-----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, UbMvI78IVIYdwYQmnEvFuWaHHhA21tgvHeg77R1aFxbr1Kyd34DyNHFL8RzY99sa G+mxZNAOFSUxglTg+chhpw== 0000712537-97-000019.txt : 19970520 0000712537-97-000019.hdr.sgml : 19970520 ACCESSION NUMBER: 0000712537-97-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 97608702 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, 1997 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, 1997 was 22,105,526. FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Included in Part I of this report: PAGE First Commonwealth Financial Corporation and Subsidiaries Consolidated Balance Sheets . . . . . 3 Consolidated Statements of Income. . . . . . . . . 4 Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows. . . . . . . 6 Notes to Consolidated Financial Statements . . . . 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 9 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, 1997 1996 ASSETS Cash and due from banks on demand.... $ 69,873 $ 69,406 Interest-bearing deposits with banks. 8,632 4,199 Federal funds sold .................. -0- -0- Securities available for sale, at market.............................. 240,423 244,415 Securities held to maturity, at cost, (market value $460,337 in 1997 and $457,189 in 1996).................. 464,540 459,746 Loans................................ 1,799,170 1,778,130 Unearned income.................... (26,689) (30,795) Allowance for possible credit losses (19,563) (19,324) Net loans....................... 1,752,918 1,728,011 Property and equipment............... 32,755 32,590 Other real estate owned.............. 1,817 1,647 Other assets......................... 48,021 44,624 TOTAL ASSETS.................... $2,618,979 $2,584,638 LIABILITIES Deposits (all domestic): Noninterest-bearing................ $ 202,420 $ 200,473 Interest-bearing................... 1,936,835 1,904,310 Total deposits.................. 2,139,255 2,104,783 Short-term borrowings................ 134,807 187,020 Other liabilities.................... 29,198 27,287 Long-term debt....................... 51,589 4,190 Total liabilities............... 2,354,849 2,323,280 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; 22,184,426 and 22,194,426 shares outstanding in 1997 and 1996 respectively......... 22,437 22,437 Additional paid-in capital........... 76,515 76,664 Retained earnings.................... 171,948 168,711 Unrealized gain (loss) on securities available for sale, net of taxes... 907 1,309 Treasury stock (252,202 shares at March 31, 1997 and 242,202 at December 31, 1996, at cost)........ (4,471) (4,289) Unearned ESOP shares................. (3,206) (3,474) Total shareholders' equity......... 264,130 261,358 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $2,618,979 $2,584,638 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, 1997 1996 Interest Income Interest and fees on loans........ $37,518 $33,097 Interest and dividends on investments: Taxable interest................ 8,890 9,850 Interest exempt from Federal income taxes................... 898 798 Dividends....................... 350 331 Interest on Federal funds sold.... 3 60 Interest on bank deposits......... 87 134 Total Interest Income.......... 47,746 44,270 Interest Expense Interest on deposits.............. 21,399 19,425 Interest on short-term borrowings. 1,602 1,316 Interest on long-term debt........ 655 104 Total Interest Expense......... 23,656 20,845 Net interest income................. 24,090 23,425 Provision for possible credit losses 1,241 900 Net interest income after provision for possible credit losses........ 22,849 22,525 Other Income Net securities gains (losses)..... 1,758 8 Trust income...................... 691 616 Service charges on deposit accounts 1,397 1,362 Other income...................... 905 955 Total Other Income............. 4,751 2,941 Other Expenses Salaries and employee benefits.... 9,291 8,186 Net occupancy expense............. 1,295 1,190 Furniture and equipment expense... 1,224 1,069 FDIC expense...................... 66 72 Other operating expenses.......... 4,630 4,476 Total Other Expenses........... 16,506 14,993 Income before taxes................. 11,094 10,473 Applicable income taxes........... 3,419 3,360 Net Income.......................... $ 7,675 $ 7,113 Average Shares Outstanding.......... 21,946,450 22,004,857 Per Share Data: Net income.......................... $0.35 $0.32 Cash dividends per share............ $0.20 $0.18 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, 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 Balance at December 31, 1996.... $22,437 $76,664 $168,711 $1,309 $(3,474) $(4,289) $261,358 Net income.................... -0- -0- 7,675 -0- -0- -0- 7,675 Cash dividends declared....... -0- -0- (4,438) -0- -0- -0- (4,438) Change in market value of securities available for sale, net of tax effect........... -0- -0- -0- (402) -0- -0- (402) Decrease in unearned ESOP shares -0- -0- -0- -0- 268 -0- 268 Discount on dividend reinvestment plan purchases.............. -0- (149) -0- -0- -0- -0- (149) Treasury stock acquired....... -0- -0- -0- -0- -0- (182) (182) Balance at March 31, 1997....... $22,437 $76,515 $171,948 $ 907 $(3,206) $(4,471) $264,130
