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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 2000 commission file number 0-11242
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1428528
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
22 NORTH SIXTH STREET INDIANA, PA 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (724) 349-7220
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XX No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
TITLE OF CLASS OUTSTANDING AT March 28, 2001
Common Stock, $1 Par Value 58,222,096 Shares
The aggregate market value of the voting common stock, par value $1 per
share, held by non-affiliates of the registrant (Based upon the closing sale
price on March 28, 2001), was approximately $545,159,574.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement related to the annual meeting of
security holders to be held April 23, 2001 are incorporated by reference
into Part III.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
First Commonwealth Financial Corporation
FORM 10-K
INDEX
PART I PAGE
ITEM 1. Business
Description of business.......................... 2
Competition...................................... 4
Supervision and regulation....................... 8
ITEM 2. Properties....................................... 7
ITEM 3. Legal Proceedings................................ 7
ITEM 4. Submission of Matters to a Vote of Security
Holders......................................... 7
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Security Holder Matters......................... 8
ITEM 6. Selected Financial Data.......................... 9
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.............. 10
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk..................................... 27
ITEM 8. Financial Statements and Supplementary Data...... 28
ITEM 9. Disagreements on Accounting and Financial
Disclosures..................................... 64
PART III
ITEM 10. Directors and Executive Officers of the
Registrant..................................... 64
ITEM 11. Management Renumeration and Transactions........ 65
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management................................. 65
ITEM 13. Certain Relationships and Related Transactions.. 65
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................ 66
Signatures..................................... 68
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business
Description of Business
First Commonwealth Financial Corporation (the "Corporation") was
incorporated as a Pennsylvania business corporation on November 15, 1982 and
is registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended. The Corporation operates two chartered banks, First
Commonwealth Bank and Southwest Bank. Personal financial planning and other
financial services and insurance products are also provided through First
Commonwealth Trust Company and First Commonwealth Insurance Agency. The
Corporation also operates through Commonwealth Systems Corporation, a data
processing subsidiary and First Commonwealth Professional Resources Inc.,
("FCPRI") a subsidiary providing professional services to affiliated
organizations.
First Commonwealth Bank ("FCB"), a Pennsylvania-chartered banking
corporation headquartered in Indiana, Pennsylvania operates through
divisions doing business under the following names: NBOC Bank, Deposit
Bank, Cenwest Bank, First Bank of Leechburg, Peoples Bank, Central Bank,
Peoples Bank of Western Pennsylvania, Unitas Bank and Reliable Bank.
On December 31, 1998 the Corporation affiliated, as a result of a statutory
merger, with Southwest National Corporation ("SNC") and its wholly-owned
subsidiary, Southwest Bank ("Southwest"). SNC was a Pennsylvania-chartered
bank holding company headquartered in Greensburg, Pennsylvania. Southwest
Bank is a Pennsylvania-chartered, federally insured commercial bank also
headquartered in Greensburg, Pennsylvania which traces its origin to 1900.
Upon merger, SNC was combined with the Corporation and Southwest Bank became
a subsidiary of the Corporation.
Through FCB, the Corporation traces its banking origins to 1866. FCB and
Southwest ("Subsidiary Banks") conduct business through 92 community banking
offices in the counties of Allegheny (4), Armstrong (3), Beaver (1), Bedford
(4), Blair (8), Cambria (11), Centre (2), Clearfield (5), Elk (3), Franklin
(2), Huntingdon (6), Indiana (9), Jefferson (4), Lawrence (6), Somerset (6),
Washington (1), and Westmoreland (17). The Subsidiary Banks engage in
general banking business and offer a full range of financial services
including such general retail banking services as demand, savings and time
deposits and mortgage, consumer installment and commercial loans.
The Subsidiary Banks operate a network of 83 automated teller machines
("ATMs") which permits customers to conduct routine banking transactions 24
hours a day. Of the ATMs, 60 are located on the premises of their main or
branch offices and 23 are in remote locations. All the ATMs are part of the
MAC network which consists of over 23,000 ATMs owned by numerous banks,
savings and loan associations and credit unions located throughout 45
states. The ATMs operated by the Subsidiary Banks are also part of the
global MasterCard/Cirrus network which is comprised of more than 300,000
ATMs located in the United States, Canada and 58 other countries and
territories, which services over 365 million card holders. Such networks
allow the Subsidiary Banks' customers to withdraw cash and in certain cases
conduct other banking transactions from ATMs of all participating financial
institutions.
In addition to funds access through the use of ATMs, the MAC debit card
offered to the Subsidiary Banks' deposit customers may be used at 300,000
point of sale terminals on the MAC system as well as being used on the
global MasterCard system for the purchase of goods and services. The MAC
debit card provides customers with the almost universal acceptability of a
credit card combined with the convenience of direct debit to the customers'
checking account.
2
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Description of Business (Continued)
First Commonwealth's corporate philosophy is to encourage its subsidiaries
to operate as locally-oriented, community-based financial service
affiliates, augmented by experienced, centralized support from the
Corporation in selected critical areas. This local market orientation is
reflected in the Subsidiary Banks' boards of directors and branch banking
centers, which generally have advisory boards comprised of local business
persons, professionals and other community representatives, that assist the
Subsidiary Banks in responding to local banking needs. The Subsidiary Banks
concentrate on customer service and business development, while relying upon
the support of the Corporation in identifying operational areas that can be
effectively centralized without sacrificing the benefits of a local
orientation. Primary candidates for centralization are those functions
which are not readily visible to customers and those which are critical to
risk management. Asset quality review, financial reporting, investment
activities, funds management, internal audit, data processing and loan
servicing are among the functions which are managed at the holding company
level, either directly or through utilization of non-bank subsidiaries as
professional resources providers.
Commonwealth Systems Corporation ("CSC") was incorporated as a Pennsylvania
business corporation in 1984 by the Corporation to function as its data
processing subsidiary and it has its principal place of business in Indiana,
Pennsylvania. Before August 1984, it had operated as the data processing
department. CSC provides on-line general ledger accounting services and
bookkeeping services for deposit and loan accounts to the Corporation, the
Banking Subsidiaries and its other nonbank subsidiaries. CSC also acts as a
centralized purchasing agent for the purchase of computer hardware and
software products by the Corporation and subsidiaries as well as providing
technical support for the installation and use of these products. It
competes, principally with data processing subsidiaries of other, mostly
larger, banks, on the basis of the price and quality of its services and the
speed with which such services are delivered.
First Commonwealth Trust Company ("FCTC") was incorporated on January 18,
1991 as a Pennsylvania chartered trust company to render general trust
services. The trust departments of subsidiary banks were combined to form
FCTC, and the corporate headquarters are located in Indiana, Pennsylvania.
FCTC has eight branch offices in the service areas of the Subsidiary Banks
and offers personal and corporate trust services, including administration
of estates and trusts, individual and corporate investment management and
custody services and employee benefit trust services.
First Commonwealth Insurance Agency ("FCIA") was incorporated as a
Pennsylvania business corporation with its principal place of business in
Indiana, Pennsylvania. FCIA began operations in January 1998 as a wholly-
owned subsidiary of FCB and provides a full range of insurance and annuity
products to retail and commercial customers.
On June 1, 1989 Commonwealth Trust Credit Life Insurance Company
("Commonwealth Trust") began operations. The Corporation owns 50% of the
voting common stock of Commonwealth Trust. Commonwealth Trust provides
reinsurance for credit life and credit accident and health insurance sold by
the subsidiaries of the two unrelated holding company owners under a joint
venture arrangement whereby the net income derived from such reinsurance
inures proportionally to the benefit of the holding company selling the
underlying insurance to its banks' customers.
3
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
First Commonwealth Capital Trust I, a business trust created under the laws
of the State of Delaware, is a wholly-owned subsidiary of the Corporation.
The trust was formed during September 1999 for the exclusive purposes of
issuing and selling trust preferred securities, using the proceeds from the
sale of the trust preferred securities to acquire subordinated debentures
issued by the Corporation and engaging in only those other activities
necessary or incidental thereto.
The Corporation and its subsidiaries employed approximately 1,460 persons
(full-time equivalents) at December 31, 2000. The Corporation does not
engage in any significant business activities other than holding the stock
of its subsidiaries. The Corporation does not at present have any plans to
expand or modify its business or that of its subsidiaries, other than as
described herein. Nevertheless, it will be receptive to and may actively
seek out mergers and acquisitions in the event opportunities which
management considers advantageous to the development of the Corporation's
business arise, and may otherwise expand or modify its business as
management deems necessary to respond to changing market conditions or the
laws and regulations affecting the business of banking.
Competition
The Subsidiary Banks, FCTC and FCIA face intense competition, both from
within and without their service areas, in all aspects of business. The
Subsidiary Banks compete for deposits, in such forms as checking, savings
and NOW (negotiable order of withdrawal) accounts, MMDA (money market
deposit accounts) and certificates of deposit, and in making consumer loans
and loans to smaller businesses, with numerous other commercial banks and
savings banks doing business within their service area. With respect to
loans to larger businesses the Subsidiary Banks also compete with much
larger banks located outside of their service area. The Subsidiary Banks
also compete, primarily in making consumer loans and for deposits, with
state and federally chartered savings and loan associations and with credit
unions. In recent years the Subsidiary Banks have encountered significant
competition for deposits from money market funds, mutual funds and
institutions that offer annuities located throughout the United States.
Money market funds pay dividends to their shareholders (which are the
equivalent of the interest paid by banks on deposits) and they are able to
offer services and conveniences similar to those offered by the Subsidiary
Banks. Annuities accumulate interest on the amounts deposited over a
predetermined time period. The depositor is then entitled to withdraw his
funds for a fixed period of time or until death. The effect of such
competition has been to increase the costs of the rest of deposits, which
provide the funds with which loans are made. In addition to savings and
loan associations and credit unions, the Subsidiary Banks also compete for
consumer loans with local offices of national finance companies and finance
subsidiaries of automobile manufacturers and with national credit card
companies such as MasterCard and VISA, whose cards, issued through financial
institutions, are held by consumers throughout their service area. The
Subsidiary Banks believe that the principal means by which they compete for
deposits and consumer and smaller commercial loans are the number and
desirability of the locations of their offices and ATMs, the sophistication
and quality of their services and the prices (primarily interest rates) of
their services. Additionally, the Subsidiary Banks intend to remain
competitive by offering financial services that target specific customer
needs. Development of an integrated advisory sales model to integrate
products between our Banks, Insurance Agency and Trust Company as well as
utilization of an employee team to deliver products and services to our
commercial customers through our "Total Solutions Financial Management"
approach have been positively received by our customers. Specific customer
needs are also met through an enhanced customer delivery system that
includes telephone banking, which provides convenient access to financial
services and hours of operation that extend past those of the Subsidiary
Banks' branch offices. The Corporation will continue to enhance its
customer delivery system in the future as the Internet is utilized to
provide customers access to product information and on-line banking.
4
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation
The Corporation is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended ("the Bank Holding Company Act") and
is registered such with the Federal Reserve Board. As a registered bank
holding company ("BHC"), it is required to file with the Federal Reserve
Board an annual report and other information. The Federal Reserve Board is
also empowered to make examinations and inspections of the Corporation and
its subsidiaries.
The Bank Holding Company Act and Regulation Y of the Federal Reserve Board
require every bank holding company to obtain the prior approval of the
Federal Reserve Board before it may acquire direct or indirect ownership or
control of more than 5% of the outstanding voting shares or substantially
all of the assets of a bank or merge or consolidate with another bank
holding company. The Federal Reserve Board may not approve acquisitions by
the Corporation of such percentage of voting shares or substantially all the
assets of any bank located in any state other than Pennsylvania unless the
laws of such state specifically authorize such an acquisition.
The Bank Holding Company Act generally prohibits a bank holding company from
engaging in a non-banking business or acquiring direct or indirect ownership
or control of more that 5% of the outstanding voting shares of any non-
banking corporation subject to certain exceptions, the principal exception
being where the business activity in question is determined by the Federal
Reserve Board to be closely related to banking or to managing or controlling
banks to be a proper incident thereto. The Bank Holding Company Act does
not place territorial restrictions on the activities of such banking related
subsidiaries of bank holding companies.
Under the Federal Reserve Act, subsidiary banks of a bank holding company
are subject to certain restrictions on extensions of credit to the bank
holding company or any of its subsidiaries, investments in the stock or
other securities thereof, or acceptance of such stock or securities as
collateral for loans to any one borrower. A bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit or the furnishing of property or
services. Under the Pennsylvania Banking Code, there is no limit on the
number of Pennsylvania banks that may be owned or controlled by a
Pennsylvania bank holding company.
The Gramm-Leach-Bliley Act ("GBLA") of 1999 revolutionizes the regulation of
financial services companies. GBLA amends the Bank Holding Company Act of
1956 to create a new type of bank holding company, a financial holding
company ("FHC"), which is permitted to engage in all activities permitted by
a bank holding company as well as securities, merchant banking and insurance
activities that were prohibited to BHCs. GLBA also repeals Sections 20 and
32 of the Glass-Steagall Act, which prohibited affiliations between a member
bank and a company principally engaged in securities activities. The
activities of a BHC that does not qualify to become a FHC will be limited to
those the Federal Reserve Board had, prior to enactment of GBLA, deemed
closely related to banking. In order to qualify as a FHC, each depository
institution subsidiary of a BHC must be well capitalized, well managed and
if insured have a satisfactory or better rating under the Community
Reinvestment Act of 1977 ("CRA") as its most recent examination and the BHC
must file an election with the Federal Reserve Board certifying that it
meets the requirements of a FHC. GBLA expands the range of business
opportunities for commercial banking organizations and enables banking
companies and other types of financial companies such as securities,
insurance and financial technology companies to combine more readily. A FHC
5
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation (Continued)
does not need to obtain prior Federal Reserve Board approval in order to
engage in, or acquire a nonbank company that engages in financial
activities. The FHC only needs to provide notice to the Federal Reserve
Board, describing the activity commenced or conducted by the acquired
company, within 30 days after commencing the activity or consummating the
acquisition.
