-----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, Hgt8LPKyZoSg9xCKuZphYsBvJeClAAxVuU+SjeCvLwS9i0qhnGWEbf9rG+fa5GM6 brJ75jnPIDTcnMde5VTVyA== 0000712537-96-000016.txt : 19961118 0000712537-96-000016.hdr.sgml : 19961118 ACCESSION NUMBER: 0000712537-96-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 241428528 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11138 FILM NUMBER: 96664530 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, 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 November 12, 1996 was 22,213,320. 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 . . . . . . . . . . . . . . . . . . . . . . 23 Signatures . . . . . . . . . . . . . . . . . . . . Signature Page FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands) September 30, December 31, 1996 1995 ASSETS Cash and due from banks on demand.... $ 80,530 $ 62,381 Interest-bearing deposits with banks. 5,021 8,288 Federal funds sold .................. -0- 4,800 Securities available for sale, at market.............................. 250,718 244,193 Securities held to maturity, at cost, (market value $476,256 in 1996 and $503,568 in 1995).................. 481,894 504,509 Loans................................ 1,723,317 1,531,174 Unearned income.................... (35,171) (43,632) Allowance for possible credit losses (19,170) (18,152) Net loans....................... 1,668,976 1,469,390 Property and equipment............... 31,453 29,435 Other real estate owned.............. 1,827 1,408 Other assets......................... 44,426 39,903 TOTAL ASSETS.................... $2,564,845 $2,364,307 LIABILITIES Deposits (all domestic): Noninterest-bearing................ $ 212,618 $ 200,939 Interest-bearing................... 1,865,396 1,761,821 Total deposits.................. 2,078,014 1,962,760 Short-term borrowings................ 200,132 120,774 Other liabilities.................... 24,749 23,236 Long-term debt....................... 4,457 5,261 Total liabilities............... 2,307,352 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; 22,213,320 and 22,371,626 shares outstanding in 1996 and 1995 respectively......... 22,437 22,437 Additional paid-in capital........... 76,785 77,226 Retained earnings.................... 165,429 157,576 Unrealized gain on securities available for sale, net of taxes... 530 511 Treasury stock (223,308 shares at September 30, 1996 and 65,002 at December 31, 1995, at cost)........ (3,947) (929) Unearned ESOP shares................. (3,741) (4,545) Total shareholders' equity......... 257,493 252,276 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $2,564,845 $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 Quarter For the 9 Months Ended September 30, Ended September 30, 1996 1995 1996 1995 Interest Income Interest and fees on loans....... $34,658 $32,733 $101,377 $ 95,245 Interest and dividends on investments: Taxable interest............... 9,498 9,938 29,065 31,778 Interest exempt from Federal income taxes.................. 929 665 2,626 2,124 Dividends...................... 382 246 1,032 728 Interest on Federal funds sold... 1 554 83 724 Interest on bank deposits........ 82 108 331 382 Total Interest Income......... 45,550 44,244 134,514 130,981 Interest Expense Interest on deposits............. 20,366 19,140 59,440 54,133 Interest on short-term borrowings 2,192 1,314 5,042 6,606 Interest on long-term debt....... 95 140 297 468 Total Interest Expense........ 22,653 20,594 64,779 61,207 Net interest income................ 22,897 23,650 69,735 69,774 Provision for possible credit losses 1,200 815 3,150 2,445 Net interest income after provision for possible credit losses....... 21,697 22,835 66,585 67,329 Other Income Securities gains (losses)........ 1 -0- (48) (604) Trust income..................... 533 545 1,711 1,669 Service charges on deposits...... 1,496 1,459 4,259 4,183 Other income..................... 1,238 726 3,222 2,304 Total Other Income............ 3,268 2,730 9,144 7,552 Other Expenses Salaries and employee benefits... 8,408 7,994 24,636 23,874 Net occupancy expense............ 1,171 1,090 3,467 3,263 Furniture and equipment expense.. 1,214 1,023 3,437 3,039 FDIC expense..................... 844 (17) 983 2,113 Other operating expenses......... 5,097 4,291 14,632 13,214 Total Other Expenses.......... 16,734 14,381 47,155 45,503 Income before taxes................ 8,231 11,184 28,574 29,378 Applicable income taxes.......... 2,369 3,729 8,711 9,638 Net Income......................... $ 5,862 $ 7,455 $19,863 $19,740 Average Shares Outstanding.........21,947,468 22,020,632 21,959,328 21,994,259 Per Share Data: Net income....................... $ 0.27 $ 0.34 $ 0.90 $ 0.90 Cash dividends per share......... $ 0.18 $ 0.16 $ 0.54 $ 0.48 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- 19,740 -0- -0- -0- 19,740 Cash dividends declared....... -0- -0- (10,736) -0- -0- -0- (10,736) Change in market value of 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 Balance at December 31, 1995.... $22,437 $77,226 $157,576 $ 511 $(4,545) $ (929) $252,276 Net income.................... -0- -0- 19,863 -0- -0- -0- 19,863 Cash dividends declared....... -0- -0- (12,010) -0- -0- -0- (12,010) Change in market value of securities available for sale, net of tax effect........... -0- -0- -0- 19 -0- -0- 19 Decrease in unearned ESOP shares -0- 63 -0- -0- 804 -0- 867 Discount on dividend reinvestment plan purchases.............. -0- (377) -0- -0- -0- -0- (377) Treasury stock acquired....... -0- -0- -0- -0- -0- (3,689) (3,689) Treasury stock reissued....... -0- (127) -0- -0- -0- 671 544 Balance at September 30, 1996... $22,437 $76,785 $165,429 $ 530 $(3,741) $(3,947) $257,493