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, 1997 1996 Operating Activities Net income....................................... $ 7,675 $ 7,113 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses............ 1,241 900 Depreciation and amortization................. 1,365 1,018 Net gains on sales of assets.................. (1,779) (263) Increase in interest receivable............... (1,727) (293) Increase in interest payable.................. 18 657 Increase in income taxes payable.............. 2,381 3,458 Change in deferred taxes...................... 755 (124) Other-net..................................... (2,835) (3,194) Net cash provided by operating activities... 7,094 9,272 Investing Activities Transactions with securities held to maturity: Proceeds from sales........................... -0- -0- Proceeds from Maturities and redemptions...... 12,436 27,860 Purchases..................................... (17,206) (19,541) Transactions with securities available for sale: Proceeds from Sales........................... 7,792 -0- Proceeds from Maturities and redemptions...... 8,681 21,574 Purchases..................................... (11,368) (22,519) Proceeds from sales of loans and other assets.... 3,282 5,805 Changes net of acquisitions: Net decrease in time deposits with banks......... (4,433) (761) Net increase in loans............................ (29,873) (31,948) Purchases of premises and equipment.............. (1,100) (1,429) Net cash used by investing activities.......... (31,789) (20,959) Financing Activities Repayments of long-term debt..................... (25,288) -0- Proceeds from issuance of long-term debt......... 36,265 -0- Discount on dividend reinvestment plan purchases. (148) (120) Dividends paid................................... (4,439) (4,027) Net decrease in Federal funds purchased.......... (26,075) (31,235) Net increase in other short-term borrowings...... 10,552 10,704 Changes net of acquisitions: Net increase in deposits......................... 34,477 35,552 Purchase of treasury stock....................... (182) (2,099) Proceeds from sale of treasury stock............. -0- 23 Net cash provided by financing activities... 25,162 8,798 Net increase (decrease) in cash and cash equivalents............................... 467 (2,889) Cash and cash equivalents at January 1............. 69,406 67,181 Cash and cash equivalents at March 31.............. $69,873 $64,292 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, 1997 (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, 1997 and the results of operations for the three month periods ended March 31, 1997 and 1996, and statements of cash flows and changes in shareholders' equity for the three month periods ended March 31, 1997 and 1996. The results of the three months ended March 31, 1997 and 1996 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) 1997 1996 Cash paid during the first three months of the year for: Interest $23,638 $20,188 Income Taxes $ 250 $ -0- Noncash investing and financing activities: ESOP loan reductions $ 268 $ 267 Gross increase (decrease) in market value adjustment to securities available for sale pursuant to FAS No. 115 $ (618) $ (807) Loans transferred to other real estate owned and repossessed assets $ 1,530 $ 454 NOTE 3 New Accounting Pronouncements In February 1997 the Financial Accounting Standards Board issued Statement No. 128 "Earnings per Share" ("FAS No. 128") which is effective for financial statements issued after December 15, 1997; earlier adoption is not permitted. This statement replaces the presentation of primary and fully diluted earnings per share with a presentation of basic and diluted earnings per share, respectively. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in 7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 (Unaudited) NOTE 3 New Accounting Pronouncements (Continued) the earnings of the entity. FAS No. 128 also requires a reconciliation of the numerator and denominator of the basic EPS calculation to the numerator and denominator of the diluted EPS calculation. Adoption of this statement is not expected to have a material impact on the disclosure of earnings per share in the financial statements. The pro forma effect of adopting FAS No. 128 would not change the reported earnings per share for either basic or fully diluted earnings per share. 8 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS First Three Months of 1997 as Compared to the First Three Months of 1997 This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and results of operations of First Commonwealth Financial Corporation (the "Corporation") including its subsidiaries. