-----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, FhJ4ggIRquThSRUsz9YKW7ghY7KZ98zpKiOBeSoL0Tfp35c19ZSoKL8XfSQIIs4q D9fFja2dT/eFaXaXm2GL1g== 0000712537-96-000010.txt : 19960517 0000712537-96-000010.hdr.sgml : 19960517 ACCESSION NUMBER: 0000712537-96-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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: 96566964 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, 1996 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 May 13, 1996 was 22,253,560. 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) March 31, December 31, 1996 1995 ASSETS Cash and due from banks on demand.... $ 56,552 $ 62,381 Interest-bearing deposits with banks. 9,049 8,288 Federal funds sold .................. 7,740 4,800 Securities available for sale, at market.............................. 244,002 244,193 Securities held to maturity, at cost, (market value $492,515 in 1996 and $503,568 in 1995).................. 496,419 504,509 Loans................................ 1,555,230 1,531,174 Unearned income.................... (41,606) (43,632) Allowance for possible credit losses (18,475) (18,152) Net loans....................... 1,495,149 1,469,390 Property and equipment............... 29,933 29,435 Other real estate owned.............. 1,394 1,408 Other assets......................... 42,978 39,903 TOTAL ASSETS.................... $2,383,216 $2,364,307 LIABILITIES Deposits (all domestic): Noninterest-bearing................ $ 200,894 $ 200,939 Interest-bearing................... 1,797,412 1,761,821 Total deposits.................. 1,998,306 1,962,760 Short-term borrowings................ 100,243 120,774 Other liabilities.................... 26,734 23,236 Long-term debt....................... 4,993 5,261 Total liabilities............... 2,130,276 2,112,031 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 shares issued; 22,263,360 and 22,353,728 shares outstanding in 1996 and 1995 respectively......... 22,437 22,437 Additional paid-in capital........... 77,073 77,226 Retained earnings.................... 160,682 157,576 Unrealized gain (loss) on securities available for sale, net of taxes... (13) 511 Treasury stock (173,268 shares at March 31, 1996 and 65,002 at December 31, 1995, at cost)........ (2,962) (929) Unearned ESOP shares................. (4,277) (4,545) Total shareholders' equity......... 252,940 252,276 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $2,383,216 $2,364,307 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, 1996 1995 Interest Income Interest and fees on loans........ $33,097 $30,713 Interest and dividends on investments: Taxable interest................ 9,850 11,009 Interest exempt from Federal income taxes................... 798 755 Dividends....................... 331 238 Interest on Federal funds sold.... 60 33 Interest on bank deposits......... 134 170 Total Interest Income.......... 44,270 42,918 Interest Expense Interest on deposits.............. 19,425 16,838 Interest on short-term borrowings. 1,316 2,947 Interest on long-term debt........ 104 163 Total Interest Expense......... 20,845 19,948 Net interest income................. 23,425 22,970 Provision for possible credit losses 900 793 Net interest income after provision for possible credit losses........ 22,525 22,177 Other Income Net security gains................ 8 24 Trust income...................... 616 558 Service charges on deposit accounts 1,362 1,314 Other income...................... 955 645 Total Other Income............. 2,941 2,541 Other Expenses Salaries and employee benefits.... 8,186 7,902 Net occupancy expense............. 1,190 1,107 Furniture and equipment expense... 1,069 1,000 FDIC expense...................... 72 1,065 Other operating expenses.......... 4,476 4,343 Total Other Expenses........... 14,993 15,417 Income before taxes................. 10,473 9,301 Applicable income taxes........... 3,360 3,011 Net Income.......................... $ 7,113 $ 6,290 Average Shares Outstanding.......... 22,004,857 21,982,714 Per Share Data: Net income.......................... $0.32 $0.29 Cash dividends per share............ $0.18 $0.16 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, 1994.... $22,437 $77,964 $146,814 $(16,802) $(5,196) $ (82) $225,135 Net income.................... -0- -0- 6,290 -0- -0- -0- 6,290 Cash dividends declared....... -0- -0- (3,576) -0- -0- -0- (3,576) Change in market value of securities available for sale, net of tax effect........... -0- -0- -0- 6,395 -0- -0- 6,395 Increase in unearned ESOP shares -0- -0- -0- -0- (233) -0- (233) Discount on dividend reinvestment plan purchases.............. -0- (78) -0- -0- -0- -0- (78) Treasury stock acquired....... -0- -0- -0- -0- -0- (1,073) (1,073) Balance at March 31, 1995....... $22,437 $77,886 $149,528 $(10,407) $(5,429) $(1,155) $232,860 Balance at December 31, 1995.... $22,437 $77,226 $157,576 $ 511 $(4,545) $ (929) $252,276 Net income.................... -0- -0- 7,113 -0- -0- -0- 7,113 Cash dividends declared....... -0- -0- (4,007) -0- -0- -0- (4,007) Change in market value of securities available for sale, net of tax effect........... -0- -0- -0- (524) -0- -0- (524) Decrease in unearned ESOP shares -0- 10 -0- -0- 268 -0- 278 Discount on dividend reinvestment plan purchases.............. -0- (120) -0- -0- -0- -0- (120) Treasury stock acquired....... -0- -0- -0- -0- -0- (2,099) (2,099) Treasury stock reissued....... -0- (43) -0- -0- -0- 66 23 Balance at March 31, 1996....... $22,437 $77,073 $160,682 $ (13) $(4,277) $(2,962) $252,940