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, 1996 1995 Operating Activities Net income....................................... $19,863 $19,740 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses............ 3,150 2,445 Depreciation and amortization................. 3,311 3,793 Net losses (gains) on sales of assets......... (271) 468 Increase in interest receivable............... (143) (655) Increase in interest payable.................. 1,771 3,836 Increase (decrease) in income taxes payable... 1,210 (446) Change in deferred taxes...................... (1,486) (375) Other-net..................................... (4,024) (1,941) Net cash provided by operating activities... 23,381 26,865 Investing Activities Transactions with securities held to maturity: Proceeds from Sales........................... -0- -0- Proceeds from maturities and redemptions...... 65,359 31,935 Purchases..................................... (42,428) (17,118) Transactions with securities available for sale: Proceeds from sales........................... 12,976 76,330 Proceeds from maturities and redemptions...... 40,446 39,865 Purchases..................................... (60,390) (37,414) Proceeds from sales of loans and other assets.... 13,530 16,623 Acquisition of affiliate and branch, net of cash received........................................ 7,836 -0- Changes net of acquisitions: Net decrease in time deposits with banks......... 3,268 8,231 Net increase in loans............................ (216,271) (85,388) Purchases of premises and equipment.............. (4,667) (2,670) Net cash provided (used) by investing activities................................... (180,341) 30,394 Financing Activities Repayments of long-term debt..................... -0- (1,684) Discount on dividend reinvestment plan purchases. (377) (242) Dividends paid................................... (12,038) (10,746) Net decrease in Federal funds purchased.......... (31,235) (56,700) Net increase (decrease) in other short-term borrowings...................................... 110,593 (39,110) Changes net of acquisitions: Net increase in deposits......................... 106,955 68,574 Purchase of treasury stock....................... (3,689) (1,552) Proceeds from sale of treasury stock............. 100 315 Net cash provided (used) by financing activities................................ 170,309 (41,145) Net increase in cash and cash equivalents... 13,349 16,114 Cash and cash equivalents at January 1............. 67,181 66,055 Cash and cash equivalents at September 30.......... $80,530 $82,169 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, 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 September 30, 1996 and the results of operations for the three and nine month periods ended September 30, 1996 and 1995, and statements of cash flows and changes in shareholders' equity for the nine month periods ended September 30, 1996 and 1995. The results of the three and nine months ended September 30, 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 nine months of the year for: Interest $63,008 $57,371 Income Taxes $ 9,350 $10,298 Noncash investing and financing activities: ESOP borrowings $ -0- $ 500 ESOP loan reductions $ 804 $ 803 Gross increase (decrease) in market value adjustment to securities available for sale pursuant to FAS No. 115 $ 30 $22,290 Loans transferred to other real estate owned and repossessed assets $ 2,127 $ 2,354 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 and intangibles 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 September 30, 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 based on fair values. 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 No. 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. 123 was implemented. The Corporation granted 195,048 stock options during the second quarter of 1996 and will provide footnote disclosures required by FAS No. 123 in the Corporation's annual financial statements, as interim disclosures are not required. The adoption of FAS No. 123 did not have a material impact on the Corporation's financial condition or results of operations. 8 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (Unaudited) NOTE 4 Business Combination Effective April 1, 1996 the Corporation acquired all of the outstanding common stock of BSI Financial Services Inc.