Subsidiary Banks
FCB and Southwest are Pennsylvania-chartered banks and are subject to the
supervision of and regularly examined by the Pennsylvania Department of
Banking and the Federal Deposit Insurance Corporation ("FDIC"), and subject
to certain regulations of the Federal Reserve Board. The areas of operation
subject to regulation by Federal and Pennsylvania laws, regulations and
regulatory agencies include reserves against deposits, maximum interest
rates for specific classes of loans, truth-in-lending disclosures,
permissible types of loans and investments, trust operations, mergers and
acquisitions, issuance of securities, payment of dividends, Community
Reinvestment Act evaluations, mandatory external audits, establishment of
branches and other aspects of operations. Under the Pennsylvania Banking
Code, a state bank located in Pennsylvania may establish branches anywhere
in the state.
Reciprocal Regional Interstate Banking
As already noted, a bank holding company located in one state cannot acquire
a bank or a bank holding company located in another state unless the law of
such other state specifically permits such acquisition. On June 25, 1986,
Pennsylvania passed a law (Act No. 1986-69) which provides that a bank
holding company located in any state or the District of Columbia can acquire
a Pennsylvania bank or bank holding company if the jurisdiction where the
acquiring bank holding company is located has passed an enabling law that
permits a Pennsylvania bank holding company to acquire a bank or a bank
holding company in such jurisdiction. As of December 31, 2000 enabling laws
have been passed so that the required reciprocity presently exists with
approximately 34 states, of which the following 18 are east of the
Mississippi River: Connecticut, Delaware, Illinois, Indiana, Kentucky,
Louisiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New
Jersey, New York, Ohio, Rhode Island, Tennessee, Vermont and West Virginia.
A similar law is applicable to savings associations and savings and loan
holding companies.
It is difficult to determine the precise effects that reciprocal regional
interstate banking will have on the Corporation in the future, but the law
has increased, and as reciprocity becomes effective for additional states
will increase further, the number of potential buyers for Pennsylvania banks
and bank holding companies. The law also permits Pennsylvania bank holding
companies and Pennsylvania savings and loan holding companies that desire to
expand outside Pennsylvania to acquire banks, savings institutions and bank
holding companies located in jurisdictions with which Pennsylvania has
reciprocity.
Effects of Governmental Policies
The business and earnings of the Corporation are affected not only by
general economic conditions, but also by the monetary and fiscal policies of
the United States Government and its agencies, including the Federal Reserve
Board. An important function of the Federal Reserve Board is to regulate
the national supply of bank credit. Among the instruments of monetary
policy used by the Federal Reserve Board to implement these objectives are
open market operations in United States government securities, changes in
6
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Effects of Governmental Policies
the discount rate on borrowings by member banks and savings institutions
from the Federal Reserve System and changes in reserve requirements against
bank and savings institution deposits. These instruments, together with
fiscal and economic policies of various governmental entities, influence
overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans, received on investments or paid for
deposits.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of bank holding companies and their
subsidiary banks in the past and are expected to continue to do so in the
future. In view of changing conditions in the national and Pennsylvania
economies and in the money markets, as well as the effect of actions by
monetary and fiscal authorities, including the Federal Reserve Board, no
prediction can be made as to possible future changes in interest rates,
deposit levels and loan demand or the effect of such changes on the business
and earnings of the Corporation or its subsidiaries.
ITEM 2. PROPERTIES
The Corporation's principal office is located in the old Indiana County
Courthouse complex. This certified Pennsylvania and national historic
landmark was built in 1870 and restored by NBOC in the early 1970s. The
Corporation, NBOC, CSC and FCB occupy this grand structure, which provides
32,000 square feet of floor space, under a 25-year restoration lease
agreement with Indiana County, which NBOC entered into in 1973 and renewed
during 1998 for an additional 25 years. Under the lease, NBOC is obligated
to pay all taxes, maintenance and insurance on the building and to restore
it in conformity with historic guidelines. In order to support future
expansion needs and centralization of various functional areas such as loan
processing, marketing, and accounting, the Corporation also owns two
additional structures, free of all liens and encumbrances. These facilities
currently provide office space for the Corporation, CSC, FCTC, FCB, FCIA and
FCPRI. The Subsidiary Banks have 92 banking facilities of which 25 are
leased and 67 are owned in fee, free of all liens and encumbrances. All of
the facilities utilized by the Corporation and its subsidiaries are used
primarily for banking activities. Management believes all such facilities
to be in good repair and well suited to their uses. Management presently
expects that such facilities will be adequate to meet the anticipated needs
of the Corporation and its subsidiaries for the immediate future.
ITEM 3. LEGAL PROCEEDINGS
There are 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 any material adverse effect on the
consolidated operations or financial position of the Corporation and its
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
7
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Part II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder
Matters
First Commonwealth Financial Corporation (the "Corporation") is listed on
the New York Stock Exchange under the symbol "FCF." The approximate number
of holders of record of the Corporation's common stock is 12,800. The table
below sets forth the high and low sales prices per share and cash dividends
declared per share for common stock of the Corporation.
Cash
Dividends
Period High Sale Low Sale Per Share
2000
First Quarter $12.000 $8.625 $0.140
Second Quarter $11.625 $9.063 $0.140
Third Quarter $10.188 $8.750 $0.140
Fourth Quarter $10.875 $8.875 $0.145
Cash
Dividends
Period High Sale Low Sale Per Share
1999
First Quarter $12.406 $10.156 $0.115
Second Quarter $12.188 $10.375 $0.130
Third Quarter $12.750 $11.031 $0.130
Fourth Quarter $14.313 $11.625 $0.140
8
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 6. Selected Financial Data (Dollar Amounts in Thousands, except per
share data)
The following selected financial data is not covered by the auditor's report
and should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations, which follows, and with
the consolidated financial statements and related notes. All amounts have
been restated to reflect the poolings of interests. Financial statement
amounts for prior periods have also been reclassified to conform to the
presentation format used in 2000. The reclassifications had no effect on
the Corporation's financial condition or result of operations.
Years Ended December 31,
2000 1999 1998 1997 1996
Interest income............................ $311,882 $296,089 $282,067 $253,917 $234,957
Interest expense........................... 174,539 152,653 148,282 124,427 109,189
Net interest income...................... 137,343 143,436 133,785 129,490 125,768
Provision for credit losses................ 10,030 9,450 15,049 10,152 6,301
Net interest income after provision for
credit losses.......................... 127,313 133,986 118,736 119,338 119,467
Securities gains........................... 1,745 565 1,457 6,825 1,599
Other operating income..................... 31,938 33,660 27,929 20,599 18,482
Merger and related charges................. -0- -0- 7,915 -0- -0-
Other operating expenses................... 99,461 95,569 93,980 89,885 86,191
Income before taxes and extra-
ordinary items...................... 61,535 72,642 46,227 56,877 53,357
Applicable income taxes.................... 14,289 19,612 12,229 17,338 16,164
Net income before extraordinary items 47,246 53,030 33,998 39,539 37,193
Extraordinary items (less applicable taxes
of $336)................................. -0- -0- (624) -0- -0-
Net income................................. $ 47,246 $ 53,030 $ 33,374 $ 39,539 $ 37,193
Per Share Data (a)
Net income before extraordinary items.... $0.82 $0.88 $0.55 $0.64 $0.60
Extraordinary items...................... 0.00 0.00 (0.01) 0.00 0.00
Net income............................... $0.82 $0.88 $0.54 $0.64 $0.60
Dividends declared....................... $0.565 $0.515 $0.445 $0.41 $0.37
Average shares outstanding............... 57,558,929 60,333,092 61,333,572 61,671,898 62,310,086
Per Share Data Assuming Dilution (a)
Net income before extraordinary items.... $0.82 $0.88 $0.55 $0.64 $0.60
Extraordinary items...................... 0.00 0.00 (0.01) 0.00 0.00
Net income............................... $0.82 $0.88 $0.54 $0.64 $0.60
Dividends declared....................... $0.565 $0.515 $0.445 $0.41 $0.37
Average shares outstanding............... 57,618,671 60,569,322 61,666,026 61,845,674 62,381,790
At End of Period
Total assets............................. $4,372,312 $4,340,846 $4,096,789 $3,668,557 $3,339,996
Investment securities.................... 1,636,337 1,592,389 1,525,332 1,015,798 901,411
Loans and leases, net of unearned income. 2,490,827 2,500,059 2,374,850 2,436,337 2,236,523
Allowance for credit losses.............. 33,601 33,539 32,304 25,932 25,234
Deposits................................. 3,064,146 2,948,829 2,931,131 2,884,343 2,756,111
Company obligated mandatorily redeemable
capital securities of subsidiary trust. 35,000 35,000 -0- -0- -0-
Other long-term debt..................... 621,855 603,355 630,850 193,054 52,737
Shareholders' equity..................... 334,156 286,683 355,405 354,323 341,522
Key Ratios
Return on average assets................. 1.10% 1.25% 0.85% 1.15% 1.17%
Return on average equity................. 15.65% 15.44% 9.13% 11.31% 11.07%
Net loans to deposit ratio............... 80.19% 83.64% 79.92% 83.57% 80.23%
Dividends per share as a percent of net
income per share....................... 68.90% 58.52% 82.41% 64.06% 61.67%
Average equity to average assets ratio... 7.00% 8.10% 9.28% 10.16% 10.53%
(a) Where applicable, per share amounts have been restated to reflect the two-for-one stock split effected in
the form of a 100% stock dividend declared on October 19, 1999.
9
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
This discussion and the related financial data are presented to assist in
the understanding and evaluation of the consolidated financial condition and
the results of operations of First Commonwealth Financial Corporation
including its subsidiaries (The "Corporation") for the years ended
December 31, 2000, 1999 and 1998 and are intended to supplement, and should
be read in conjunction with, the consolidated financial statements and
related footnotes.
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 this "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 or update these
forward-looking statements to reflect events or circumstances that arise
after the date hereof.
The Corporation acquired Southwest National Corporation and its subsidiary
("Southwest") effective December 31, 1998. The merger was accounted for as
a pooling of interests and accordingly, all financial statements have been
restated as though the merger had occurred at the beginning of the earliest
period presented. During the fourth quarter of 1997 the Corporation formed
First Commonwealth Insurance Agency ("FCIA") as a subsidiary of First
Commonwealth Bank ("FCB"), a commercial banking subsidiary of the
Corporation. FCIA began marketing a wide range of insurance and annuity
products to the Corporation's retail and commercial customers beginning
January 1, 1998.
On October 19, 1999, the Corporation's Board of Directors approved a 2-for-1
stock split effected in the form of a 100% stock dividend. Shareholders of
record at the close of business November 4, 1999 received one additional
share for each share held. The additional shares were distributed on
November 18, 1999. Share data for all periods presented has been restated
to reflect the stock split as if it had occurred at the beginning of the
earliest period presented.
Financial statements amounts in prior periods have been reclassified to
conform to the presentation format used in 2000. The reclassifications had
no effect on the Corporation's financial condition or results of operations.
Results of Operations
Net income in 2000 was $47.2 million, reflecting a decrease of $5.8 million
from 1999 results of $53.0 million and compared to $33.4 million reported in
1998. The decrease in net income for 2000 was primarily the result of gains
on sale of loans which were realized during 1999. The 1998 period was
impacted negatively by a number of merger and other related charges totaling
$7.9 million. These charges included merger expenses for the acquisition of
Southwest National Corporation, early retirement and postretirement benefit
accruals and premises and equipment expenses to standardize depreciation
methods. Extraordinary items for 1998 resulted from a single transaction
whereby the Corporation incurred a cost of $960 thousand for the prepayment
of FHLB term borrowings. This transaction was executed as part of the
Corporation's repositioning of its balance sheet to reduce exposure to
declining interest rates.
10
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Basic earnings per share and diluted earnings per share were $0.82 for 2000
compared to basic earnings per share and diluted earnings per share of $0.88
for 1999. Basic earnings per share and diluted earnings per share were
$0.54 for 1998. Basic earnings per share excluding gains on sale of assets
was $0.79 for 2000 compared to $0.82 for 1999. Return on average assets was
1.10% and return on average equity was 15.65% during 2000 compared to 1.25%
and 15.44%, respectively for 1999. Return on average assets was 0.85%
during 1998 while return on average equity was 9.13%.
The following is an analysis of the impact of changes in net income on basic
earnings per share:
2000 1999
vs. vs.
1999 1998
Net income per share, prior year $0.88 $0.54
Increase (decrease) from changes in:
Net interest income 0.01 0.20
Provision for credit losses (0.02) 0.09
Security transactions 0.02 (0.01)
Gain on sale of loans (0.08) 0.06
Other income 0.07 0.05
Salaries and employee benefits (0.09) (0.03)
Occupancy and equipment costs (0.02) 0.00
Merger and other related charges 0.00 0.13
Other expenses (0.03) (0.03)
Provision for income taxes 0.08 (0.13)
Extraordinary items, net of tax 0.00 0.01
Net income per share $0.82 $0.88
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 $137.3 million in 2000
compared to $143.4 million in 1999 and $133.8 million in 1998. The
following is an analysis of the average balance sheets and net interest
income for each of the three years in the period ended December 31, 2000.