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, 1996 1995 Operating Activities Net income....................................... $ 7,113 $ 6,290 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible credit losses.......... 900 793 Depreciation and amortization................. 1,018 1,258 Net gains on sales of assets.................. (263) (25) Increase in interest receivable............... (293) (695) Increase in interest payable.................. 657 1,284 Increase in income taxes payable.............. 3,458 2,542 Change in deferred taxes...................... (124) 296 Other-net..................................... (3,194) (3,102) Net cash provided by operating activities... 9,272 8,641 Investing Activities Transactions with securities held to maturity: Sales......................................... -0- -0- Maturities and redemptions.................... 27,860 7,365 Purchases..................................... (19,541) (2,131) Transactions with securities available for sale: Sales......................................... -0- 2,641 Maturities and redemptions.................... 21,574 10,385 Purchases..................................... (22,519) (7,166) Proceeds from sales of loans and other assets.... 5,805 3,251 Net (increase) decrease in time deposits with banks........................................... (761) 8,627 Net increase in loans............................ (31,948) (26,095) Purchases of premises and equipment.............. (1,429) (926) Net cash used by investing activities.......... (20,959) (4,049) Financing Activities Repayments of long-term debt..................... -0- (4) Discount on dividend reinvestment plan purchases. (120) (78) Dividends paid................................... (4,027) (3,589) Net increase (decrease) in deposits.............. 35,552 (4,784) Net (decrease) increase in federal funds purchased....................................... (31,235) 21,865 Net increase (decrease) in other short-term borrowings...................................... 10,704 (22,561) Treasury stock acquired.......................... (2,099) (1,073) Reissuance of treasury stock..................... 23 -0- Net cash provided (used) by financing activities................................. 8,798 (10,224) Net decrease in cash and cash equivalents.. (2,889) (5,632) Cash and cash equivalents at January 1............. 67,181 66,055 Cash and cash equivalents at March 31.............. $64,292 $60,423 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, 1996 (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, 1996 and the results of operations for the three month periods ended March 31, 1996 and 1995, and statements of cash flows and changes in shareholders' equity for the three month periods ended March 31, 1996 and 1995. The results of the three months ended March 31, 1996 and 1995 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) 1996 1995 Cash paid during the first three months of the year for: Interest $20,188 $18,664 Income Taxes $ -0- $ 148 Noncash investing and financing activities: ESOP borrowings $ -0- $ 500 ESOP loan reductions $ 267 $ 267 Gross increase (decrease) in market value adjustment to securities available for sale pursuant to FAS No. 115 $ (807) $ 9,838 Loans transferred to other real estate owned and repossessed assets $ 454 $ 1,033 NOTE 3 New Accounting Pronouncements The Corporation adopted the Financial Accounting Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("FAS No. 121") effective January 1, 1996. This statement requires long- lived assets, such as premises and equipment to be reviewed for impairment whenever events or changes in circumstances, such as a significant decrease in the market value of an asset or the extent or manner in which an asset is used indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the carrying amount of an asset may not be recoverable, future cash flows expected to result from the use of the asset are estimated. If the sum of the expected cash flows is less than the carrying value of the asset a loss is recognized for the difference between the carrying value and fair market value of the asset. Adoption of this statement did not have a material impact on the Corporation's financial condition or results of operations. 