 1.33% (annualized) in the 1994 period. The reduction in the FDIC expense reflects the above mentioned rate changes. Other operating expenses decreased $998 thousand in the nine months of 1995 when compared to the 1994 related period. Professional fees were reduced by $1.3 million during the 1995 period primarily because the 1994 period contained merger related expenses. No single expense category resulted in significant increases during the 1995 period. Income tax expense was $9.6 million during the nine months of 1995 and $9.4 million during the 1994 period. Income before taxes increased $623 thousand in the 1995 period when compared to the same time period of 1994. The Corporation's effective tax rate was 32.8% for the 1995 period and compared to 32.7% for the 1994 period. Three Months ended September 30, 1995 as Compared to the Three Months Ended September 30, 1994 Net income was $7.5 million for the third quarter of 1995, which was compared to $6.3 million in the same quarter of 1994. Professional fees were $875 thousand less in the 1995 period when compared to the 1994 quarter, primarily due to merger related costs during the 1994 period. Additionally, FDIC expense was nearly $1.1 million less in the 1995 period because of the rate reduction. Earnings per share was $0.34 during the 1995 quarter and $0.28 during the related quarter of 1994. Net interest income increased $419 thousand to $23.7 million in the third quarter of 1995 when compared to the related 1994 quarter. Interest income increased $3.6 million as average earning assets increased $13.1 million. Yields increased 56 basis points (0.56%) as yields on investments and variable rate loans improved. The yield on average interest earning assets was 8.08% in the 1995 quarter, and compared to 7.52% in the related 11 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months ended September 30, 1995 as Compared to the Three Months Ended September 30, 1994 (Continued) 1994 quarter. Interest expense increased $3.2 million in the 1995 quarter while average interest-bearing liabilities decreased $6.4 million and the cost of funds increased 69 basis points (0.69%). The cost of funds increased from 3.72% in the 1994 quarter to 4.41% in the third quarter of 1995. The increase in deposit rates occurred primarily in the short-term certificates of deposit. Net interest margin was 4.36% for the 1995 quarter compared to 4.35% during the 1994 period. Provision for possible loan losses was $815 thousand in the 1995 quarter or $49 thousand more than the 1994 period. Net loans charged off in the third quarter of 1995 were $581 thousand and can be compared to $682 thousand in the related 1994 quarter. The loan quality continues to remain strong. Noninterest income increased $118 thousand in the third quarter of 1995 to $2.7 million. Net security losses were $71 thousand during the 1994 period while the 1995 period had no securities gains nor losses. Noninterest expense was $14.4 million in the three month period ended September 30, 1995 compared to $15.7 million in the 1994 period, reflecting a decrease of $1.4 million. Salaries and employee benefits increased $509 thousand to $8.0 million in the third quarter of 1995. Net occupancy expense and furniture and equipment expense remained stable in the 1995 quarter when compared to the 1994 related period. FDIC expense and other operating expenses decreased primarily as a result of the FDIC rate decrease and the reduction in merger related professional fees. Income taxes increased $730 thousand primarily because the taxable income increased. 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. 12 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY (Continued) Net loans increased $67.1 million in the first nine months of 1995. Consumer demand resulted in $47.3 million of growth in consumer mortgages and loans to individuals for personal and household purposes. Total deposits grew $68.5 million as all deposit categories increased. The growth is primarily from core customer deposit relationships. Investment securities classified as "held to maturity" declined $14.8 million while interest- bearing bank deposits declined $8.2 million and Federal funds sold increased $18.4 million since December 31, 1994. An additional source of liquidity are 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 strategies. As of September 30, 1995 securities available for sale had an amortized cost of $389.5 million and an approximate value of $386.1 million. As long-term interest rates stabilized since the end of 1994, the market value of securities available for sale improved. The difference between the market value and amortized cost of the securities available for sale 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. 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 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. 13 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest Sensitivity (continued) The primary components of ISA include adjustable rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, N.O.W. accounts and short-term borrowings. The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated as of September 30, 1995 and December 31, 1994. September 30, 1995 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans.................... $ 442,147 $ 94,672 $175,856 $ 712,675 Investments.............. 24,969 30,655 48,955 104,579 Other interest-earning assets.................. 116,623 6,311 8,794 131,728 Total interest-sensitive assets................ 583,739 131,638 233,605 948,982 Certificates of deposits. 158,477 171,094 268,356 597,927 Other deposits........... 674,086 -0- -0- 674,086 Borrowings............... 88,409 10,587 12,407 111,403 Total interest-sensitive liabilities........... 920,972 181,681 280,763 1,383,416 GAP.................... (337,233) (50,043) (47,158) (434,434) ISA/ISL.................. 0.63 0.72 0.83 0.69 Gap/Total assets......... 14.44% 2.14% 2.02% 18.60% December 31, 1994 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans.................... $ 423,116 $ 95,292 $182,799 $ 701,207 Investments.............. 