11
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
2000 1999 1998
Average Income/ Yield or Average Income/ Yield or Average Income/ Yield or
Balance Expense Rate(a) Balance Expense Rate(a) Balance Expense Rate(a)
Assets
Interest-earning assets:
Time deposits with banks $ 1,220 $ 82 6.71% $ 1,844 $ 121 6.56% $ 3,692 $ 230 6.23%
Investment securities 1,572,290 103,018 6.88 1,608,467 100,853 6.59 1,271,319 78,205 6.43
Federal funds sold 3,821 234 6.12 2,097 105 5.01 35,521 1,893 5.33
Loans (b) (c), net of
unearned income 2,503,036 208,548 8.50 2,408,450 195,010 8.21 2,439,436 201,739 8.38
Total interest-
earning assets 4,080,367 311,882 7.87 4,020,858 296,089 7.56 3,749,968 282,067 7.69
Noninterest-earning assets:
Cash 74,178 80,716 78,999
Allowance for credit losses (34,296) (33,757) (27,388)
Other assets 191,534 174,063 138,114
Total noninterest-
earning assets 231,416 221,022 189,725
Total Assets $4,311,783 $4,241,880 $3,939,693
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing
demand deposits (d) $ 386,149 $ 9,593 2.48% $ 386,124 $ 8,375 2.17% $ 341,835 $ 7,579 2.22%
Savings deposits (d) 652,647 17,027 2.61 712,637 17,769 2.49 715,814 21,379 2.99
Time deposits 1,585,694 88,887 5.61 1,499,857 77,187 5.15 1,530,491 85,002 5.55
Short-term borrowings 371,286 22,218 5.98 279,269 13,832 4.95 195,334 10,214 5.23
Long-term debt 632,837 36,814 5.82 643,746 35,490 5.51 430,677 24,108 5.60
Total interest-
bearing liabilities 3,628,613 174,539 4.81 3,521,633 152,653 4.33 3,214,151 148,282 4.61
Noninterest-bearing
liabilities and capital:
Noninterest-bearing
demand deposits (d) 349,259 345,311 328,720
Other liabilities 31,971 31,439 31,177
Shareholders' equity 301,940 343,497 365,645
Total noninterest-
bearing funding sources 683,170 720,247 725,542
Total Liabilities and
Shareholders' Equity $4,311,783 $4,241,880 $3,939,693
Net Interest Income and
Net Yield on Interest-
earning Assets $137,343 3.59% $143,436 3.76% $133,785 3.73%
(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes net loan fees.
(d) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits
into savings deposits which were made for regulatory purposes.
12
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Both interest income and interest expense increased over 1999 levels as a
result of both volume increased and rate increases. Average interest-
earning assets increased $59.5 million while average interest-bearing
liabilities increased $107.0 million in 2000. Asset yields, on a tax-
equivalent basis, increased 31 basis points (0.31%) during 2000 to 7.87%,
from 7.56% reported in 1999 and compared to 7.69% reported in 1998. The
cost of funds for 2000 increased 48 basis points (0.48%) over 1999 costs of
4.33% and compared to costs of 4.61% for 1998.
Interest and fees on loans increased $13.5 million for 2000 over 1999
levels, primarily as a result of volume and rate increases for commercial
loans. Enhanced marketing strategies continue to enable the Corporation to
capitalize on lending opportunities with small to mid-sized commercial
customers, including Small Business Administration ("SBA") loans generated
through the Corporation's preferred lender status. Average loans for 2000
increased $94.6 million compared to 1999 averages and included increases in
commercial loans and municipal loans which were partially offset by
decreases in average consumer loans. The decrease in average consumer loans
for the 2000 period resulted from the sale of $42.2 million of 1-4 family
residential mortgage loans in the first quarter of 1999 and the sale of
$20.4 million of consumer credit card loans during the second quarter of
1999.
Interest and fees on loans also reflected increases due to rate of $6.2
million during 2000 as loan yields increased 29 basis points (0.29%) during
2000 to 8.50% from 8.21% reported for 1999 and compared to 8.38% during
1998. Mortgage portfolio yields rose 17 basis points (0.17%) for 2000
compared to 1999 as "teaser-rates" on innovative loan products introduced in
previous years were phased out. Yields on commercial loans, municipal
loans, and both secured and unsecured revolving credit loans for 2000 also
reflected increases compared to 1999 yields reflecting the increase in
general interest rates.
Interest income on investments increased $2.2 million for 2000 compared to
1999, as rate increases during 2000 were only partially offset by volume
decreases. Yields on investments for 2000 were 6.88% compared to 6.59% for
1999 and 6.43% for 1998. Increases in interest income due to rate for U.S.
government agency securities were $2.4 million during 2000 as yields on U.S.
government agency securities increased 22 basis points (0.22%) compared to
1999 yields. Prepayment speeds of mortgage backed securities which had
slowed during 1999 as interest rates rose, began to accelerate at the end of
2000 as interest rates began to decline. The primary risk of owning MBS
relates to the uncertainty of prepayments of the underlying mortgages.
Interest rate changes have a direct impact on prepayment speeds. As
interest rates increase, prepayment speeds generally decline, resulting in a
longer average life of a MBS. Conversely as interest rates decline,
prepayment speeds increase, resulting in a shorter average life of a MBS.
Using computer simulation models, the Corporation tests the average life and
yield volatility of all MBSs under various interest rate scenarios on a
regular basis to insure that volatility falls within acceptable limits. The
Corporation holds no "high risk" securities nor does the Corporation own any
securities of a single issuer exceeding 10% of shareholders' equity other
than U.S. government and agency securities.
Decreases in interest income on investments due to volume of $2.4 million
during 2000 resulted primarily from volume decreases for U.S. government
agency securities which were partially offset by volume increases for
corporate bonds. Average balances of U.S. government agency securities
decreased $111.6 million for 2000 compared to 1999 averages as an inverted
yield curve prevented a reinvestment of proceeds generated by paydowns at a
positive spread. Average balances of corporate bonds increased $66.1
million over the same time period primarily as a result of investment in
trust preferred securities.
13
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Interest on deposits increased $12.2 million for 2000 compared to 1999 as
both volumes and rates increased over 1999 levels. Average time deposits
increased $85.8 million for 2000 compared to 1999, resulting in an increase
in interest expense due to volume of $4.4 million. Increases in average
time deposits for 2000 compared to 1999 averages were partially offset by
decreases in average savings deposits of $60.0 million. The cost of time
deposits for 2000 increased by 46 basis points (0.46%) compared to 1999
costs of 5.15%, resulting in an increase in interest expense due to rate of
$7.3 million. Interest on total savings deposits for 2000 also reflected
increases due to rate of $2.0 million as deposit costs for total savings
deposits increased 18 basis points (0.18%) for 2000 compared to 1999.
Average balances of noninterest-bearing demand deposits for 2000 reflected
an increase of $3.9 million compared to 1999 averages.
Interest expense on short-term borrowings increased $8.4 million during 2000
as the average balance of repurchase agreements increased $150.9 million.
The cost of short-term borrowings for 2000 also increased by 103 basis
points (1.03%) compared to 1999 costs of 4.95%.
Interest expense on long-term debt increased $1.3 million for 2000 compared
to the 1999 period. The long-term debt increase for 2000 resulted primarily
from the funding of the repurchase of 3.8 million shares of the
Corporation's common stock through a "modified Dutch Auction" tender offer
during 1999. The aggregate amount of $49.7 million paid by the Corporation
in connection with the repurchase of common shares was funded through the
issuance of capital securities and the issuance of a bank loan from an
unrelated financial institution. Capital securities borrowings in the
amount of $35 million were issued during the third quarter of 1999 bearing
an interest rate of 9.50% and maturing in thirty years, consequently
interest expense on capital securities for 2000 was $3.3 million compared to
$1.0 million for 1999. The parent company incurred a $16 million bank loan
during 1999 primarily to fund the remaining cost of the stock repurchase.
(See NOTE 16 to the financial statements for a description of the Company
obligated mandatorily redeemable capital securities of subsidiary trust and
NOTE 17 to the financial statements for a description of the bank loan
incurred).
Net interest margin (net interest income, on a tax-equivalent basis as a
percentage of average earning assets), was 3.59% during 2000 compared to
3.76% in 1999 and 3.73% in 1998. The Corporation's use of computer modeling
to manage interest rate risk is described in the "Interest Sensitivity"
section of this discussion herein.
The following table shows the effect of changes in volumes and rates on
interest income and interest expense.
Analysis of Year-to-Year Changes in Net Interest Income
(Dollar Amounts in Thousands)
2000 Change from 1999 1999 Change from 1998
Total Change Due Change Due Total Change Due Change Due
Change to Volume to Rate Change to Volume to Rate
Interest-earning assets:
Time deposits with banks $ (39) $ (41) $ 2 $ (109) $ (115) $ 6
Securities 2,165 (2,383) 4,548 22,648 21,682 966
Federal funds sold 129 86 43 (1,788) (1,781) (7)
Loans 13,538 7,765 5,773 (6,729) (2,596) (4,133)
Total interest income 15,793 5,427 10,366 14,022 17,190 (3,168)
Interest-bearing liabilities:
Deposits 12,176 2,922 9,254 (10,629) (815) (9,814)
Short-term borrowings 8,386 4,558 3,828 3,618 4,389 (771)
Long-term debt 1,324 (601) 1,925 11,382 11,927 (545)
Total interest expense 21,886 6,879 15,007 4,371 15,501 (11,130)
Net interest income $(6,093) $(1,452) $(4,641) $ 9,651 $ 1,689 $ 7,962
14
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
The provision for credit losses is an amount added to the allowance against
which credit losses are charged. The amount of the provision is determined
by management based upon its assessment of the size and quality of the loan
portfolio and the adequacy of the allowance in relation to the risks
inherent within the loan portfolio. The provision for credit losses was
$10.0 million in 2000 compared to $9.5 million in 1999 and $15.0 million in
1998. The 1998 period contains an additional provision of $4.2 million
recorded in the fourth quarter of 1998 to reflect changing economic
conditions. The allowance for credit losses was $33.6 million at
December 31, 2000, for a ratio of 1.35% of actual loans outstanding. The
ratio of the allowance for credit losses to total loans outstanding as of
December 31, 2000 has increased slightly from the 1.34% reported as of
December 31, 1999. Net charge-offs for 2000 reflected increases in charge-
offs of commercial loans not secured by real estate of $2.0 million and
revolving credit loans of $269 thousand which were partially offset by
decreases in net charge-offs of 1-4 family residential mortgages, consumer
installment and commercial loans secured by real estate. Net charge-offs
against the allowance for credit losses were $10.0 million, or 0.40% of
average total loans in 2000. This compared to net charge-offs of $8.2
million in 1999 and $8.7 million in 1998. Net charge-offs were 0.34% and
0.36% of average total loans during 1999 and 1998, respectively. For an
analysis of credit quality, see the "Credit Review" section of this
discussion.
The following table presents an analysis of the consolidated allowance for
credit losses for the five years ended December 31, 2000 (Dollar Amounts in
Thousands):
Summary of Loan Loss Experience
2000 1999 1998 1997 1996
Loans outstanding at end of year $2,490,827 $2,500,059 $2,374,850 $2,436,337 $2,236,523
Average loans outstanding $2,503,036 $2,408,450 $2,439,436 $2,330,657 $2,060,196
Allowance for credit losses:
Balance, beginning of year $ 33,539 $ 32,304 $ 25,932 $ 25,234 $ 23,803
Loans charged off:
Commercial, financial and agricultural 4,335 1,821 1,513 1,473 633
Loans to individuals 5,521 6,126 7,293 8,022 5,069
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial 130 427 812 664 440
Real estate-residential 874 1,035 690 819 195
Lease financing receivables 407 187 319 -0- 26
Total loans charged off 11,267 9,596 10,627 10,978 6,363
Recoveries of loans previously charged off:
Commercial, financial and agricultural 406 290 462 223 263
Loans to individuals 826 1,057 1,328 1,218 1,033
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial -0- -0- 70 13 83
Real estate-residential 42 33 87 57 109
Lease financing receivables 25 1 3 13 5
Total recoveries 1,299 1,381 1,950 1,524 1,493
Net loans charged off 9,968 8,215 8,677 9,454 4,870
Provision charged to expense 10,030 9,450 15,049 10,152 6,301
Balance, end of year $ 33,601 $ 33,539 $ 32,304 $ 25,932 $ 25,234
Ratios:
Net charge-offs as a percentage of
average loans outstanding 0.40% 0.34% 0.36% 0.41% 0.24%
Allowance for credit losses as
a percentage of average loans
outstanding 1.34% 1.39% 1.32% 1.11% 1.22%
15
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Net securities gains increased $1.2 million during 2000 from $565 thousand
reported in 1999 and compared to $1.5 million in 1998. The securities gains
during 2000 resulted primarily from the sale of Pennsylvania bank stocks
with a book value of $19.9 million. The securities gains during 1999
resulted in part from the sales of fixed rate U.S. government agency
securities and U.S. treasury securities classified as securities "available
for sale" having book values of $15.0 million and $21.9 million,
respectively, which resulted in securities gains of $167 thousand and $317
thousand, respectively. Proceeds from the sale of U.S. treasury securities
in 1999 were the primary funding source for the acquisition of $20 million
of bank owned life insurance during the first quarter of 1999. The security
gains during 1998 resulted in part from the third and fourth quarter sales
of floating collateralized mortgage obligations classified as securities
"available for sale" having book values of $87.9 million and $16.1 million
respectively, which resulted in security gains of $1.7 million during the
third quarter and security losses of $803 thousand during the fourth
quarter. These securities were sold to reduce the exposure to accelerated
prepayments in a declining interest rate environment. The $89.6 million
proceeds from the sale of securities in the third quarter of 1998 were used
to reduce outstanding Federal funds purchased while the $15.3 million
proceeds in the fourth quarter of 1998 were reinvested in higher yielding
municipal securities. The 1998 securities gains also included the sale of
U.S. treasury securities having a book value of $45.8 million with the
proceeds being reinvested in mortgage backed and other U.S. government
agency securities with similar average expected maturities and the sale of
Pennsylvania bank stocks having a book value of $5.2 million. Securities
losses of $586 thousand were incurred during the fourth quarter of 1998
primarily as a result of the sale of mutual funds classified as equity
securities having a book value of $5.8 million.