7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1996 (Unaudited) NOTE 3 New Accounting Pronouncements (Continued) Effective January 1, 1996 the Corporation adopted the Financial Accounting Standards Board Statement No. 122 "Accounting for Mortgage Servicing Rights an amendment of FASB Statement No. 65" ("FAS No. 122"). This statement eliminates the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities from those servicing rights acquired through purchase transactions. When a mortgage banking enterprise purchases or originates mortgage loans with a definitive plan to sell or securitize those loans and retain the mortgage servicing rights, the corporation must measure the mortgage servicing rights at cost by allocating the cost of the mortgage loans between the mortgage servicing rights and the mortgage loans (without the mortgage servicing rights) based on their relative fair values at the date of purchase or origination. When the mortgage banking enterprise does not have a definitive plan at the purchase or origination date and later sells or securitizes the mortgage loans and retains the mortgage servicing rights, the Corporation must allocate the amortized cost of the mortgage loans between the mortgage servicing rights and the mortgage loans (without mortgage servicing rights) based on their relative fair values at the date of sale. The amount capitalized as the right to service mortgage loans is recognized as a separate asset and amortized in proportion to, and over the period of, estimated net servicing income (servicing revenue in excess of servicing cost). FAS No. 122 also requires mortgage servicing rights to be periodically evaluated for impairment. The adoption of FAS No. 122 did not have a material impact on the Corporation's financial condition or results of operations. The Corporation adopted the Financial Accounting Standards Board Statement No. 123 "Accounting for Stock Based Compensation" ("FAS No. 123") effective January 1, 1996. This statement defines a method of measuring stock based compensation, such as stock options granted, at an estimated fair value. FAS No. 123 also permits the continued measurement of stock based compensation under provisions of the Accounting Practice Board Opinion 25 "Accounting for Stock Issued to Employees" ("APB 25"). Corporations electing to measure stock based compensation under APB 25 are required to disclose, in a footnote to the financial statements, net income and earnings per share determined as if the fair value methodology of FAS No. 122 was implemented. The Corporation granted no stock options or other stock based compensation during the first quarter of 1996, therefore adoption of FAS No. 122 had no impact on the Corporation's financial condition or results of operations. NOTE 4 Subsequent Event Effective April 1, 1996 the Corporation acquired all of the outstanding common stock of BSI Financial Services Inc., headquartered in Titusville, PA for cash and stock consideration aggregating $1.2 million. BSI provides mortgage banking, loan servicing and collection services to the Corporation's subsidiary 8 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1996 (Unaudited) NOTE 4 Subsequent Event (Continued) banks as well as unaffiliated organizations. The acquisition was accounted for as a purchase transaction, whereby the identifiable tangible and intangible assets and liabilities of BSI were recorded at their fair values at the acquisition date. Under the purchase method of accounting, the results of operations of BSI from the date of acquisition will be included in the Corporation's financial statements. 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 First Three Months of 1996 as Compared to the First Three Months of 1995 Net income in the three months of 1996 was $7.1 million, an increase of $823 thousand over the 1995 level of $6.3 million. Earnings per share was $0.32 for the three months of 1996 reflecting an increase of $0.03 over the 1995 level of $0.29. Return on average assets was 1.21% and return on average equity was 11.20% during the 1996 period, compared to 1.09% and 11.09%, respectively during the same period of 1995. 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 $23.4 million for the three months of 1996 compared to $23.0 million for 1995. Both interest income and interest expense for 1996 increased over 1995 levels, reflecting increased volumes for both interest-earning assets and interest-bearing liabilities. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) remained stable for the 1996 period at 4.30%, reflecting a decrease of 3 basis points (0.03%) from 4.33% reported in 1995. Interest and fees on loans increased $2.4 million, while interest income on investments decreased $1.0 million when compared to the corresponding period of 1995, primarily as a result of volume increases in loans and decreases in investments. Yields on both loans and investments remained stable for the 1996 period reflecting declines of 8 basis points (0.08%) and 4 basis points (0.04%) respectively over the 1995 period. Interest on deposits increased $2.6 million for the 1996 period compared to the 1995 quarter, reflecting both increases due to volume and increases due to rate. Total cost of deposits increased 32 basis points (0.32%) over the 1995 period as a result of increases in all categories of certificates of deposit in denominations less than $100 thousand, most notably those with maturities ranging from 6 to 36 months. Interest expense on short-term borrowings decreased $1.6 million compared to the 1995 period, primarily as a result of a de-leveraging strategy during the second quarter of 1995 which reduced borrowings. In addition the Corporation has not incurred additional borrowings during 1996 as a result of the Corporation's ability to fund loan growth through deposits. Average interest-earning assets were 95.8% of average total assets in the 1996 period and 94.9% during the 1995 time frame. Average interest-bearing liabilities decreased as a percentage of average total assets to 80.3% for the 1996 period compared to 81.5% during the related 1995 period. 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 1996 as Compared to the First Three Months of 1995 (Continued) The provision for possible credit losses was $900 thousand for the three month period of 1996 compared to $793 thousand during the 1995 period. Net charge-offs against the allowance for possible credit losses were $577 thousand in the 1996 period and $803 thousand in the 1995 period. The 1996 decline in net charge-offs reflects a strengthening of the Corporation's commercial loan portfolio. Net charge-offs for commercial loans including those secured by real estate declined by $305 thousand compared to the related period of 1995. See the "Credit Review" section for an analysis of the quality of the loan portfolio. Below is an analysis of the consolidated allowance for possible credit losses for the three month periods ended March 31, 1996 and 1995. 1996 1995 Balance January 1, $18,152 $17,337 Loans charged off: Commercial, financial and agricultural 94 289 Real estate-construction -0- -0- Real estate-commercial -0- 139 Real estate-residential 30 80 Loans to individuals 599 549 Lease financing receivables 21 5 Total loans charged off 744 1,062 Recoveries of previously charged off loans: Commercial, financial and agricultural 21 50 Real estate-construction 17 -0- Real estate-commercial -0- 13 Real estate-residential 9 8 Loans to individuals 119 101 Lease financing receivables 1 87 Total recoveries 167 259 Net charge offs 577 803 Provision charged to operations 900 793 Balance March 31, $18,475 $17,327 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 1996 as Compared to the First Three Months of 1995 (Continued) Other operating income increased $400 thousand in 1996 to $2.9 million. Net securities gains decreased $16 thousand and reflected calls of securities both held to maturity and available for sale, but no sales activity during the 1996 period. Other income was $955 thousand in the 1996 period, an increase of $310 thousand over the $645 thousand reported in 1995. The most notable components of the increase in other income were gains on sale of loans totalling $188 thousand and increases in ATM and charge card user fees totalling $139 thousand. Noninterest expense was $15.0 million in the three months of 1996 which reflected a decrease of $424 thousand over the 1995 period. Total noninterest expense was 2.56% of average assets during the 1996 period compared to 2.68% for the 1995 related time frame. The major component of this decrease was the deposit insurance assessment from the Federal Deposit Insurance Corporation ("FDIC") which decreased by $993 thousand in 1996 from $1.1 million reported in 1995. The 1996 amount represents the minimum FDIC assessment for the Corporation's commercial bank subsidiary combined with a regular assessment against thrift deposits of the Corporation. The additional one-time assessment against the Corporation's thrift deposits which was anticipated as a result of the Savings and Loan Insurance Fund remaining underfunded has not yet been enacted. Employee costs were $8.2 million in 1996, representing 1.39% of average assets on an annualized basis compared to $7.9 million and 1.37% of average assets on an annualized basis for 1995. Employee cost increases can be attributed to an increase in the number of full time equivalent employees which resulted in higher salaries and payroll taxes. The increase