("BSI"), 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 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 are 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 Nine Months of 1996 as Compared to the First Nine Months of 1995 Net income in the nine months of 1996 was $19.9 million and can be compared to $19.7 million for the nine months of 1995. Both the 1996 and 1995 periods include nonrecurring adjustments to the Corporation's Federal Deposit Insurance costs. The 1996 period includes an additional one-time assessment against the Corporation's thrift deposits of $768 thousand as a result of the Savings and Loan Insurance Fund (SAIF) remaining underfunded while the 1995 related period includes a rebate of $1.1 million of deposit insurance costs to the Corporation's commercial banking subsidiaries as a result of the Federal Deposit Insurance Corporation's Bank Insurance Fund (BIF) reaching its regulatory cap. These adjustments have been made to enable banks and thrifts to pay equal deposit insurance rates in the future. BIF insured institutions will pay an annual rate of approximately $1.29 cents per $100 of deposits while SAIF insured institutions will pay approximately $6.44 cents per $100 annually for the years 1997 through 1999. It is anticipated that beginning in the year 2000 banks and thrifts will pay an equal rate of $2.43 cents per $100 of deposits. Earnings per share was $0.90 for both the 1996 and 1995 periods. Excluding the impact of the FDIC and SAIF adjustments, earnings for 1996 reflected an increase of $0.06 per share over 1995 levels. Return on average assets was 1.09% and return on average equity was 10.34% during the 1996 period, compared to 1.14% and 11.07%, 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 $69.7 million for the nine months of 1996 compared to $69.8 million for the same period of 1995. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) for the 1996 period was 4.15%, reflecting a decrease of 18 basis points (0.18%) from 4.33% reported in 1995. Interest and fees on loans increased $6.1 million reflecting volume increases in all loan categories as average total loans for the nine months of 1996 increased $156.6 million over 1995 averages. Yields on loans for the nine months of 1996 decreased by 33 basis points (0.33%) when compared to 1995 yields, as yields on mortgage loans and time and demand loans decreased by 47 basis points (0.47%) and 35 basis points (0.35%) respectively while installment loan yields increased by 12 basis points (0.12%). The decline in mortgage loan yields is primarily the short-term impact of low introductory rates offered on innovative new loan products while the decline in time and demand loan yields can mainly be attributed to the repricing of prime and 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 1996 as Compared to the First Nine Months of 1995 (Continued) other variable rate loans at lower rates during 1996 than the rates for the corresponding 1995 period. Yields on investments remained stable for the 1996 period reflecting a decline of 3 basis points (0.03%) over 1995 yields. Interest on deposits increased $5.3 million for the 1996 period compared to 1995, reflecting both increases due to volume of $3.7 million and increases due to rate of 1.6 million. Total cost of deposits increased 14 basis points (0.14%) over the 1995 level and included cost increases of 19 basis points (0.19%) and 8 basis points (0.08%) for total savings deposits and total time deposits, respectively. Rate increases for savings can primarily be attributed to new savings products bearing higher interest rates than standard savings accounts. These new savings products have been designed to build long-term customer relationships and are intended to produce a favorable impact on the Corporation's net interest margin over the long-term. Interest expense on short-term borrowings decreased $1.6 million compared to the 1995 period, primarily as a result of a de-leveraging strategy during the second quarter of 1995, combined with the Corporation's ability to fund loan growth from deposits. Average loans for the nine months of 1996 increased $157 million over 1995 levels while average deposits increased by $111 million when compared to 1995 averages. Average interest-earning assets were 95.5% of average total assets in the 1996 period and 95.0% during the 1995 time frame. Average interest-bearing liabilities decreased as a percentage of average total assets to 80.4% for the 1996 period compared to 80.9% during the related 1995 period. The provision for possible credit losses was $3.2 million for the nine month period of 1996 compared to $2.4 million during the 1995 period. Net charge-offs against the allowance for possible credit losses were $2.1 million in the 1996 period and $2.2 million in the 1995 period. The 1996 reduction in net charge- offs included a decline in net charge-offs for commercial loans not secured by real estate of $488 thousand and an increase in net charge-offs for loans to individuals of $565 thousand compared to 1995. See the "Credit Review" section for an analysis of the quality of the loan portfolio. 11 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) First Nine Months of 1996 as Compared to the First Nine Months of 1995 (Continued) Below is an analysis of the consolidated allowance for possible credit losses for the nine month periods ended September 30, 1996 and 1995. 1996 1995 Balance January 1, $18,152 $17,337 Loans charged off: Commercial, financial and agricultural 287 831 Real estate-construction -0- -0- Real estate-commercial 20 184 Real estate-residential 73 289 Loans to individuals 2,263 1,553 Lease financing receivables 25 40 Total loans charged off 2,668 2,897 Recoveries of previously charged off loans: Commercial, financial and agricultural 60 114 Real estate-construction -0- -0- Real estate-commercial 83 28 Real estate-residential 31 44 Loans to individuals 360 386 Lease financing receivables 2 94 Total recoveries 536 666 Net charge offs 2,132 2,231 Provision charged to operations 3,150 2,445 Balance September 30, $19,170 $17,551 12 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 1996 as Compared to the First Nine Months of 1995 (Continued) Other operating income increased $1.6 million in 1996 to $9.1 million. Net securities losses were $48 thousand during the 1996 period compared to securities losses of $604 thousand during the 1995 related period. 