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise of update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Net income in the three months of 1997 was $7.7 million and can be compared to $7.1 million for the three months of 1996. Earnings per share was $0.35 for the three months of 1997 reflecting an increase of $0.03 over the 1996 level of $0.32. The impact of net securities transactions increased earnings per share $0.08 in 1997 while changes in net interest income increased earnings by $0.03 per share during 1997. Salary and benefit costs reduced earnings per share by $0.05 during 1997. Return on average assets was 1.21% and return on average equity was 11.72% during the 1997 period, compared to 1.21% and 11.20%, respectively during the same period of 1996. 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 $24.1 million for the three months of 1997 compared to $23.4 million for the same period of 1996. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) for the 1997 period was 4.10%, reflecting a decrease of 20 basis points (0.20%) from 4.30% reported in 1996. Interest and fees on loans increased $4.4 million for 1997 over 1996 levels reflecting volume increase in all loan categories as average total loans for the three months of 1997 increased $264.9 million over 1996 averages. The most notable components of loan growth for 1997 were an increase in average mortgage loans of $122.9 million and an increase in average installment loans of $60.1 million over 1996 averages. The increase in interest and fees on loans for 1997 included increases due to volume of $5.4 9 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS First Three Months of 1997 as Compared to the First Three Months of 1997 (Continued) million and decreases due to rate of $923 thousand. Yields on loans for the three months of 1997 decreased by 28 basis points (0.28%) when compared to 1996 yields, as yields on installment loans and time and demand loans decreased by 41 basis points (0.41%) and 26 basis points (0.26%), respectively. The decline in installment loan yields is primarily the result of increased utilization of indirect automobile lending 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 1997 than the rates for the corresponding 1996 period. Interest income on investments decreased $841 thousand when compared to the corresponding period of 1996 primarily as a result of decreases due to volume which amounted to $724 thousand. Yields on investments remained stable for the 1997 period reflecting a decline of 5 basis points (0.05%) over 1996 yields. Interest on deposits increased $2.0 million for the 1997 period compared to 1996, and included increases in interest on time deposits of $1.3 million. The most notable increase in time deposit interest occurred in the 36 - 59 month maturity range which increased by $1.2 million over 1996 levels as a result of volume increases. Average time deposits in the 36-59 month maturity range increased $81.4 million for the three months of 1997 compared to 1996 averages as competitive rates and aggressive marketing programs generated results. Total cost of deposits increased 14 basis points (0.14%) over the 1996 level and included increases of 34 basis points (0.34%) for total savings deposits which were partially offset by cost decreases of 5 basis points (0.05%) for time deposits. 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 establish and reward 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 long-term debt increased $551 thousand compared to the 1996 period as average long-term debt for the three months of 1997 increased $15.8 million over 1996 averages. The long-term debt increase for 1997 was a result of borrowings from the Federal Home Loan Bank with maturities of up to 10 years. Average interest-earning assets were 95.6% of average total assets in the 1997 period and 95.8% during the 1996 time frame. Average interest-bearing liabilities increased as a percentage of average total assets to 81.1% for the 1997 period compared to 80.3% during the related 1996 period. The change in this mix had a negative impact on net interest income. 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 1997 as Compared to the First Three Months of 1996 (Continued) The provision for possible credit losses was $1.2 million for the three month period of 1997 compared to $900 thousand during the 1996 period. Net charge-offs against the allowance for possible credit losses were $1.0 million in the 1997 period and $577 thousand in the 1996 period. The 1997 increase in net charge- offs included a decline in net charge-offs for commercial loans not secured by real estate of $110 thousand and an increase in net charge-offs for loans to individuals of $515 thousand compared to 1996. The total dollar amount of charge-offs of loans to individuals during 1997 increased primarily as a result of unsecured loans and credit card loans. 