Trust income of $5.6 million for 2000 compared to $5.5 million for 1999 and
$5.3 million for 1998. Enhanced referral programs and integrated growth
plans for financial affiliates have been initiated to help improve sales in
various areas including trust assets managed. Additional noninterest income
analysis is planned for 2001 through the use of recently implemented
customer and product profitability systems. Conversion of deposit
processing systems utilized by the Corporation's data processing subsidiary
to new software during 2001 will facilitate the offering of enhanced deposit
products and services which are expected to increase deposit fees in future
periods.
Gains on sale of loans decreased $4.7 million for 2000 from 1999 gains on
sale of loans of $5.0 million and compared to $1.6 million reported in 1998.
Gains on sale of loans for the 1999 period resulted primarily from the sale
of $42.2 million of residential mortgage loans during the first quarter of
1999 and the sale of its $20.4 million retail credit card loans during the
second quarter of 1999 which generated gains of $890 thousand and $4.0
million, respectively. Gains on sale of loans for 1998 resulted primarily
from the sale of $52.5 million of 1-4 family residential mortgage loans
during the fourth quarter of 1998 which resulted in a gain of $1.3 million.
Other income for 2000 was $15.6 million representing an increase of $3.1
million over 1999 income of $12.5 million and compared to $11.4 for 1998.
Other income for the 2000 period reflected a gain on sale of fixed assets of
$515 thousand and increases in merchant discount of $401 thousand and MAC
interchange fees of $628 thousand compared to 1999 revenues. Insurance
commissions, which have continued to increases since FCIA's formation in
1998, generated increases of $415 thousand during 2000 compared to 1999.
Other income for the 2000 period also included an increase in income from
bank owned life insurance of $1.3 million, resulting from claim income and
the impact of an additional $15 million investment during 2000. As a result
of branch analysis including the evaluation of the potential sale or
consolidation of branches competing in the same market area, the Corporation
sold two of its branches located in State College, Pennsylvania during 1998
that resulted in a gain of $950 thousand, which is included in other revenue
for 1998.
16
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Total other operating expenses increased $3.9 million to $99.5 million for
2000 compared to $95.6 million and $101.9 million in 1999 and 1998,
respectively. Total noninterest expense as a percent of average assets was
2.31% for the 2000 period compared to 2.26% for 1999. Employee costs were
$52.5 million in 2000, representing 1.22% of average assets compared to
$49.8 million and 1.17% of average assets for 1999. Employee costs for 1998
were $48.7 million or 1.24% of average assets. Salary and benefit costs for
2000 were negatively impacted by decreases in deferred loan origination
costs as loan volumes for 2000 decreased over 1999 volumes. Although
increases in employee insurance expenses of $498 thousand represented an
increase of 12.1% for 2000 compared to 1999, these increases were less than
anticipated. The Corporation continues to address hospitalization and other
employee insurance costs in future periods by utilizing the expertise of
FCIA's staff to enable dependable and high quality benefits to be offered in
the most cost effective manner. Additional increases in employee benefit
costs during 2000 occurred in 401(k) plan expenses as employees took
advantage of contribution and investment enhancements to the plan instituted
during 1999. The 2000 period included decreases in employee benefit costs
for pension and postretirement benefits totaling $504 thousand at Southwest
as a result of plan curtailment discussed below.
Salary and benefit costs increased only 2.3% for 1999 compared to 1998 and
were favorably impacted by the early retirement plan offered to employees
during the fourth quarter of 1998. The success of the early retirement plan
accelerated the process of right-sizing the Corporation beyond normal
attrition management by adjusting employment levels quickly while continuing
the Corporation's tradition of not laying off employees due to merger
activity.
Furniture and equipment expenses of $8.2 million for 2000 reflected
increases of $501 thousand over 1999 levels and included increases in
software depreciation and maintenance costs totaling $358 thousand as well
as increases in furniture and equipment depreciation and repairs. The 1999
period reflected decreases in occupancy and furniture and equipment expenses
as a result of the sale of two branches in 1998 and the closing or
consolidation of several branches in 1999. Computer software depreciation
and maintenance costs are expected to increase in future periods as software
utilized by the Corporation's data processing subsidiary to process loan and
deposit accounts is replaced and placed in service during 2001. The new
application software will enable the subsidiary banks to provide customers
with enhanced products and services including internet banking. Technology
continues to have a great impact on financial services companies and their
ability to compete in the marketplace. The Corporation is committed to
providing banking, trust and insurance services through traditional branch
and telephone channels in the markets we serve, as well as meeting the
changing needs of our customers.
Outside data processing expenses were $3.3 million for 2000 compared to $3.4
million for both 1999 and 1998. Outside data processing expenses are
managed by the Corporation's data processing subsidiary along with
management of internal data processing costs. Outsourced data processing
needs are evaluated based on technology, efficiency and cost considerations.
This cost would be expected to be reduced by 2002 as Southwest Bank is
converted from an outsourced environment to our internal systems.
Included in the 1998 period were merger and related charges of $7.9 million.
Merger expenses incurred during the acquisition of Southwest National
Corporation for legal, accounting, printing, filing and other professional
services totaled $1.6 million and were expensed during the fourth quarter of
1998. As part of the evaluation of appropriate staffing levels for the
17
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Corporation after inclusion of Southwest, an early retirement plan was
offered to employees during the fourth quarter of 1998. Salary and benefit
costs of the early retirement plan in the amount of $4.7 million are
included in merger and other related charges for 1998, as approximately 5%
of employees took advantage of this opportunity. In anticipation of the
merger of Southwest benefit plans into those of the Corporation in the near
future, Southwest curtailed their postretirement benefit plan during the
fourth quarter of 1998. An additional accrual adjustment of $1.1 million
related to this curtailment is included in merger and other related charges
for 1998. Additional merger and other related charges of $462 thousand were
incurred during 1998 to standardize depreciation for Southwest to that of
the Corporation and to write-off signs and supplies that become obsolete as
a result of the merger.
Other operating expenses for 2000 were $25.4 million, an increase of $749
thousand over the $24.6 million reported for 1999. Collection and
repossession expenses increased $454 thousand for 2000 compared to 1999 as
accelerated collection efforts attempted to reduce nonperforming loan levels
and minimize risk of loss in future periods. FDIC expenses increased $180
thousand during 2000, primarily as a result of rate changes implemented when
the FDIC Bank Insurance Fund and Savings and Loan Insurance Fund rates were
standardized. Express freight charges for 2000 increased $198 thousand
compared to 1999 partially because of the impact of gasoline prices on
carrier providers. Other operating expenses for 2000 also included
increases in advertising and promotions, charge card interchange, and
checkbook printing expenses. Increases in other operating expenses for 2000
were partially offset by decreases in other professional fees, postage and
printing costs of $210 thousand, $171 thousand and $116 thousand,
respectively compared to 1999 costs.
Other operating expenses for the 1999 period included an increase in the
write-down of mortgage servicing rights in the amount of $336 thousand
related to the disposition of BSI. The disposition of BSI in 1999 also
resulted in a loss on sale of $202 thousand. Advertising, charge card
interchange and telephone expense reflected increases for the 1999 period of
$265 thousand, $335 thousand, and $265 thousand, respectively compared to
the 1998 period. Since 1999, telephone expenses have been analyzed and
successfully reduced during 2000. Other professional fees, legal fees and
audit and accounting fees decreased for 1999 compared to 1998.
Income tax expense was $14.3 million during 2000 representing a decrease of
$5.3 million over the 1999 amount of $19.6 million and compared to $12.2
million in 1998. The Corporation's effective tax rate was 23.2% for 2000
compared to 27.0% for 1999 and 26.5% for 1998. The reduction in the
Corporation's effective tax rate was primarily the result of increased tax
free income from municipal loans and bank owned life insurance.
Extraordinary items for 1998 resulted from a single transaction whereby the
Corporation incurred a cost of $960 thousand for the prepayment of FHLB term
borrowings. This transaction was executed as part of the Corporation's
repositioning of its balance sheet to reduce exposure to declining interest
rates.
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 the 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.
18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Liquidity (Continued)
Increased competition from nonbanking sources such as mutual funds,
insurance companies and brokerage and investment banking firms have required
banks to rely more heavily on alternative funding from other borrowings.
Many of our competitors have significantly greater resources (financial and
other) than us and may offer certain services that our banks do not provide
at this time. In addition certain of our banks' competitors are not subject
to the regulation and supervision to which we and our banks are subject, and
therefore may have competitive advantages over our banks. The impact of
increased competition for deposits could become more consequential in the
future. The Corporation monitors liquidity through regular computations of
prescribed liquidity ratios. The Corporation actively manages liquidity
within a defined range and has developed liquidity contingency plans,
including ensuring availability of alternate funding sources to maintain
liquidity under a variety of business conditions. In addition to the
previously described funding sources the Corporation's ability to access the
capital markets was demonstrated during 1999 through the issuance of $35
million of capital securities.
The Corporation's long-term liquidity source is a large core deposit base
and a strong capital position. Core deposits are the most stable source of
liquidity a bank can have due to the long-term relationship with a deposit
customer. Deposits increased $115.3 million in 2000 and included an
increase of $18.2 million in core deposits. Non-core deposits, which are
time deposits in denominations of $100 thousand or more represented 14.86%
of total deposits at December 31, 2000, up from 12.15% of total deposits at
December 31, 1999. Non-core deposits increased by $97.1 million in 2000 and
$58.8 million 1999 due in part to an increase in public funds. The increase
in non-core deposits during 2000 also included the issuance of brokered time
deposits in the amount of $26.1 million. Although the Corporation's primary
source of funds remains traditional deposits from within the communities
served by its banking subsidiaries, future sources of deposits utilized
could include the use of brokered time deposits offered outside the
Corporation's traditional market area. Time deposits of $100 thousand or
more at December 31, 2000, 1999 and 1998 had remaining maturities as
follows:
Maturity Distribution of
Large Certificates of Deposit
(Dollar Amounts in Thousands)
2000 1999 1998
Amount Percent Amount Percent Amount Percent
Remaining Maturity:
3 months or less $358,112 79% $273,376 76% $151,121 50%
Over 3 months through 6 months 36,941 8 13,372 4 40,363 14
Over 6 months through 12 months 19,241 4 14,503 4 27,546 9
Over 12 months 41,088 9 57,010 16 80,382 27
Total $455,382 100% $358,261 100% $299,412 100%
Net loans decreased $9.3 million during 2000 as residential real estate
loans and loans to individuals decreased by $47.6 million and $52.3 million
respectively, compared to year-end 1999. Decreases during 2000 for consumer
loans were partially offset by increases in commercial loans secured by real
estate and increases in municipal loans of $64.3 million and $35.5 million
over the same time period.
19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Below is a schedule of loans by classification for the five years ended
December 31, 2000.
Loans by Classification
(Dollar Amounts in Thousands)
2000 1999 1998 1997 1996
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial,
agricultural and
other $ 443,618 18% $ 417,300 16% $ 377,733 16% $ 363,699 15% $ 316,550 14%
Real estate-construction 37,146 2 41,734 2 33,097 1 35,308 1 39,120 2
Real estate-commercial 560,066 22 495,789 20 387,166 16 384,794 16 356,106 16
Real estate-residential 932,915 37 980,506 39 1,009,903 42 1,048,405 43 941,147 41
Loans to individuals 450,154 18 502,465 20 517,907 22 569,742 23 578,204 25
Net leases 68,975 3 65,893 3 56,423 3 51,245 2 36,329 2
Gross loans and
leases 2,492,874 100% 2,503,687 100% 2,382,229 100% 2,453,193 100% 2,267,456 100%
Unearned income (2,047) (3,628) (7,379) (16,856) (30,933)
Total loans, and leases
net of unearned income $2,490,827 $2,500,059 $2,374,850 $2,436,337 $2,236,523
An additional source of liquidity is marketable securities that the
Corporation holds in its investment portfolio. These securities are
classified as "securities available for sale". While the Corporation does
not have specific intentions to sell these securities, they 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 December 31,
2000, securities available for sale had an amortized cost of $1,250 million
and an approximate fair value of $1,238 million. Gross unrealized gains
were $4.6 million and gross unrealized losses were $16.6 million. Based
upon the Corporation's historical ability to fund liquidity needs from other
sources, the current available for sale portfolio is deemed to be more than
adequate, as the Corporation does not anticipate a need to liquidate the
investments until maturity. Below is a schedule of the contractual maturity
distribution of securities held to maturity and securities available for
sale at December 31, 2000.
Maturity Distribution of Securities Held to Maturity
(Dollar Amounts in Thousands)
States and Total Weighted
U.S. Government Agencies Political Other Amortized Average
and Corporations Subdivisions Securities Cost Yield*
Within 1 year $ 13,341 $ 3,957 $ -0- $ 17,298 5.90%
After 1 but within 5 years 96,448 19,636 22,972 139,056 6.46
After 5 but within 10 years 29,857 28,739 255 58,851 6.96
After 10 years 108,720 74,182 -0- 182,902 6.56
Total $248,366 $126,514 $23,227 $398,107 6.56%
Maturity Distribution of Securities Available for Sale
At Amortized Cost
(Dollar Amounts in Thousands)
U.S. Treasury, and other States and Total Weighted
U.S. Government Agencies Political Other Amortized Average
and Corporations Subdivisions Securities Cost Yield*
Within 1 year $ 10,032 $ 1,945 $ 250 $ 12,227 6.60%
After 1 but within 5 years 117,555 6,860 101,131 225,546 6.67
After 5 but within 10 years 58,385 11,829 6,316 76,530 6.54
After 10 years 694,066 55,432 186,407 935,905 6.77
Total $880,038 $76,066 $294,104 $1,250,208 6.73%
*Yields are calculated on a tax-equivalent basis.
20
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (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") exceeds interest-sensitive liabilities
("ISL") during a prescribed time period, a positive gap results.
Conversely, when ISL exceeds ISA during a time period, a negative gap
results.