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%. This transaction resulted in a net improvement in net interest income over the remaining life of the securities in excess of the net loss on the sale. Other income was $3.2 million in the 1996 period, an increase of $918 thousand over the $2.3 million reported in 1995. The most notable components of the increase in other income were increased merchant fees on debit card transactions and the inclusion of BSI results beginning April 1, 1996. BSI loan origination, collection and servicing revenue increased other income by $408 thousand for the 1996 period when compared to 1995. Additional increases in other income during the 1996 period occurred in gains on the sale of loans and other assets and income from the Corporation's credit life insurance subsidiary which reflected increases of $160 thousand and $132 thousand respectively over the corresponding period of 1995. Noninterest expense was $47.2 million in the nine months of 1996 which reflected an increase of $1.7 million over the 1995 period. Total noninterest expense was 2.59% of average assets during the 1996 period compared to 2.62% for the 1995 related time frame. Employee costs were $24.6 million in 1996, representing 1.35% of average assets on an annualized basis compared to $23.9 million and 1.37% of average assets on an annualized basis for 1995. Inclusion of BSI in the 1996 period accounted for $353 thousand of the $762 thousand total increase in employee costs for the 1996 period. A shift in full time equivalent employees during 1996 occurred from back office positions to 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 though the use of telephone banking. Employee benefit costs in the 1996 period also reflect an increase in the employer's 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 which reduced costs by $196 when compared to 1995. Other operating expenses increased $1.4 million in 1996 to $14.6 million. Telephone cost increases of $285 thousand reflected usage increases for both voice and data lines partially offset by rate decreases. Aggressive marketing of innovative new products and services resulted in increases of $218 thousand in advertising expenses and $63 thousand in promotional expenses for 13 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 1996 as Compared to the First Nine Months of 1995 (Continued) the nine months of 1996. Additional cost increases occurred in stationery and supplies, filing and recording fees and printing which incurred increases of $215 thousand, $196 thousand and $80 thousand respectively over the nine months of 1995. The cost of processing debit and credit cards increased $229 thousand during the 1996 period. These expenses are not expected to grow as rapidly over the rest of 1996. Other professional fees increased $235 thousand for the nine months of 1996 compared to 1995 as a result of the use of outside consultants to help analyze and implement standardized fee schedules. Income tax expense was $8.7 million during the nine months of 1996 compared to $9.6 million during the 1995 period. Income before taxes decreased $804 thousand in the 1996 period when compared to the corresponding period of 1995. The Corporation's effective tax rate was 30.5% for the 1996 period and compared to 32.8% for 1995, reflecting an increase in tax-free income. Three Months ended September 30, 1996 as Compared to the Three Months Ended September 30, 1995 Net income was $5.9 million for the third quarter of 1996, a decrease of $1.6 million over the same quarter of 1995. Earnings per share was $0.27 during the 1996 quarter and can be compared to $0.34 for the same period of 1995. The FDIC deposit insurance assessment described previously, increased by $861 thousand for the third quarter of 1996 up from a credit of $17 thousand reported for the 1995 quarter. Interest income increased $1.3 million in the third quarter of 1996 reflecting increased interest income on loans partially offset by a decrease in interest income on Federal funds sold. The decrease in income on Federal funds sold for the 1996 quarter was primarily a result of volume decreases. Loan volumes for the 1996 period resulted in increased interest income on loans even though loan yields for the 1996 quarter reflected decreases of 68 basis points (0.68%) compared to the third quarter of 1995. Average loans outstanding for the third quarter of 1996 were $212.7 million higher than 1995 averages as all loan types reflected growth but most notable were mortgage loans which grew $104.8 million over 1995 averages for nine months. Yields on mortgage loans and time and demand loans decreased by 80 basis points (0.80%) and 49 basis points (0.49%) respectively. The decline in mortgage loan yields is primarily the short-term impact of low introductory rates offered on innovative new loan products while the decline in time and demand loan yields can mainly be attributed to the repricing of prime and other variable rate loans at lower rates during 1996 than the rates for the corresponding 1995 period. The yield on the new mortgage product is expected to begin to rise dramatically beginning in the fourth quarter of 1997. 