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, 1997 and 1996. 1997 1996 Balance January 1, $19,324 $18,152 Loans charged off: Commercial, financial and agricultural 6 94 Real estate-construction -0- -0- Real estate-commercial 19 -0- Real estate-residential 52 30 Loans to individuals 1,121 599 Lease financing receivables -0- 21 Total loans charged off 1,198 744 Recoveries of previously charged off loans: Commercial, financial and agricultural 41 21 Real estate-construction -0- 17 Real estate-commercial 13 -0- Real estate-residential 4 9 Loans to individuals 129 119 Lease financing receivables 9 1 Total recoveries 196 167 Net charge offs 1,002 577 Provision charged to operations 1,241 900 Balance March 31, $19,563 $18,475 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 1997 as Compared to the First Three Months of 1996 (Continued) Total other operating income increased $1.8 million in 1997 to $4.8 million. Net securities gains were $1.8 million during the 1997 period compared to securities gains of $8 thousand during the 1996 related period. The securities gains during 1997 resulted from the sale of investments in Pennsylvania bank stocks classified as equity securities "available for sale" having a book value of $5.9 million. Although other income showed a decrease of $50 thousand for 1997 compared to 1996, growth of the credit card portfolio generated an increase in charge user fees of $120 thousand over 1996 levels. Noninterest expense was $16.5 million for the three months of 1997 which reflected an increase of $1.5 million over the 1996 level of $15.0 million. Total noninterest expense was 2.59% of average assets during the 1997 period compared to 2.56% for the 1996 related time frame. Employee costs were $9.3 million in 1997, representing 1.44% of average assets on an annualized basis compared to $8.2 million and 1.39% of average assets on an annualized basis for 1996. Inclusion of BSI in the 1997 period accounted for $261 thousand of the $1.1 million total increase in employee costs for the 1997 period. Salary and benefit increases can also be attributed to an increase in the number of full-time equivalent employees for 1997. The employees were primarily customer contact employees to support our expansion and our convenience banking center. Net occupancy and furniture and equipment expenses increased $105 thousand and $155 thousand respectively for 1997 when compared to 1996 primarily as a result of additional branches. Other operating expenses increased $154 thousand in 1997 to $4.6 million. Telephone cost increases of $85 thousand reflected usage increases for both voice and data lines. Aggressive marketing of innovative new products and services resulted in an increase of $87 thousand in advertising expenses for the three months of 1997. Loan collection and repossession expenses decreased $187 thousand during the 1997 period and may be impacted in future periods by the redesign of the collection process and the use of internal resources rather than outsourcing collection efforts. Income tax expense was $3.4 million for both the 1997 and 1996 periods. Income before taxes increased $620 thousand in the 1997 period to $11.1 million. The Corporation's effective tax rate was 30.8% for the 1997 period and compared to 32.1% for 1996, reflecting an increase in tax-free income. 12 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY Liquidity is a measure of the Corporation's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from deposits (primary source), and maturity or repayment of earning assets, such as securities and loans. As an additional secondary source, short-term liquidity needs may be provided through the use of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements, and borrowings from the Federal Reserve Bank. Additionally, the banking subsidiaries are members of the Federal Home Loan Bank and may borrow under overnight and term borrowing arrangements. The sale of earning assets may also provide an additional source of liquidity. Net loans increased $24.9 million in the first three months of 1997 as specialized loan products and target marketing strategies generated results. Residential mortgages increased by $13.9 million during the three months of 1997 while municipal loans increased by $11.9 million. The Corporation's FlexLease product introduced in 1996 continued to generate strong growth reflecting an increase of $5.1 million so far for 1997. Loan growth for the period was funded primarily by deposit growth and borrowings from the Federal Home Loan Bank with maturities of up to ten years which is classified as long-term debt. Total deposits grew $34.5 million and reflected increases in time deposits of $30.7 million combined with increases in both demand