A positive gap tends to indicate that earnings will be impacted favorably if
interest rates rise during the period and negatively when interest rates
fall during the time period. A negative gap tends to indicate that earnings
will be affected inversely to interest 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
December 31, 2000 and 1999 (Dollar Amounts in Thousands):
2000
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
Loans $ 621,536 $130,374 $ 244,605 $ 996,515
Investments 130,220 47,279 105,423 282,922
Other interest-earning assets 11,552 -0- -0- 11,552
Total interest-sensitive
assets 763,308 177,653 350,028 1,290,989
Certificates of deposit 274,963 264,805 470,828 1,010,596
Other deposits 1,018,205 -0- -0- 1,018,205
Borrowings 274,673 884 457 276,014
Total interest-sensitive
liabilities 1,567,841 265,689 471,285 2,304,815
Gap $ (804,533) $(88,036) $(121,257) $(1,013,826)
ISA/ISL 0.49 0.67 0.74 0.56
Gap/Total assets 18.40% 2.01% 2.77% 23.19%
1999
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
Loans $ 697,645 $113,547 $ 204,090 $ 1,015,282
Investments 44,666 39,497 66,465 150,628
Other interest-earning assets 18,799 2,759 4,532 26,090
Total interest-sensitive
assets 761,110 155,803 275,087 1,192,000
Certificates of deposit 325,985 231,804 277,769 835,558
Other deposits 1,074,451 -0- -0- 1,074,451
Borrowings 467,255 961 127,108 595,324
Total interest-sensitive
liabilities 1,867,691 232,765 404,877 2,505,333
Gap $(1,106,581) $(76,962) $(129,790) $(1,313,333)
ISA/ISL 0.41 0.67 0.68 0.48
Gap/Total assets 25.49% 1.77% 2.99% 30.26%
21
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Although the periodic gap analysis provides management with a method of
measuring current interest rate risk, it only measures rate sensitivity at a
specific point in time. 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 income simulation model used by the Corporation captures all
assets, liabilities, and off-balance sheet financial instruments, accounting
for significant variables that are believed to be affected by interest
rates. These variables include prepayment speeds on mortgage loans and
mortgage backed securities, cash flows from loans, deposits and investments
and balance sheet growth assumptions. The model also captures embedded
options, such as interest rate caps/floors or call options, and accounts for
changes in rate relationships as various rate indices lead or lag changes in
market rates. 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 Corporation's asset/liability management policy guidelines limit
interest rate risk exposure for the succeeding twelve month period.
Simulations are prepared under the base case where interest rates remain
flat and most likely case where interest rates are defined using projections
of economic factors. Additional simulations are produced estimating the
impact on net interest income of a 300 basis point (3.00%) movement upward
or downward from the base case scenario. The Corporation's current
asset/liability management policy indicates that a 300 basis point (3.00%)
change in interest rates up or down cannot result in more than a 7.5% change
in net interest income when compared to a base case without Board approval
and a strategy in place to reduce interest rate risk below the established
maximum level. The analysis at December 31, 2000, 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 and the Corporation's
position would remain well within current policy guidelines.
The Corporation's "Asset/Liability Management Committee" ("ALCO") is
responsible for the identification, assessment and management of interest
rate risk exposure, liquidity, capital adequacy and investment portfolio
position. The primary objective of the ALCO process is to ensure that the
Corporation's balance sheet structure maintains prudent levels of risk
within the context of currently known and forecasted economic conditions and
to establish strategies which provide the Corporation with appropriate
compensation for the assumption of those risks. The ALCO attempts to
mitigate interest rate risk through the use of strategies such as asset
disposition, asset and liability pricing and matched maturity funding. The
ALCO strategies are established by the Corporation's senior management and
are approved by the Corporation's board of directors.
Final loan maturities and rate sensitivity of the loan portfolio excluding
consumer installment and mortgage loans and before unearned income at
December 31, 2000 were as follows (Dollar Amounts in Thousands):
Within One One to After
Year 5 Years 5 Years Total
Commercial and industrial $157,096 $ 80,434 $ 53,898 $ 291,428
Financial institutions 160 -0- -0- 160
Real estate-construction 13,854 6,166 17,126 37,146
Real estate-commercial 84,316 92,191 383,559 560,066
Other 23,985 15,934 112,111 152,030
Totals $279,411 $194,725 $566,694 $1,040,830
Loans at fixed interest rates 144,198 359,826
Loans at variable interest rates 50,527 206,868
Totals $194,725 $566,694
22
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Credit Review
Maintaining a high quality loan portfolio is of great importance to the
Corporation. The Corporation manages the risk characteristics of the loan
portfolio through the use of prudent lending policies and procedures and
monitors risk through a periodic review process provided by internal
auditors, regulatory authorities and our loan review staff. These reviews
include the analysis of credit quality, diversification of industry,
compliance to policies and procedures, and an analysis of current economic
conditions.
In the management of its credit portfolio, the Corporation emphasizes the
importance of the collectibility of loans and leases as well as asset and
earnings diversification. The Corporation immediately recognizes as a loss
all credits judged to be uncollectible and has established an allowance for
credit losses that may exist in the portfolio at a point in time, but have
not been specifically identified.
The Corporation's written lending policy requires certain underwriting
standards to be met prior to funding any loan, including requirements for
credit analysis, collateral value coverage, documentation, and terms. The
principal factor used to determine potential borrowers' creditworthiness is
business cash flows or consumer income available to service debt payments.
Secondary sources of repayment, including collateral or guarantees, are
frequently obtained.
The lending policy provides limits for individual and bank committees
lending authorities. In addition to the bank loan approval process,
requests for borrowing relationships which will exceed one million dollars
must also be approved by the Corporation's Credit Committee. This Committee
consists of a minimum of three members of the Corporation's board of
directors. Early in 2000, the Corporation initiated an additional level of
approval for credit relationships between $500 thousand and $1.0 million.
This procedure requires approval of those credits by a committee consisting
of senior lenders of the Corporation.
Commercial and industrial loans are generally granted to small and middle
market customers for operating, expansion or asset acquisition purposes.
Operating cash flows of the business enterprise are identified as the
principal source of repayment, with business assets held as collateral.
Collateral margins and loan terms are based upon the purpose and structure
of the transaction as set forth in loan policy.
Commercial real estate loans are granted for the acquisition or improvement
of real property. Generally, commercial real estate loans do not exceed 75%
of the appraised value of property pledged to secure the transaction.
Repayment of such loans are expected from the operations of the subject real
estate and are carefully analyzed prior to approval.
Real estate construction loans are granted for the purposes of constructing
improvements to real property, both commercial and residential. On-site
inspections are conducted by qualified individuals prior to periodic
permanent project financing, which is generally committed prior to the
commencement of construction financing.
23
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Real estate loans secured by 1-4 family residential housing properties are
granted subject to statutory limits in effect for each bank regarding the
maximum percentage of appraised value of the mortgaged property.
Residential loan terms are normally established in compliance with secondary
market requirements. Residential mortgage portfolio interest rate risk is
controlled by secondary market sales, variable interest rate loans and
balloon maturities.
Loans to individuals represent financing extended to consumers for personal
or household purposes, including automobile financing, education, home
improvement, and personal expenditures. These loans are granted in the form
of installment, credit card, or revolving credit transactions. Consumer
creditworthiness is evaluated on the basis of ability to repay, stability of
income sources, and past credit history.
The Corporation maintains an allowance for credit losses at a level deemed
sufficient to absorb losses which are inherent in the loan and lease
portfolios at each balance sheet date. Management reviews the adequacy of
the allowance on at least a quarterly basis to ensure that the provision for
credit losses has been charged against earnings in an amount necessary to
maintain the allowance at a level that is appropriate based on management's
assessment of probable estimated losses. The Corporation's methodology for
assessing the appropriateness of the allowance for credit losses consists of
several key elements. These elements include a specific allowance for
primary watch list classified loans, an allowance based on historical
trends, an additional allowance for special circumstances, and an
unallocated portion. The Corporation consistently applies the following
comprehensive methodology and procedure at the subsidiary bank level.
The allowance for primary watch list classified loans addresses those loans
maintained on the Corporation's primary watch list which are assigned a
rating of substandard, doubtful, or loss. Substandard loans are those with
a well-defined weakness or a weakness which jeopardizes the repayment of the
debt. A loan may be classified as substandard as a result of impairment of
the borrower's financial condition and repayment capacity. Loans for which
repayment plans have not been met or collateral equity margins do not
protect the Corporation may also be classified as substandard. Doubtful
loans have the characteristics of substandard loans with the added
characteristic that collection or liquidation in full, on the basis of
presently existing facts and conditions, is highly improbable. Although the
possibility of loss is extremely high for doubtful loans, the classification
of loss is deferred until pending factors, which might improve the loan,
have been determined. Loans rated as doubtful in whole or in part are
placed in nonaccrual status. Loans which are classified as loss are
considered uncollectible and are charged to the allowance for credit losses
at the next meeting of the Corporation's credit committee after placement in
this category. There were no loans classified as loss on the primary watch
list as of December 31, 2000.
Loans on the primary watch list may also be impaired loans, which are
defined as nonaccrual loans or troubled debt restructurings which are not in
compliance with their restructured terms. Each of the classified loans on
the primary watch list are individually analyzed to determine the level of
the potential loss in the credit under the current circumstances. The
specific reserve established for these criticized and impaired loans is
based on careful analysis of the loan's performance, the related collateral
value, cash flow considerations and the financial capability of any
guarantor. The allowance for primary watch list classified loans is equal
to the total amount of potential unconfirmed losses for the individual
classified loans on the watch list. Primary watch list loans are managed
and monitored by assigned account officers within the Corporation in
conjunction with Senior Management.
The allowance based on historical trends uses charge-off experience of the
Corporation to estimate potential unconfirmed losses in the balances of the
loan and lease portfolios. The historical loss experience percentage is
24
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
based on the charge-off history for the twenty most recent quarters.
Historical loss experience percentages are applied to all non-classified
loans to obtain the portion of the allowance for credit losses which is
based on historical trends. Before applying the historical loss experience
percentages, loan balances are reduced by the portion of the loan balances
which are subject to guarantee by a government agency. Loan balances are
also adjusted for unearned discount on installment loans.
The additional allowance for special circumstances provides management with
the opportunity to estimate additional potential allowance amounts which may
be needed to cover specific factors. The specific factors that management
currently evaluates consist of portfolio risk or concentrations of credit,
off balance sheet risk, economic conditions, management or staff
considerations, and comparative peer analysis variances. Portfolio risks
include unusual changes or recent trends in specific portfolios such as
unexpected changes in the trends or levels of delinquency or charge-offs,
unusual repossession activities or large levels of unsecured loans in a
portfolio.
The Corporation also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions which may cause a
potential credit loss but are not specifically identifiable. It is prudent
to maintain an unallocated portion of the allowance because no matter how
detailed an analysis of potential credit losses is performed these estimates
by definition lack precision. Management must make estimates using
assumptions and information which is often subjective and changing rapidly.
Since all identified losses are immediately charged off, no portion of the
allowance for credit losses is restricted to any individual credit or groups
of credits, and the entire allowance is available to absorb any and all
credit losses. However, for analytical purposes, the following table sets
forth an allocation of the allowance for credit losses at December 31
according to the categories indicated:
Allocation of the Allowance for Credit Losses
(Dollar Amounts in Thousands)
2000 1999 1998 1997 1996
Commercial, industrial, financial,
agricultural and other $ 6,263 $ 6,321 $ 4,375 $ 3,726 $ 3,628
Real estate-construction 643 831 414 415 461
Real estate-commercial 9,064 7,675 5,119 4,912 4,731
Real estate-residential 10,211 9,928 10,319 8,595 8,145
Loans to individuals 4,938 5,131 5,223 4,583 4,933
Lease financing receivables 638 586 512 393 285
Unallocated 1,844 3,067 6,342 3,308 3,051
Total $33,601 $33,539 $32,304 $25,932 $25,234
Allowance as percentage
of average total loans 1.34% 1.39% 1.32% 1.11% 1.22%
Other than those described below, there are no material credits that
management has serious doubts as to the borrower's ability to comply with
the present loan repayment terms. The following table identifies
nonperforming loans at December 31. A loan is placed in a nonaccrual status
at the time when ultimate collectibility of principal or interest, wholly or
partially, is in doubt. Past due loans are those loans which were
contractually past due 90 days or more as to interest or principal payments
but are well secured and in the process of collection. Renegotiated loans
are those loans which terms have been renegotiated to provide a reduction or
deferral of principal or interest as a result of the deteriorating financial
position of the borrower.
25
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Nonperforming and Impaired Assets and Effect on Interest
Income Due to Nonaccrual
(Dollar Amounts in Thousands)
2000 1999 1998 1997 1996
Loans on nonaccrual basis $10,698 $12,765 $ 9,677 $11,387 $ 9,536
Past due loans 22,086 15,815 15,780 13,955 14,046
Renegotiated loans 2,263 62 64 67 280
Total nonperforming loans $35,047 $28,642 $25,521 $25,409 $23,862
Nonperforming loans as a percentage of
total loans 1.41% 1.15% 1.07% 1.04% 1.07%
Allowance as percentage of nonperforming
loans 95.87% 117.10% 126.58% 102.06% 105.75%
Other real estate owned $ 1,661 $ 1,707 $ 2,370 $ 1,950 $ 1,732
Gross income that would have been
recorded at original rates $ 750 $ 724 $ 961 $ 1,017 $ 799
Interest that was reflected in income 333 458 286 146 223
Net reduction to interest income due to
nonaccrual $ 417 $ 266 $ 675 $ 871 $ 576
The reduction of income due to renegotiated loans was less than $50 thousand
in any year presented.