14 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, 1996 as Compared to the Three Months Ended September 30, 1995 Interest expense on deposits increased $1.2 million for the third quarter of 1996 when compared to the 1995 quarter primarily a result of increased deposit balances. The cost of deposits increased by 3 basis points (0.03%) and included an increase of 21 basis points (0.21%) for total savings deposits combined with a decrease of 8 basis points (0.08%) for time deposits. A reduction in the short-term borrowing rate of 26 basis points (0.26%) for the 1996 quarter was offset by increased borrowings of $72.2 million in average balances for the third quarter of 1996 compared to 1995 quarter to date averages. Interest expense on short-term borrowings for the three months of 1996 increased $878 thousand over the three months of 1995. Net interest margin was 3.96% for the 1996 quarter compared to 4.38% during the 1995 period. Provision for possible credit losses was $1.2 million for the three months ended September 30, 1996 and compared to $815 thousand for the three months ended September 30, 1995. Net loans charged off in the third quarter of 1996 were $896 thousand, an increase of $315 thousand from net charge-offs of $581 thousand reported for the corresponding period of 1995. Salaries and employee benefits increased by $414 thousand for the 1996 quarter over the three months of 1995. Inclusion of BSI for the three months of 1996 accounted for nearly half of this increase. As described previously employee benefit costs in the 1996 period also reflect 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. The Corporation's 401(k) expenses increased by $97 thousand for the quarter. Occupancy and furniture and equipment cost increases for the 1996 quarter totalling $272 thousand can primarily be attributed to the preparation of facilities to be used for centralization of various functional areas of the Corporation such as loan operations, accounting, human resources and marketing. These functional areas of the Corporation are being redesigned to more efficiently support the new organizational structure resulting from the merger of eight commercial bank subsidiaries into a single operating unit during 1995. Other operating expenses for the third quarter of 1996 reflected increases in filing and recording fees, stationery and supplies, promotions and telephone expenses of $118 thousand, $114 thousand, $138 thousand and $109 thousand respectively, compared to the third quarter of 1995. Income taxes decreased $1.4 million for the third quarter of 1996 primarily as a result of a decrease in income which was combined with an increase in the level of tax free income over 1995 levels. The Corporation's effective tax rate was 28.8% for the 1996 period and compared to 33.3% for the 1995 period. 15 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY Liquidity is a measure of the Corporation's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from deposits (primary source), and maturity or repayment of earning assets, such as securities and loans. As an additional secondary source, short-term liquidity needs may be provided through the use of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements, and borrowings from the Federal Reserve Bank. Additionally, the banking subsidiaries are members of the Federal Home Loan Bank and may borrow 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 $199.6 million in the first nine months of 1996 as specialized loan products and target marketing strategies generated results. Residential mortgages increased by $106.8 million during the nine months of 1996 while loans to individuals increased by $36.2 million. Loan growth for the period was funded primarily by deposit growth. Total deposits grew $115.3 million and reflected increases in time deposits of $87.1 million combined with increases in demand deposits and savings of $11.7 million and $16.5 million respectively. Growth in time deposits occurred primarily in maturity ranges of 36 to 59 months. Marketable securities that the Corporation holds in its investment portfolio are an additional source of liquidity. These securities are classified as "securities available for sale" and while the Corporation does not have specific intentions to sell these securities they have been designated as "available for sale" because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of September 30, 1996 securities available for sale had an amortized cost of $249.6 million and an approximate fair value of $250.7 million. 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. 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) 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. 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, 1996 and December 31, 1995. September 30, 1996 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans.................... $ 643,445 $ 97,243 $163,566 $ 904,254 Investments.............. 18,264 18,515 76,046 112,825 Other interest-earning assets.................. 102,846 6,070 14,213 123,129 Total interest-sensitive assets................ 764,555 121,828 253,825 1,140,208 Certificates of deposits. 209,412 180,171 227,708 617,291 Other deposits........... 696,773 -0- -0- 696,773 Borrowings............... 