deposits and savings of $1.9 million since year-end 1996. Time deposits grew $27.8 million in the 36 - 59 month maturity range as deposit customers extended maturities to take advantage of competitive rates being offered by the subsidiary banks. Customers also took advantage of time deposits in the 24 month maturity range which included the option of withdrawal without penalty with 30 day notice. These "Option" certificate of deposit products give customers the ability to guarantee a fixed interest rate for 24 months, usually slightly below market rates, in return for the flexibility to reinvest in higher yielding deposit products if interest rates rise. Marketable securities that the Corporation holds in its investment portfolio are an additional source of liquidity. These securities are classified as "securities available for sale" and while the Corporation does not have specific intentions to sell these securities they have been designated as "available for sale" because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of March 31, 1997 securities available for sale had an amortized cost of $239.0 million and an approximate fair value of $240.4 million. 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, 1997 and December 31, 1996. March 31, 1997 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans.................... $ 684,640 $ 84,320 $229,755 $ 998,715 Investments.............. 30,805 44,546 84,582 159,933 Other interest-earning assets.................. 106,508 9,463 6,470 122,441 Total interest-sensitive assets................ 821,953 138,329 320,807 1,281,089 Certificates of deposits. 237,507 117,195 281,706 636,408 Other deposits........... 702,306 -0- -0- 702,306 Borrowings............... 152,408 5,013 21,187 178,608 Total interest-sensitive liabilities........... 1,092,221 122,208 302,893 1,517,322 GAP....................$ (270,268) $ 16,121 $ 17,914 $ (236,233) ISA/ISL.................. 0.75 1.13 1.06 0.84 Gap/Total assets......... 10.32% 0.62% 0.68% 9.02% December 31, 1996 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 669,043 $102,628 $190,064 $ 961,735 Investments.............. 17,574 37,133 84,794 139,501 Other interest-earning assets.................. 97,201 7,346 11,361 115,908 Total interest-sensitive assets................ 783,818 147,107 286,219 1,217,144 Certificates of deposits. 269,090 154,045 227,381 650,516 Other deposits........... 700,445 -0- -0- 700,445 Borrowings............... 179,308 5,621 4,946 189,875 Total interest-sensitive liabilities........... 1,148,843 159,666 232,327 1,540,836 GAP....................$ (365,025) $(12,559) $ 53,892 $ (323,692) ISA/ISL.................. 0.68 0.92 1.23 0.79 Gap/Total assets......... 14.12% 0.49% 2.09% 12.52% 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, 1997, 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, 1997 1996 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ 7,975 $ 7,761 Past due loans 11,553 7,622 Renegotiated loans 277 288 Total nonperforming loans $ 19,805 $ 15,671 Other real estate owned $ 1,817 $ 1,394 Loans outstanding at end of period $1,772,481 $1,513,624 Average loans outstanding (year-to-date) $1,763,331 $1,498,477 Nonperforming loans as percent of total loans 1.12% 1.04% Provision for possible credit losses $ 1,241 $ 900 Net charge-offs $ 1,002 $ 577 Net charge-offs as percent of average loans 0.06% 0.04% Provision for possible credit losses as percent of net charge-offs 123.85% 155.98% Allowance for possible credit losses as percent of average loans outstanding 1.11% 1.23% Allowance for possible credit losses as percent of nonperforming loans 98.78% 117.89% 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 repayment terms. Additionally, the portfolio is well diversified and as of March 31, 1997, there were no significant concentrations of credit. Nonperforming loans at March 31, 1997 increased $4.1 million over 1996 levels and included increases in nonaccrual loans of $214 thousand and increases in past due loans of $3.9 million. The increase in past due loans for 1997 was primarily the result of increases in residential loans secured by real estate of $2.3 million and increases in consumer installment and revolving credit loans of $1.2 million. Past due loans have increased during 1997 in the loan categories which reflected the largest growth, as the outstanding balances of residential loans secured by real estate increased by $140 million while consumer installment and revolving credit loans increased by $29.9 million compared to March 1996. Although the dollar amount of nonperforming loans has increased, nonperforming loans as a percentage of total loans has not increased above historic levels. Net charge-offs in both dollars and as a percentage of average loans have increased over 1996 levels, but remain below peer averages. The allowance for possible credit losses as percent of average loans outstanding remains below peer levels and has decreased when compared to March 1996. Management has considered both the favorable charge-off history compared to peer and the unfavorable allowance for possible credit losses as percentage of average loans outstanding compared to peer when analyzing the adequacy of the allowance for possible credit losses. Management believes that the allowance for possible credit losses and nonperforming loans remain safely within acceptable levels. 