The level of nonperforming loans at year-end 2000 increased by $6.4 million
over 1999 levels as increases in past due and renegotiated loans were only
partially offset by decreases in nonaccrual loans. Increases for past due
loans primarily resulted from increases for commercial loans secured by real
estate and commercial and industrial loans of $5.1 million and $2.1 million,
respectively. The major portion of these increases relate to small business
loans, of which $1.6 million were guaranteed by the SBA. The Corporation
continues to aggressively collect these loans. Also, early in 2000 the
Corporation initiated an additional level of approval for credit
relationships between $500 thousand and $1.0 million. This procedure
requires approval of those credits by a committee consisting of senior
lenders of the Corporation. The increase in renegotiated loans for 2000
compared to 1999 was the result of the modification of loan terms for one
commercial borrower. Decreases for nonaccrual loans for 2000 occurred
primarily in commercial loans which reflected decreases of $658 thousand for
commercial loans secured by real estate and decreases for commercial and
industrial loans of $1.5 million compared to 1999. Nonperforming loans as a
percentage of total loans was 1.41% at December 31, 2000 compared to 1.15%
at December 31, 1999.
The Corporation's loan portfolio continues to be monitored by senior
management to identify potential portfolio risks and detect potential credit
deterioration in the early stages. Credit risk is mitigated through the use
of sound underwriting policies and collateral requirements. Management
attempts to minimize loan losses by analyzing and modifying collection
techniques on a periodic basis. Management believes that the allowance for
credit losses and nonperforming loans remained safely within acceptable
levels.
Capital Resources
Equity capital increased $47.5 million in 2000 to $334.2 million. Dividends
declared decreased equity by $32.9 million during 2000, an increase over
dividends for the 1999 period as the dividend rate was increased. The
retained net income of $14.4 million remained in permanent capital to fund
future growth and expansion. Long-term debt payments and fair value
adjustments to unearned ESOP shares increased equity capital by $793
thousand. The market value adjustment to securities available for sale
26
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Capital Resources (Continued)
increased equity by $32.5 million. Amounts paid to fund the discount on
reinvested dividends reduced equity by $593 thousand. The cost of
purchasing treasury shares decreased equity by $873 thousand while proceeds
from the reissuance of treasury shares to provide for stock options
exercised increased equity by $327 thousand during 2000. Equity capital
during 2000 also reflected an increase of $852 thousand from the reissuance
of treasury shares to fund the buy-out of the insurance agency's joint
venture partner (See NOTE 4 to the Consolidated Financial Statements).
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. See NOTE 25 for an analysis of regulatory capital
guidelines and the Corporation's capital ratios relative to these
measurement standards.
Inflation and Changing Prices
Management is aware of the impact inflation has on interest rates and
therefore the impact it can have on a bank's performance. The ability of a
financial institution to cope with inflation can only be determined by
analysis and monitoring of its asset and liability structure. The
Corporation monitors its asset and liability position with particular
emphasis on the mix of interest-sensitive assets and liabilities in order to
reduce the effect of inflation upon its performance. However, it must be
remembered that the asset and liability structure of a financial institution
is substantially different from an industrial corporation in that virtually
all assets and liabilities are monetary in nature, meaning that they have
been or will be converted into a fixed number of dollars regardless of
changes in general price levels. Examples of monetary items include cash,
loans and deposits. Nonmonetary items are those assets and liabilities
which do not gain or lose purchasing power solely as a result of general
price level changes. Examples of nonmonetary items are premises and
equipment.
Inflation can have a more direct impact on categories of noninterest
expenses such as salaries and wages, supplies and employee benefit costs.
These expenses are very closely monitored by management for both the effects
of inflation and increases relating to such items as staffing levels, usage
of supplies and occupancy costs.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information appearing in Item 7 of this report under the caption "Interest
Sensitivity" is incorporated herein by reference in response to this item.
27
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
(Dollar Amounts in Thousands)
December 31,
2000 1999
Assets
Cash and due from banks.....................$ 90,723 $ 92,673
Interest-bearing bank deposits.............. 427 1,218
Federal funds sold.......................... 11,125 8,700
Securities available for sale, at market.... 1,238,230 1,144,042
Securities held to maturity, at cost, (market
value $398,661 in 2000 and $435,000 in 1999) 398,107 448,347
Loans....................................... 2,492,874 2,503,687
Unearned income........................... (2,047) (3,628)
Allowance for credit losses............... (33,601) (33,539)
Net loans............................ 2,457,226 2,466,520
Property and equipment...................... 44,671 43,380
Other real estate owned..................... 1,661 1,707
Other assets................................ 130,142 134,259
Total assets.........................$4,372,312 $4,340,846
Liabilities
Deposits (All Domestic):
Noninterest-bearing.......................$ 244,010 $ 251,404
Interest-bearing.......................... 2,820,136 2,697,425
Total deposits....................... 3,064,146 2,948,829
Short-term borrowings....................... 272,171 424,827
Other liabilities........................... 44,984 42,152
Company obligated mandatorily redeemable
capital securities of subsidiary trust.... 35,000 35,000
Other long-term debt........................ 621,855 603,355
Total long-term debt................ 656,855 638,355
Total liabilities.................... 4,038,156 4,054,163
Shareholders' Equity
Preferred stock, $1 par value per
share, 3,000,000 shares authorized,
none issued............................... -0- -0-
Common stock, $1 par value per share,
100,000,000 shares authorized, 62,525,412
shares issued and 58,195,450 shares
outstanding in 2000; 62,525,412 shares
issued and 58,142,848 shares outstanding
in 1999................................... 62,525 62,525
Additional paid-in capital.................. 67,223 68,330
Retained earnings........................... 272,169 257,773
Accumulated other comprehensive income (loss) (7,808) (40,304)
Treasury stock (4,329,962 and 4,382,564 shares
at December 31, 2000 and 1999, respectively,
at cost).................................. (54,666) (55,448)
Unearned ESOP shares........................ (5,287) (6,193)
Total shareholders' equity........... 334,156 286,683
Total liabilities and
shareholders' equity..........$4,372,312 $4,340,846
The accompanying notes are an integral part of these consolidated
financial statements.
28
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Income
(Dollar Amounts in Thousands, except per share data)
Years Ended December 31,
2000 1999 1998
Interest Income
Interest and fees on loans................... $208,548 $195,010 $201,739
Interest and dividends on investments:
Taxable interest........................... 89,723 88,266 69,467
Interest exempt from Federal income taxes.. 9,638 9,479 6,600
Dividends.................................. 3,657 3,108 2,138
Interest on Federal funds sold............... 234 105 1,893
Interest on bank deposits.................... 82 121 230
Total interest income.................... 311,882 296,089 282,067
Interest Expense
Interest on deposits......................... 115,507 103,331 113,960
Interest on short-term borrowings............ 22,218 13,832 10,214
Interest on mandatorily redeemable capital
securities of subsidiary trust............. 3,325 1,007 -0-
Interest on other long-term debt............. 33,489 34,483 24,108
Total interest on long-term debt......... 36,814 35,490 24,108
Total interest expense................... 174,539 152,653 148,282
Net interest income............................ 137,343 143,436 133,785
Provision for credit losses.................... 10,030 9,450 15,049
Net interest income after provision for
credit losses................................ 127,313 133,986 118,736
Other Income
Securities gains............................. 1,745 565 1,457
Trust income................................. 5,555 5,525 5,251
Service charges on deposits.................. 10,562 10,645 9,628
Gain on sale of loans........................ 257 4,996 1,630
Other income................................. 15,564 12,494 11,420
Total other income....................... 33,683 34,225 29,386
Other Expenses
Salaries and employee benefits............... 52,529 49,806 48,710
Net occupancy expense........................ 6,577 6,537 6,750
Furniture and equipment expense.............. 8,154 7,653 7,485
Data processing expense...................... 3,310 3,449 3,354
Pennsylvania shares tax expense.............. 3,495 3,477 3,152
Merger and related charges................... -0- -0- 7,915
Other operating expenses..................... 25,396 24,647 24,529
Total other expenses..................... 99,461 95,569 101,895
Income before income taxes and extra-
ordinary items................................ 61,535 72,642 46,227
Applicable income taxes........................ 14,289 19,612 12,229
Net income before extraordinary items.......... 47,246 53,030 33,998
Extraordinary items (less applicable income
taxes of $336)............................... -0- -0- (624)
Net Income..................................... $47,246 $53,030 $33,374
Average Shares Outstanding (a)................. 57,558,929 60,333,092 61,333,572
Average Shares Outstanding Assuming Dilution (a) 57,618,671 60,569,322 61,666,026
Earnings per common share: (a)
Net income before extraordinary items........ $0.82 $0.88 $ 0.55
Extraordinary items.......................... $0.00 $0.00 $(0.01)
Net income................................... $0.82 $0.88 $ 0.54
Earnings per common share assuming dilution: (a)
Net income before extraordinary items........ $0.82 $0.88 $ 0.55
Extraordinary items.......................... $0.00 $0.00 $(0.01)
Net income................................... $0.82 $0.88 $ 0.54
(a) Where applicable, share amounts have been restated to reflect the two-for-one stock split effected in the
form of a 100% stock dividend declared on October 19, 1999.
The accompanying notes are an integral part of these consolidated financial
statements.
29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Changes in Shareholders' Equity
(Dollar Amounts in Thousands)
Accumulated
Additional Other Unearned Total
Common Paid-in Retained Comprehensive Treasury ESOP Shareholders'
Stock Capital Earnings Income Stock Shares Equity
Balance at December 31, 1997............. $63,322 $74,998 $228,230 $2,156 $(11,947) $(2,436) $354,323
Comprehensive income
Net income............................. -0- -0- 33,374 -0- -0- -0- 33,374
Other comprehensive income, net of tax:
Unrealized holding gains on securities
arising during the period............ -0- -0- -0- 971 -0- -0- 971
Less: reclassification adjustment
for gains on securities included
in net income...................... -0- -0- -0- (928) -0- -0- (928)
Total other comprehensive income....... -0- -0- -0- 43 -0- -0- 43
Total comprehensive income.............. -0- -0- 33,374 43 -0- -0- 33,417
Cash dividends declared.................. -0- -0- (25,981) -0- -0- -0- (25,981)
Net increase in unearned ESOP shares..... -0- 158 -0- -0- -0- (5,571) (5,413)
Discount on dividend reinvestment plan
purchases............................... -0- (1,016) -0- -0- -0- -0- (1,016)
Treasury stock acquired.................. -0- -0- -0- -0- (2,123) -0- (2,123)
Treasury stock reissued.................. -0- (38) -0- -0- 2,255 -0- 2,217
Treasury stock cancelled in merger....... (795) (5,107) -0- -0- 5,902 -0- -0-
Cash issued for partial shares in merger. (2) (17) -0- -0- -0- -0- (19)
Balance at December 31, 1998............. 62,525 68,978 235,623 2,199 (5,913) (8,007) 355,405
Comprehensive income
Net income............................. -0- -0- 53,030 -0- -0- -0- 53,030
Other comprehensive income, net of tax:
Unrealized holding losses on
securities arising during the period.. -0- -0- -0- (42,137) -0- -0- (42,137)
Less: reclassification adjustment
for gains on securities included
in net income......................... -0- -0- -0- (366) -0- -0- (366)
Total other comprehensive income....... -0- -0- -0- (42,503) -0- -0- (42,503)
Total comprehensive income.............. -0- -0- 53,030 (42,503) -0- -0- 10,527
Cash dividends declared.................. -0- -0- (30,880) -0- -0- -0- (30,880)
Decrease in unearned ESOP shares......... -0- 53 -0- -0- -0- 1,814 1,867
Discount on dividend reinvestment plan
purchases............................... -0- (358) -0- -0- -0- -0- (358)
Treasury stock acquired.................. -0- -0- -0- -0- (51,331) -0- (51,331)
Treasury stock reissued.................. -0- (343) -0- -0- 1,796 -0- 1,453
Balance at December 31, 1999............. 62,525 68,330 257,773 (40,304) (55,448) (6,193) 286,683
Comprehensive income
Net income............................. -0- -0- 47,246 -0- -0- -0- 47,246
Other comprehensive income, net of tax:
Unrealized holding gains on
securities arising during the period.. -0- -0- -0- 33,630 -0- -0- 33,630
Less: reclassification adjustment
for gains on securities included
in net income......................... -0- -0- -0- (1,134) -0- -0- (1,134)
Total other comprehensive income....... -0- -0- -0- 32,496 -0- -0- 32,496
Total comprehensive income.............. -0- -0- 47,246 32,496 -0- -0- 79,742
Cash dividends declared.................. -0- -0- (32,850) -0- -0- -0- (32,850)
Decrease in unearned ESOP shares......... -0- (113) -0- -0- -0- 906 793
Discount on dividend reinvestment plan
purchases............................... -0- (593) -0- -0- -0- -0- (593)
Treasury stock acquired.................. -0- -0- -0- -0- (873) -0- (873)
Treasury stock reissued.................. -0- (476) -0- -0- 1,655 -0- 1,179
Tax benefit of stock options............. -0- 75 -0- -0- -0- -0- 75
Balance at December 31, 2000............. $62,525 $67,223 $272,169 $(7,808) $(54,666) $(5,287) $334,156
The accompanying notes are an integral part of these consolidated financial statements.