20,298 24,414 55,647 100,359 Other interest-earning assets.................. 92,845 6,696 6,707 106,248 Total interest-sensitive assets................ 536,259 126,402 245,153 907,814 Certificates of deposits. 166,557 114,482 125,588 406,627 Other deposits........... 687,882 -0- -0- 687,882 Borrowings............... 174,728 16,554 4,074 195,356 Total interest-sensitive liabilities........... 1,029,167 131,036 129,662 1,289,865 GAP.................... (492,908) (4,634) 115,491 (382,051) ISA/ISL.................. 0.52 0.96 1.89 0.70 Gap/Total assets......... 21.11% 0.20% 4.95% 16.36% 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. 14 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 1995, 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. 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 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 September 30, 1995 1994 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ 6,876 $ 9,407 Past due loans 8,578 8,421 Renegotiated loans 294 753 Total nonperforming loans $ 15,748 $ 18,581 Other real estate owned $ 2,235 $ 2,903 Loans outstanding at end of period $1,445,084 $1,334,035 Average loans outstanding (year-to-date) $1,406,998 $1,260,655 Nonperforming loans as percent of total loans 1.09% 1.39% Provision for possible loan losses $ 2,445 $ 2,176 Net charge-offs $ 2,231 $ 1,335 Net charge-offs as percent of average loans 0.16% 0.11% Provision for possible loan losses as percent of net charge-offs 109.59% 163.00% Reserve for possible loan losses as percent of average loans outstanding 1.25% 1.37% Reserve for possible loan losses as percent of nonperforming loans 111.45% 93.24% 15 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CREDIT REVIEW (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 prepayment terms. Additionally, the portfolio is well diversified and as of September 30, 1995, 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 1995. The Corporation adopted Financial Accounting Standards Board Statement No. 114 "Accounting by Creditors for Impairment of a Loan", as amended by Statement No. 118 "Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosures", ("FAS No. 118") effective January 1, 1995. These statements address 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 loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The adoption of FAS No. 118 did not have a material impact on the Corporation's financial condition or results of operations. As of September 30, 1995, the Corporation had a recorded investment in impaired loans of $5.1 million with an average balance of $5.8 million for the nine month period. An allocation of the reserve for possible loan losses in the amount of $803 thousand relates to $3.4 million of the impaired loans. Impaired loans totalling $1.8 million have no reserve allocation, in accordance with FAS No. 118. 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 expected discounted cash flows, income is recorded on a cash basis. Income recorded on impaired loans during the first nine months of 1995 was $18 thousand. 16 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES Equity capital increased $22.3 million in 1995. Earnings retention was $9.0 million, representing an earnings retention rate of 45.6%. 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 $500 thousand while the loan repayments by the ESOP of debt guaranteed by the Corporation increased equity by $803 thousand. Amounts paid to fund the discount on reinvested dividends reduced equity by $242 thousand. The market value adjustment to securities available for sale increased equity by $14.5 million resulting from a rebound in market values as longer term interest rates decreased in the first nine months of 1995. Treasury stock in the amount of $1.6 million, acquired to satisfy outstanding stock option commitments, reduced equity by a like amount, while reissuance of Treasury stock to satisfy exercised options added $315 thousand. A capital base can be considered adequate when it enables the Corporation to intermediate funds responsibly and provide related services, while protecting against future uncertainties. The evaluation of capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings history and prospects, internal controls and management caliber. In consideration of these factors, management's primary emphasis with respect to the Corporation's capital position is to maintain an adequate and stable ratio of equity to assets. 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. As of September 30, 1995, the Corporation had a Tier I Capital to risk- weighted assets ratio and total capital to risk-weighted assets ratio of 16.88% and 18.14%, respectively and a minimum leverage ratio of 10.27%. 17 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. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K Form 8-K dated August 23, 1995 reporting the Corporation's intent to merge eight of its commercial bank subsidiaries into one. 18 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 7, 1995 /S/ Joseph E. O'Dell Joseph E. O'Dell, President and Chief Executive Officer DATED: NOVEMBER 7, 1995 /S/ John J. Dolan John J. Dolan, Sr. Vice President, Comptroller, and Chief Financial Officer 19 EX-27 2
9 1,000 3-MOS 9-MOS DEC-31-1995 DEC-31-1995 SEP-30-1995 SEP-30-1995 63,794 63,794 5,456 5,456 18,375 18,375 0 0 386,053 386,053 355,721 355,721 351,738 351,738 1,491,398 1,491,398 17,551 17,551 2,336,060 2,336,060 1,949,581 1,949,581 105,897 105,897 27,522 27,522 5,609 5,609 22,437 22,437 0 0 0 0 225,014 225,014 2,336,060 2,336,060 32,733 95,245 10,849 34,630 662 1,106 44,244 130,981 19,140 54,133 20,594 61,207 23,650 69,774 815 2,445 0 (604) 14,381 45,503 11,184 29,378 7,455 19,740 0 0 0 0 7,455 19,740 $0.34 $0.90 $0.34 $0.90 4.38 4.33 6,876 6,876 8,578 8,578 294 294 0 0 17,317 17,337 781 2,897 200 666 17,551 17,551 0 0 0 0 0 0
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