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. 17 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CREDIT REVIEW (Continued) As of March 31, 1997 ad 1996 the Corporation had a recorded investment in impaired loans of $8.3 million and $8.0 million respectively. Impaired loans include loans on a nonaccrual basis and renegotiated loans. The average balance of impaired loans for the three month periods ending March 31, 1997 and 1996 were $8.5 million and $8.2 million, respectively. An allocation of the allowance for possible credit losses in the amount of $1.9 million relates to $4.1 million of the impaired loans at March 31, 1997. An allocation of the allowance for possible credit losses in the amount of $665 thousand relates to $4.0 million of the impaired loans at March 31, 1996. Impaired loans totalling $4.2 million and $4.0 million at March 31, 1997 and 1996 respectively have no allocation of the allowance, in accordance with the Financial Accounting Standards Board Statement No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." Income earned on impaired loans during the first three months of 1997 was $13 thousand compared to $8 thousand for the related 1996 period. CAPITAL RESOURCES Equity capital increased $2.8 million in the first three months of 1997. Dividends declared reduced equity by $4.4 million over the 1997 period, while earnings retention was $3.2 million, representing an earnings retention rate of 42.2%. 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 $268 thousand. Amounts paid to fund the discount on reinvested dividends and optional cash payments reduced equity by $149 thousand. The market value adjustment to securities available for sale decreased equity by $402 thousand. The cost of purchasing treasury shares net of the reissuance of treasury shares to provide for stock options exercised, decreased equity by $182 thousand. A capital base can be considered adequate when it enables the Corporation to intermediate funds responsibly and provide related services, while protecting against future uncertainties. The evaluation of capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings history and prospects, internal controls and management caliber. In consideration of these factors, management's primary emphasis with respect to the Corporation's capital position is to maintain an adequate and stable ratio of equity to assets. 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 Federal Reserve Board issued risk-based capital adequacy guidelines which are designed principally as a measure of credit risk. These guidelines require: (1) at least 50% of a banking organization's total capital be common and other "core" equity capital ("Tier I Capital"); (2) assets and off-balance-sheet items must be weighted according to risk; (3) the total capital to risk-weighted assets ratio be at least 8%; and (4) a minimum leverage ratio of Tier I capital to average total assets. The minimum leverage ratio is not specifically defined, but is generally expected to be 3-5 percent for all but the most highly rated banks, as determined by a regulatory rating system. The table below presents the Corporation's capital position at March 31, 1997: Percent Amount of Adjusted (in thousands) Assets Tier I Capital $251,018 14.8% Risk-Based Requirement 68,065 4.0 Total Capital 270,580 15.9 Risk-Based Requirement 136,130 8.0 Minimum Leverage Capital 251,018 9.8 Minimum Leverage Requirement 102,820 4.0 At March 31, 1997 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 (a) Exhibits None (b) Reports on Form 8-K Form 8-K dated February 26, 1997 reporting that the Corporation granted incentive stock options and intends to buy back shares of its common stock to be used to cover outstanding options. 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, 1997 /S/ JOSEPH E. O'DELL Joseph E. O'Dell, President and Chief Executive Officer DATED: MAY 14, 1997 /S/ JOHN J. DOLAN John J. Dolan, Sr. Vice President, Comptroller, and Chief Financial Officer 21 EX-27 2
9 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 69,873 8,632 0 0 240,423 464,540 460,337 1,799,170 19,563 2,618,979 2,139,255 134,807 29,198 51,589 0 0 22,437 241,693 2,618,979 37,518 10,138 90 47,746 21,399 23,656 24,090 1,241 1,758 16,506 11,094 7,675 0 0 7,675 .35 .35 4.10 7,975 11,553 277 0 19,324 1,198 196 1,241 0 0 0
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