30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Years Ended December 31,
2000 1999 1998
Operating Activities
Net income............................................ $ 47,246 $ 53,030 $ 33,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses........................ 10,030 9,450 15,049
Depreciation and amortization...................... 7,480 7,735 7,914
Net gains on sales of assets....................... (1,929) (5,192) (3,829)
Income from increase in cash surrender value of
bank owned life insurance........................ (3,419) (2,126) (1,365)
Increase in interest receivable.................... (932) (773) (4,011)
Increase in interest payable....................... 7,620 1,815 1,159
Increase (decrease) in income taxes payable........ 255 445 (584)
Change in deferred taxes........................... 1,533 287 (1,404)
Other - net........................................ (1,751) (11,922) 6,567
Net cash provided by operating activities....... 66,133 52,749 52,870
Investing Activities
Transactions with securities held to maturity:
Sales.............................................. -0- -0- -0-
Maturities and redemptions......................... 67,735 127,566 211,948
Purchases of investment securities................. (17,458) (93,151) (184,668)
Transactions with securities available for sale:
Sales.............................................. 22,391 39,282 171,891
Maturities and redemptions......................... 108,636 193,605 184,508
Purchases of investment securities................. (173,514) (398,933) (891,718)
Proceeds from sales of loans and other assets......... 36,482 99,692 104,609
Sale of subsidiary.................................... -0- (2,431) -0-
Investment in bank owned life insurance............... (15,000) (20,000) -0-
Net decrease in time deposits with banks.............. 790 689 3,127
Net increase in loans................................. (36,435) (227,347) (50,580)
Purchases of premises and equipment................... (7,736) (5,197) (7,702)
Net cash used by investing activities........... (14,109) (286,225) (458,585)
Financing Activities
Proceeds from issuance of other long-term debt........ 89,900 25,000 469,800
Repayments of other long-term debt.................... (70,493) (50,319) (37,576)
Proceeds from issuance of company obligated
mandatorily redeemable capital securities of
subsidiary trust.................................... -0- 35,000 -0-
Discount on dividend reinvestment plan purchases...... (593) (358) (1,016)
Dividends paid........................................ (32,553) (27,825) (25,746)
Net increase (decrease) in Federal funds purchased.... 13,875 (45,025) (60,675)
Net increase (decrease) in other short-term borrowings (166,531) 329,306 (2,228)
Sale of branch and deposits, net of cash received..... -0- -0- (8,612)
Stock option tax benefit.............................. 75 -0- -0-
Acquisition of treasury stock......................... (873) (51,331) (2,123)
Reissuance of treasury stock.......................... 326 1,453 2,217
Net increase in deposits.............................. 115,318 21,333 56,909
Net cash provided (used) by financing activities (51,549) 237,234 390,950
Net increase (decrease) in cash and cash
equivalents................................... 475 3,758 (14,765)
Cash and cash equivalents at January 1.................. 101,373 97,615 112,380
Cash and cash equivalents at December 31................ $101,848 $101,373 $ 97,615
The accompanying notes are an integral part of these consolidated financial
statements.
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
NOTE 1--Statement of Accounting Policies
General
The following summary of accounting and reporting policies is presented to
aid the reader in obtaining a better understanding of the financial
statements and related financial data of First Commonwealth Financial
Corporation and its subsidiaries (the "Corporation") contained in this
report.
The financial information is presented in accordance with generally accepted
accounting principles and general practice for financial institutions. In
preparing financial statements, management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. In addition, these estimates and assumptions affect revenues
and expenses in the financial statements and as such, actual results could
differ from those estimates.
Through its subsidiaries which include two commercial banks, a nondepository
trust company and insurance agency, the Corporation provides a full range of
loan, deposit, trust and insurance services primarily to individuals and
small to middle-market businesses in seventeen counties in central and
western Pennsylvania. Under current conditions, the Corporation is
reporting one business segment.
The Corporation and subsidiaries are subject to regulations of certain state
and federal agencies. These regulatory agencies periodically examine the
Corporation and its subsidiaries for adherence to laws and regulations. As
a consequence, the cost of doing business may be affected.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Corporation and its wholly-owned subsidiaries. All material
intercompany transactions have been eliminated in consolidation.
Investments of 20 to 50 percent of the outstanding common stock of investees
are accounted for using the equity method of accounting.
Reclassifications
Financial statement amounts in prior periods have been reclassified to
conform to the presentation format used in 2000. The reclassifications had
no effect on the Corporation's financial condition or results of operations.
Securities
Debt securities that the Corporation has the positive intent and ability to
hold to maturity are classified as securities held-to-maturity and are
reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are to be
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings. Debt and equity securities not
classified as either held-to-maturity securities or trading securities are
classified as securities available-for-sale and are reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of deferred taxes.
The Corporation has securities classified as either held-to-maturity or
available-for-sale. The Corporation does not engage in trading activities.
Net gain or loss on the sale of securities is determined by using the
specific identification method.
32
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
NOTE 1--Statement of Accounting Policies (Continued)
Securities (Continued)
Effective January 1, 1999, the Corporation adopted the Financial Accounting
Standards Board ("FASB") Statement No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise" ("FAS No. 134"). FAS No. 134 amends FAS
No. 65 "Accounting for Certain Mortgage Banking Activities". FAS No. 65
required that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities as trading securities while FAS No. 134 requires
the resulting mortgage-backed securities or other retained interests be
classified based on the entity's ability and intent to sell or hold those
investments. On the date FAS No. 134 is initially applied, an enterprise
may reclassify mortgage backed securities and other beneficial interests
retained after the securitization of mortgage loans held for sale from the
trading category, except for those with sales commitments in place. The
Corporation currently holds no mortgage backed securities or other
beneficial interests retained after the securitization of mortgage loans
held for sale. The adoption of FAS No. 134 did not have a material impact
on the Corporation's financial condition or results of operations.
Loans
Loans are carried at the principal amount outstanding. Unearned income on
installment loans and leases is taken into income on a declining basis which
results in an approximately level rate of return over the life of the loan
or lease. Interest is accrued as earned on nondiscounted loans.
The Corporation considers a loan to be impaired when, based on current
information and events, it is probable that a creditor 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.
Mortgage Servicing Rights
When the Corporation purchases or originates mortgage loans with a
definitive plan to sell or securitize those loans and retain the mortgage
servicing rights, the Corporation measures 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 Corporation 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 allocates
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
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Mortgage Servicing Rights (Continued)
income (servicing revenue in excess of servicing cost). Mortgage servicing
rights are periodically evaluated for impairment based on fair values.
Loan Fees
Loan origination and commitment fees, net of associated direct costs, are
deferred and the net amount is amortized as an adjustment to the related
loan yield on the interest method, generally over the contractual life of
the related loans or commitments.
Other Real Estate Owned
Real estate, other than bank premises, is recorded at the lower of cost or
fair value less selling costs at the time of acquisition. Expenses related
to holding the property, net of rental income, are generally charged against
earnings in the current period.
Allowance for Credit Losses
The allowance for credit losses represents management's estimate of an
amount adequate to provide for losses which may be incurred on loans
currently held. Management determines the adequacy of the allowance based
on historical patterns of loan charge-offs and recoveries, the relationship
of the allowance to outstanding loans, industry experience, current economic
trends and other factors relevant to the collectibility of loans currently
in the portfolio.
Bank-Owned Life Insurance
The Corporation purchased insurance on the lives of a certain group of
employees. The policies accumulate asset values to meet future liabilities
including the payment of employee benefits such as health care. Increases
in the cash surrender value are recorded as other income in the Consolidated
Statements of Income. The cash surrender value of bank-owned life insurance
is reflected in "other assets" on the Consolidated Balance Sheets in the
amount of $65,961 and $48,382 at December 31, 2000 and 1999, respectively.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line and accelerated
methods over the estimated useful life of the asset. Charges for
maintenance and repairs are expensed as incurred. Where a lease is
involved, amortization is charged over the term of the lease or the
estimated useful life of the improvement, whichever is shorter.
The Corporation records computer software in accordance with the American
Institute of Certified Public Accountants' Statement of Position 98-1, "
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). The statement identifies the following three
stages of software development: the preliminary project stage, the
application development stage, and the post-implementation stage. In
compliance with SOP 98-1, the Corporation expenses costs incurred during the
preliminary project stage and capitalizes certain costs incurred during the
application development stage. Once software is in operation, maintenance
costs are expensed over the maintenance period while upgrades which result
in additional functionality or enhancement are capitalized. Training and
data conversion costs are expensed as incurred. Capitalized costs are
amortized on a straight-line basis over a period of 3-7 years, depending on
the life of the software license.
34
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands, except per share data)
NOTE 1--Statement of Accounting Policies (Continued)
Accounting for the Impairment of Long-Lived Assets
The Corporation reviews long-lived assets, such as premises and equipment
and intangibles 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 discounted 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.
Income Taxes
The Corporation records taxes in accordance with the asset and liability
method utilized by FASB Statement No. 109 ("FAS No. 109"), whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amount
of existing assets and liabilities and their respective tax bases given the
provisions of the enacted tax laws. Deferred tax assets are reduced, if
necessary, by the amount of such benefits that are not expected to be
realized based upon available evidence.
Comprehensive Income Disclosures
For all periods presented, "other comprehensive income" (comprehensive
income excluding net income) includes only one component, which is the
change in unrealized holding gains and losses on available for sale
securities, net of related tax effects.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and Federal funds sold. Generally, Federal
funds are sold for one-day periods.
Stock Split
On October 19, 1999, the Corporation's Board of Directors approved a 2-for-1
stock split effected in the form of a 100% stock dividend. Shareholders of
record at the close of business November 4, 1999 received one additional
share for each share held. The additional shares were distributed on
November 18, 1999. Pursuant to the foregoing stock split an additional
31,262,706 common shares were issued, and the sum of $31,263 ($1 per share)
was transferred to the Corporation's common stock account, and such amount
was charged against the Corporation's additional paid-in capital account.
Common stock, additional paid-in capital, and share data for prior periods
have been restated to reflect the stock split as if it had occurred at the
beginning of the earliest period presented.
35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
NOTE 1--Statement of Accounting Policies (Continued)
Employee Stock Ownership Plan
Accounting treatment for the Corporation's Employee Stock Ownership Plan
("ESOP") described in NOTE 21 follows Statement of Position 93-6 ("SOP 93-
6") "Employers Accounting for Employee Stock Ownership Plans" for ESOP
shares acquired after December 31, 1992 (new shares). The Corporation has
elected, as permitted under SOP 93-6, not to adopt this statement for ESOP
shares acquired on or before December 31, 1992 (old shares).
ESOP shares purchased subject to debt guaranteed by the Corporation are
recorded as a reduction of common shareholders' equity by charging unearned
ESOP shares. As shares are committed to be released to the ESOP trust for
allocation to plan participants, unearned ESOP shares is credited for the
average cost of the shares to the ESOP. Compensation cost recognized for
new shares in accordance with the provisions of SOP 93-6 is based upon the
fair market value of the shares committed to be released. Additional paid-
in capital is charged or credited for the difference between the fair value
of the shares committed to be released and the cost of those shares to the
ESOP. Compensation cost recognized for old shares committed to be released
is recorded at the cost of those shares to the ESOP.
Dividends on both old and new unallocated ESOP shares are used for debt
service and are reported as a reduction of debt and accrued interest
payable. Dividends on allocated ESOP shares are charged to retained
earnings and allocated to the plan participants' accounts. The average
number of common shares outstanding used in calculating earnings per share
excludes all unallocated ESOP shares.
Employee Stock Option Plan
FASB Statement No. 123 "Accounting for Stock Based Compensation" ("FAS No.
123") 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 Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25").
As permitted under FAS No. 123, the Corporation has elected to use the
intrinsic value method to measure stock based compensation under APB 25 and
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 (see NOTE 22).
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133
establishes accounting and reporting standards for derivative instruments
and for hedging activities which require that an entity recognize all
derivatives as either assets or liabilities in a balance sheet and measure
those instruments at fair value. Changes in the fair value of derivatives
must be recognized in earnings when they occur unless the derivative
qualifies as a hedge. If a derivative qualifies as hedge, a company can
elect to use hedge accounting to eliminate or reduce income-statement
volatility that would arise from reporting changes in a derivative's fair
value in income. FAS No. 133 was amended by FASB statement No. 137 which
delays the effective date of FAS No. 133 to the first quarter of fiscal
years beginning after June 15, 2000. FAS No. 133 was also amended in June
2000 by FAS No. 138. FAS No. 138 addresses and clarifies issues causing
implementation difficulties for numerous entities applying FAS No. 133. FAS
No. 138 includes amendments to FAS No. 133 which resulted from decisions
made by the FASB related to the Derivatives Implementation Group ("DIG")
36
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
NOTE 1--Statement of Accounting Policies (Continued)
Derivative Instruments and Hedging Activities (Continued)
process. The DIG was created by the FASB to facilitate implementation by
identifying issues that arise from applying the requirements of FAS No. 133
and to advise the FASB on how to resolve those issues. The Corporation
currently has no freestanding derivative or hedging instruments.
Management has reviewed contracts from various functional areas of the
Corporation to identify potential derivatives embedded within selected
contracts. In accordance with the guidance provided in DIG Issue 11-4,
management had identified embedded derivatives in some loan commitments for
residential mortgages where the Corporation has intent to sell to an
investor such as the Federal Home Loan Mortgage Corporation ("Freddie Mac")
or the Federal National Mortgage Association ("Fannie Mae"). Due to the
short-term nature of these loan commitments (30 days or less) and the
historical dollar amount of commitments outstanding at period end, the
adoption of FAS No. 133 will not have a material impact on the Corporation's
financial condition or results of operations.
Earnings Per Common Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders less unallocated ESOP shares 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 the earnings of the entity. For all periods presented the
dilutive effect on average shares outstanding is the result of compensatory
stock options outstanding.
New Accounting Pronouncements
In September 2000, the FASB issued statement No. 140, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities" which replaces FASB statement No. 125, issued in June 1996.
FAS No. 140 revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of the provisions of FAS No. 125. The
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
FAS No. 140 is effective for transfers occurring after March 31, 2001 and
for disclosures relating to securitization transactions and collateral for
years ending after December 15, 2000. Implementation of FAS No. 140 will
not have a material impact on the Corporation's financial condition or
results of operations.