in full time equivalent employees during 1996 occurred in customer contact positions, most notably staffing levels of the Corporation's "Convenience Banking Center". This center is open for extended hours during the week and on weekends to provide customers with a wide array of financial services through the use of telephone banking. The 1996 period also reflects an increase in the employers matching contribution for the Corporation's 401(k) plan to 80% of the amount contributed by the employee up from 60% in 1995. Employee benefit cost increases for 1996 were partially offset by a reduction in hospitalization costs as a result of the Corporation's conversion to a managed health care plan effective in January. Other operating expenses increased $133 thousand in 1996 to $4.5 million. Loan collection and repossession expenses represented an increase of $131 thousand over the 1995 levels while outside data processing costs increased $76 thousand. Telephone cost increases reflected usage increases for both voice and data lines combined with rate decreases. The merger of the Corporation's eight commercial bank subsidiaries during the fourth quarter of 1995 has begun to impact several expense categories in the current period. 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 1996 as Compared to the First Three Months of 1995 (Continued) Income tax expense was $3.4 million during the three months of 1996 compared to $3.0 million during the 1995 period. Income before taxes increased $1.2 million in the 1996 period when compared to the corresponding period of 1995. The Corporation's effective tax rate was 32.1% for the 1996 period and compared to 32.4% for 1995, reflecting an increase in tax-free income. 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 up to ten percent of their total assets at any one time. The sale of earning assets may also provide an additional source of liquidity. Net loans increased $25.8 million in the first three months of 1996 as specialized loan products and target marketing strategies generated results. Municipal loans increased by $12.7 million during the three months of 1996 while residential mortgages increased by $9.8 million. Loan growth for the period was funded primarily by deposit growth. Total deposits grew $35.5 million as time deposit categories increased and demand deposits decreased. Growth in time deposits with maturities of 1 to 2 years which began during 1995 has continued during 1996, resulting in an increase of $23.2 million. Additional increases during 1996 occurred in time deposits in denominations of $100 thousand or more, primarily as a result of an increase in public funds. Investment securities held to maturity declined $8.1 million while Federal funds sold increased $2.9 million since December 31, 1995. Marketable equity 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, 1996 securities available for sale had an amortized cost of $243.6 million and an approximate fair value of $244.0 million. The approximate fair value of securities available for sale declined slightly since the end of 1995 as interest rates began to rise. 13 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY (Continued) 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. 14 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, 1996 and December 31, 1995. March 31, 1996 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans.................... $ 528,253 $ 90,883 $164,608 $ 783,744 Investments.............. 42,013 27,849 43,332 113,194 Other interest-earning assets.................. 86,573 4,841 7,864 99,278 Total interest-sensitive assets................ 656,839 123,573 215,804 996,216 Certificates of deposits. 229,043 147,927 233,530 610,500 Other deposits........... 678,351 -0- -0- 678,351 Borrowings............... 75,755 2,030 6,234 84,019 Total interest-sensitive liabilities........... 983,149 149,957 239,764 1,372,870 GAP.................... $(326,310) $(26,384) $(23,960) $ (376,654) ISA/ISL.................. 0.67 0.82 0.90 0.73 Gap/Total assets......... -13.69% -1.11% -1.01% -15.80% December 31, 1995 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans.................... $ 515,833 $ 82,754 $167,780 $ 766,367 Investments.............. 18,351 33,319 42,960 94,630 Other interest-earning assets.................. 91,408 6,698 6,272 104,378 Total interest-sensitive assets................ 625,592 122,771 217,012 965,375 Certificates of deposits. 223,659 130,053 257,833 611,545 Other deposits........... 680,303 -0- -0- 680,303 Borrowings............... 102,527 10,164 6,838 119,529 Total interest-sensitive liabilities........... 1,006,489 140,217 264,671 1,411,377 GAP....................$ (380,897) $(17,446) $(47,659) $ (446,002) ISA/ISL.................. 0.62 0.88 0.82 0.68 Gap/Total assets......... -16.11% -0.74% -2.02% -18.86% 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. 