175,338 16,440 13,353 205,131 Total interest-sensitive liabilities........... 1,081,523 196,611 241,061 1,519,195 GAP.................... $(316,968) $(74,783) $ 12,764 $ (378,987) ISA/ISL.................. 0.71 0.62 1.05 0.75 Gap/Total assets......... 12.36% 2.92% 0.50% 14.78% 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% 17 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 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. 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 September 30, 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. 18 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CREDIT REVIEW 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, 1996 1995 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ 7,424 $ 6,876 Past due loans 12,676 8,578 Renegotiated loans 283 294 Total nonperforming loans $ 20,383 $ 15,748 Other real estate owned $ 1,827 $ 2,235 Loans outstanding at end of period $1,688,146 $1,445,084 Average loans outstanding (year-to-date) $1,563,576 $1,406,998 Nonperforming loans as percent of total loans 1.21% 1.09% Provision for possible credit losses $ 3,150 $ 2,445 Net charge-offs $ 2,132 $ 2,231 Net charge-offs as percent of average loans 0.14% 0.16% Provision for possible credit losses as percent of net charge-offs 147.75% 109.59% 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 94.05% 111.45% 19 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CREDIT REVIEW (Continued) 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, 1996, there were no significant concentrations of credit. Nonperforming loans at September 30, 1996 increased $4.6 million over 1995 levels primarily as a result of increases in past due commercial and residential loans secured by real estate. Although the ratio of the allowance for possible credit losses as a percent of nonperforming loans is lower than the Corporation's peers at September 30, 1996, other factors should be considered such as historical net charge offs, and the composition of the loan portfolio. These were favorable when compared to peer group levels over the past five years. The provision for possible credit losses for the nine months of 1996 exceeds that reported for 1995 while net charge-offs have declined, resulting in an increase in the provision for possible credit losses as a percent of net charge-offs. 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 September 30, 1996, the Corporation had a recorded investment in impaired loans of $7.7 million which included loans on a nonaccrual basis and renegotiated loans. The average balance of impaired loans for the nine month period was $8.2 million. An allocation of the allowance for possible credit losses in the amount of $1.5 million relates to $4.5 million of the impaired loans. Impaired loans totalling $3.2 million have no allocation of the allowance, in accordance with the Financial Accounting Standards Board Statement No. 118 "Accounting by Creditors for Impairment of a Loan Income Recognition and Disclosures." Income earned on impaired loans during the first nine months of 1996 was $74 thousand. 20 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 $5.2 million in the first nine months of 1996. Dividends declared reduced equity by $12.0 million over the 1996 period while earnings retention was $7.9 million, representing an earnings retention rate of 39.5%. 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 $867 thousand. Amounts paid to fund the discount on reinvested dividends and optional cash payments reduced equity by $377 thousand. The market value adjustment to securities available for sale increased equity by $19 thousand. The cost of purchasing treasury shares net of the reissuance of treasury shares, decreased equity by $3.1 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. 21 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 September 30, 1996: Percent Amount of Adjusted (in thousands) Assets Tier I Capital $244,121 14.8% Risk-Based Requirement 65,988 4.0 Total Capital 263,434 16.0 Risk-Based Requirement 131,976 8.0 Minimum Leverage Capital 244,121 9.8 Minimum Leverage Requirement 99,614 4.0 At September 30, 1996 the Corporation and its banking subsidiaries are considered well capitalized as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. 22 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There were no material legal proceedings to which the Corporation or its subsidiaries are a party, or of which any of their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have a material adverse effect on the consolidated operations or financial position of the Corporation and its subsidiaries. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on form 8-k None 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) DATED: NOVEMBER 12, 1996 /S/ Joseph E. O'Dell Joseph E. O'Dell, President and Chief Executive Officer DATED: NOVEMBER 12, 1996 /S/ John J. Dolan John J. Dolan, Sr. Vice President, Comptroller, and Chief Financial Officer 24 EX-27 2
9 1,000 3-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 80,530 5,021 0 0 250,718 481,894 476,256 1,723,317 19,170 2,564,845 2,078,014 200,132 24,749 4,457 0 0 22,437 235,056 2,564,845 34,658 10,809 83 45,550 20,366 22,653 22,897 1,200 1 16,734 8,231 5,862 0 0 5,862 0.27 0.27 3.96 7,424 12,676 283 0 18,152 2,668 536 19,170 0 0 0
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