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) 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 lag in a deposit rate increase. The repricing strategies for loans would be inversely related. The analysis at March 31, 1996, 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 March 31, 1996 1995 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ 7,761 $ 9,461 Past due loans 7,622 7,076 Renegotiated loans 288 709 Total nonperforming loans $ 15,671 $ 17,246 Other real estate owned $ 1,394 $ 2,497 Loans outstanding at end of period $1,513,624 $1,399,652 Average loans outstanding (year-to-date) $1,498,477 $1,390,093 Nonperforming loans as percent of total loans 1.04% 1.23% Provision for possible credit losses $ 900 $ 793 Net charge-offs $ 577 $ 803 Net charge-offs as percent of average loans 0.04% 0.06% Provision for possible credit losses as percent of net charge-offs 155.98% 98.75% Allowance for possible credit losses as percent of average loans outstanding 1.23% 1.25% Allowance for possible credit losses as percent of nonperforming loans 117.89% 100.47% 16 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) 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 March 31, 1996, there were no significant concentrations of credit. The ratio of the allowance for possible credit losses as a percentage of nonperforming loans continues to improve, reflecting an increase since year end as well as in comparison to March 1995. Although this ratio remains lower than the Corporation's peers at March 31, 1996, 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. The provision for possible credit losses for the three months of 1996 exceeds that reported for 1995 while net charge-offs and nonperforming loans have declined. As a result the allowance for possible credit losses as a percentage of nonperforming loans and the provision for possible credit losses as a percentage of net charge-offs have both increased over 1995. Management believes that the allowance for possible credit losses and nonperforming loans remain safely within acceptable levels during 1996. 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, 1996, the Corporation had a recorded investment in impaired loans of $8.0 million which included loans on a nonaccrual basis and renegotiated loans. The average balance of impaired loans for the three month period was $8.2 million. An allocation of the allowance for possible credit losses in the amount of $665 thousand relates to $4.0 million of the impaired loans. Impaired loans totalling $4.0 million have no allowance allocation, 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 1996 was $8 thousand. 17 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CAPITAL RESOURCES Equity capital increased $664 thousand in the first three months of 1996. Dividends declared reduced equity by $4.0 million, an increase over the 1995 period as the dividend rate was increased. Earnings retention was $3.1 million, representing an earnings retention rate of 43.7%. 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 $278 thousand. Amounts paid to fund the discount on reinvested dividends and optional cash payments reduced equity by $120 thousand. The market value adjustment to securities available for sale reduced equity by $524 thousand. The cost of purchasing treasury shares net of the reissuance of treasury shares to provide for stock options exercised, decreased equity by $2.1 million. 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. 18 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES (Continued) The table below presents the Corporation's capital position at March 31, 1996: Percent Amount of Adjusted (in thousands) Assets Tier I Capital $239,692 16.3% Risk-Based Requirement 58,880 4.0 Total Capital 258,235 17.6 Risk-Based Requirement 117,760 8.0 Minimum Leverage Capital 239,692 10.2 Minimum Leverage Requirement 93,695 4.0 At March 31, 1996 the Corporation and its banking subsidiaries are considered well capitalized as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. 19 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 Not applicable. 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: MAY 14, 1996 /S/ Joseph E. O'Dell Joseph E. O'Dell, President and Chief Executive Officer DATED: MAY 14, 1996 /S/ John J. Dolan John J. Dolan, Sr. Vice President, Comptroller, and Chief Financial Officer EX-27 2
9 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 56,552 9,049 7,740 0 244,002 496,419 492,515 1,555,230 18,475 2,383,216 1,998,306 100,243 26,734 4,993 0 0 22,437 230,503 2,383,216 33,097 10,979 194 44,270 19,425 20,845 23,425 900 8 14,993 10,473 7,113 0 0 7,113 0.32 0.32 4.30 7,761 7,622 288 0 18,152 744 167 18,475 0 0 0
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