37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands, except per share data)
NOTE 2--Supplemental Comprehensive Income Disclosures
The following table identifies the related tax effects allocated to each
component of other comprehensive income in the Statements of Changes in
Shareholders' Equity:
December 31, 2000 December 31, 1999 December 31, 1998
Tax Net of Tax Net of Tax Net of
Pre-tax (Expense) Tax Pre-tax (Expense) Tax Pre-tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $ 51,739 $(18,109) $33,630 $(64,826) $22,689 $(42,137) $1,495 $(524) $971
Less: reclassification adjustment for
gains realized in net income (1,745) 611 (1,134) (563) 197 (366) (1,428) 500 (928)
Net unrealized gains (losses) 49,994 (17,498) 32,496 (65,389) 22,886 (42,503) 67 (24) 43
Other comprehensive income $ 49,994 $(17,498) $32,496 $(65,389) $22,886 $(42,503) $ 67 $ (24) $ 43
NOTE 3--Supplemental Cash Flow Disclosures
2000 1999 1998
Cash paid during the year for:
Interest $166,919 $150,839 $147,123
Income taxes $ 12,842 $ 18,832 $ 14,200
Noncash investing and financing activities:
ESOP borrowings $ -0- $ -0- $ 6,000
ESOP loan reductions $ 906 $ 1,814 $ 429
Loans transferred to
other real estate owned
and repossessed assets $ 6,405 $ 4,936 $ 6,624
Gross increase (decrease)
in market value adjustment
to securities available for
sale $ 49,994 $(65,389) $ 67
Treasury stock reissued for
insurance agency interest
acquired $ 852 $ -0- $ -0-
38
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 4--Joint Venture Buy-Out of Insurance Agency
When the Corporation formed First Commonwealth Insurance Agency ("FCIA"),
its wholly-owned subsidiary, it entered into a joint venture agreement with
a partner to assist FCIA in establishing itself as a full service insurance
agency in exchange for an undivided 50% interest in FCIA's expiring list of
policy holders. Effective August 31, 2000 the Corporation acquired the 50%
interest in the policy holders' list owned by its joint venture partner;
thereby becoming the sole owner of such list. In exchange the joint venture
partner received 89,742 shares of the Corporation's common stock.
NOTE 5--Sale of Subsidiary
Effective April 1, 1999, the Corporation sold all of the outstanding common
stock of BSI Financial Services Inc. ("BSI"), a wholly-owned subsidiary of
the Corporation, to a bank headquartered in Richmond, Indiana. Cash
proceeds in the amount of $1,709 were received, resulting in a loss on sale
of $202 which has been reflected in the financial statements. BSI provided
mortgage banking, loan servicing and collection services to the
Corporation's subsidiary banks and unaffiliated organizations. Services
performed by BSI for the subsidiary banks have been transferred to the
subsidiary banks or other nonbank subsidiaries of the Corporation.
NOTE 6--Business Combination
Effective December 31, 1998, the Corporation acquired all of the outstanding
shares of Southwest National Corporation ("Southwest"), a Pennsylvania-
chartered bank holding company headquartered in Greensburg, Pennsylvania.
Each of the 3,043,738 outstanding shares of Southwest National Corporation
were exchanged for 5.8 shares of the Corporation's common stock. The
aggregate number of shares issued by the Corporation, excluding partial
shares was 17,652,156. Related share amounts have been restated for the
stock split described in NOTE 1. The merger was accounted for as a pooling
of interests, and accordingly, all financial statements were restated as
though the merger had occurred at the beginning of the earliest period
presented.
NOTE 7--Cash and Due From Banks on Demand
Regulations of the Board of Governors of the Federal Reserve System impose
uniform reserve requirements on all depository institutions with transaction
accounts (checking accounts, NOW accounts, etc.). Reserves are maintained
in the form of vault cash or a noninterest-bearing balance held with the
Federal Reserve Bank. The subsidiary banks maintained with the Federal
Reserve Bank average balances of $3,075 during 2000 and $3,807 during 1999.
39
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 8--Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of
securities available for sale at December 31, 2000 and 1999:
2000 1999
Gross Gross Approximate Gross Gross Approximate
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
U.S. Treasury Securities $ 9,972 $ 77 $ -0- $ 10,049 $ 4,970 $-0- $ (27) $ 4,943
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities 752,481 1,636 (7,126) 746,991 781,690 104 (38,777) 743,017
Other 117,585 125 (370) 117,340 123,436 -0- (4,068) 119,368
Obligations of States and
Political Subdivisions 76,066 606 (1,376) 75,296 75,348 210 (5,940) 69,618
Debt Securities Issued
by Foreign Governments 425 -0- -0- 425 430 -0- -0- 430
Corporate Securities 142,933 1,814 (6,271) 138,476 70,252 11 (5,812) 64,451
Other Mortgage Backed
Securities 97,922 336 (418) 97,840 85,521 -0- (4,413) 81,108
Total Debt Securities 1,197,384 4,594 (15,561) 1,186,417 1,141,647 325 (59,037) 1,082,935
Equities 52,824 -0- (1,011) 51,813 64,330 3 (3,226) 61,107
Total Securities
Available for Sale $1,250,208 $4,594 $(16,572) $1,238,230 $1,205,977 $328 $(62,263) $1,144,042
Mortgage backed securities include mortgage backed obligations of U.S.
Government agencies and corporations, mortgage backed securities issued by
other organizations and other asset backed securities. These obligations
have contractual maturities ranging from less than one year to 30 years and
have an anticipated average life to maturity ranging from less than one year
to 21 years. All mortgage backed securities contain a certain amount of
risk related to the uncertainty of prepayments of the underlying mortgages.
Interest rate changes have a direct impact upon prepayment speeds, therefore
the Corporation uses computer simulation models to test the average life and
yield volatility of all mortgage backed securities under various interest
rate scenarios to insure that volatility falls within acceptable limits. At
December 31, 2000 and 1999, the Corporation owned no high risk mortgage
backed securities as defined by the Federal Financial Institutions
Examination Council's Supervisory Policy Statement on Securities Activities.
40
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 8--Securities Available For Sale (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 2000, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or repay obligations with or without call or
prepayment penalties.
Approximate
Amortized Fair
Cost Value
Due within 1 year $ 12,227 $ 12,247
Due after 1 but within 5 years 212,239 213,924
Due after 5 but within 10 years 11,828 11,824
Due after 10 years 110,687 103,591
346,981 341,586
Mortgage Backed Securities 850,403 844,831
Total Debt Securities $1,197,384 $1,186,417
Proceeds from the sales of securities available for sale were $22,391,
$39,282 and $171,891 during 2000, 1999 and 1998 respectively. Gross gains
of $1,752, $541 and $2,817 and gross losses of $18, $0 and $1,284 were
realized on those sales during 2000, 1999 and 1998 respectively.
Securities available for sale with an approximate fair value of $626,719 and
$463,004 were pledged at December 31, 2000 and 1999, respectively, to secure
public deposits and for other purposes required or permitted by law.
NOTE 9--Securities Held to Maturity
Below is an analysis of the amortized cost and approximate fair values of
debt securities held to maturity at December 31, 2000 and 1999:
2000 1999
Gross Gross Approximate Gross Gross Approximate
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities $148,522 $ 635 $ (604) $148,553 $183,926 $ 60 $ (4,231) $179,755
Other 99,844 194 (129) 99,909 104,790 -0- (2,436) 102,354
Obligations of States and
Political Subdivisions 126,514 1,355 (807) 127,062 134,770 176 (6,204) 128,742
Debt Securities Issued by
Foreign Governments 357 -0- -0- 357 358 -0- -0- 358
Corporate Securities 22,154 140 (227) 22,067 22,212 -0- (711) 21,501
Other Mortgage Backed
Securities 716 -0- (3) 713 2,291 -0- (1) 2,290
Total Securities Held to
Maturity $398,107 $2,324 $(1,770) $398,661 $448,347 $236 $(13,583) $435,000
41
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
Note 9--Securities Held to Maturity (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 2000, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or repay obligations with or without call or
prepayment penalties.
Approximate
Amortized Fair
Cost Value
Due within 1 year $ 15,956 $ 15,935
Due after 1 but within 5 years 129,737 129,848
Due after 5 but within 10 years 28,994 29,640
Due after 10 years 74,182 73,972
248,869 249,395
Mortgage Backed Securities 149,238 149,266
Total Debt Securities $398,107 $398,661
There were no sales of securities held to maturity in 2000, 1999 or 1998.
Securities held to maturity with an amortized cost of $245,908 and $282,388
were pledged at December 31, 2000 and 1999, respectively, to secure public
deposits and for other purposes required or permitted by law.
NOTE 10--Loans (all domestic)
Loans at year end were divided among these general categories:
December 31,
2000 1999
Commercial, financial,
agricultural and other $ 443,618 $ 417,300
Real estate loans:
Construction and land
development 37,146 41,734
1-4 Family dwellings 932,915 980,506
Other real estate loans 560,066 495,789
Loans to individuals for household,
family and other personal
expenditures 450,154 502,465
Leases, net of unearned income 68,975 65,893
Subtotal 2,492,874 2,503,687
Unearned income (2,047) (3,628)
Total loans and leases $2,490,827 $2,500,059
Most of the Corporation's business activity was with customers located
within Pennsylvania. The portfolio is well diversified, and as of
December 31, 2000 and 1999, there were no significant concentrations of
credit.
NOTE 11--Allowance for Credit Losses
Description of changes:
2000 1999 1998
Allowance at January 1 $33,539 $32,304 $25,932
Additions:
Recoveries of previously
charged off loans 1,299 1,381 1,950
Provision charged to operating
expense 10,030 9,450 15,049
Deductions:
Loans charged off 11,267 9,596 10,627
Allowance at December 31 $33,601 $33,539 $32,304
42
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 11--Allowance for Credit Losses (Continued)
Relationship to impaired loans:
2000 1999
Recorded investment in impaired loans
at end of period $12,961 $12,827
Average balance of impaired loans for
the year $13,154 $10,808
Allowance for credit losses related
to impaired loans $ 2,187 $ 3,082
Impaired loans with an allocation
of the allowance for credit losses $ 4,679 $ 7,471
Impaired loans with no allocation
of the allowance for credit losses $ 8,282 $ 5,356
Income recorded on impaired loans
on a cash basis $ 333 $ 458
NOTE 12--Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers. These financial instruments include commitments to extend
credit, standby letters of credit and commercial letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The
contract or notional amount of those instruments reflects the extent of
involvement the Corporation has in particular classes of financial
instruments.
As of December 31, 2000 and 1999, the Corporation did not own or trade any
other financial instruments with significant off-balance-sheet risk
including derivatives such as futures, forwards, interest rate swaps, option
contracts and the like, although such instruments may be appropriate to use
in the future to manage interest rate risk.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party of the financial instrument for commitments to extend
credit, standby letters of credit and commercial letters of credit written
is represented by the contract or notional amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The
following table identifies the notional amount of those instruments at
December 31, 2000 and 1999.
2000 1999
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $445,200 $421,871
Standby letters of credit $ 37,787 $ 39,847
Commercial letters of credit $ 471 $ 514
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
counter-party. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, residential and income-producing
commercial properties.
43
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 12--Financial Instruments with Off-Balance-Sheet Risk (Continued)
Standby letters of credit and commercial letters of credit written are
conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
NOTE 13--Premises and Equipment
Premises and equipment are described as follows:
Estimated
Useful Life 2000 1999
Land Indefinite $ 5,336 $ 5,425
Buildings and improvements 5 - 50 Years 45,296 44,582
Leasehold improvements 7 - 39 Years 9,839 9,930
Furniture and equipment 3 - 25 Years 48,643 46,177
Software 3 - 7 Years 9,926 6,160
Subtotal 119,040 112,274
Less accumulated depreciation
and amortization 74,369 68,894
Total premises and
equipment $44,671 $43,380
Depreciation and amortization related to premises and equipment was $5,996
in 2000, $5,790 and $6,265 in 1999 and 1998, respectively.
NOTE 14--Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
2000 1999
NOW and Super NOW accounts $ 98,552 $ 98,545
Savings and MMDA accounts 1,025,447 1,073,789
Time deposits 1,696,137 1,525,091
Total interest-bearing deposits $2,820,136 $2,697,425
Interest-bearing deposits at December 31, 2000 and 1999, include
reallocations from demand deposits of $105,795 and $97,883 and reallocations
from NOW and Super NOW accounts of $279,779 and $294,943 respectively into
Savings and MMDA accounts. These reallocations are based on a formula and
have been made to reduce the Corporation's reserve requirement in compliance
with regulatory guidelines.
Included in time deposits at December 31, 2000 and 1999, were certificates
of deposit in denominations of $100 or more of $455,382 and $358,261
respectively.
Interest expense related to $100 or greater certificates of deposit amounted
to $22,639 in 2000, $18,103 in 1999, and $16,921 in 1998.
Included in time deposits at December 31, 2000, were certificates of deposit
with the following scheduled maturities:
2001 $ 981,884
2002 465,459
2003 179,499
2004 30,190
2005 and thereafter 36,622
$1,693,654
44
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 15--Short-term Borrowings
Short-term borrowings at December 31 were as follows:
2000 1999
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
Federal funds
purchased $ 16,825 $ 49,990 6.28% $ 2,950 $ 94,161 5.22%
Borrowings from
FHLB -0- 20,814 6.03% 100,000 49,037 5.21%
Securities sold
under agreements
to repurchase 237,806 275,839 5.92% 262,301 124,904 4.66%
Treasury, tax and
loan note option 17,540 24,643 6.04% 59,576 11,167 4.81%
Total $272,171 $371,286 5.98% $424,827 $279,269 4.95%
Maximum total at
any month-end $455,285 $424,960
Interest expense on short-term borrowings for the years ended December 31 is
detailed below:
2000 1999 1998
Federal funds purchased $ 3,138 $ 4,913 $ 4,119
Borrowings from FHLB 1,256 2,557 1,051
Securities sold under agreements to
repurchase 16,335 5,825 4,305
Treasury, tax and loan note option 1,489 537 739
Total interest on
short-term borrowings $22,218 $13,832 $10,214
NOTE 16--Company Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust
The Corporation established First Commonwealth Capital Trust I ("the
Trust"), a Delaware business trust and the Trust issued 35,000 capital
securities (liquidation amount of $35,000) during September 1999, through a
private offering to qualified investors. Additionally, the Trust issued
common securities to the Corporation. The Trust used the proceeds from the
sale to buy a series of 9.50% junior subordinated deferrable interest
debentures due 2029 from the Corporation with the same economic terms as the
capital securities. The sole asset of the Trust is the $36,083 aggregate
liquidation amount of the junior subordinated debentures. The Trust will
distribute the cash payments it receives from the Corporation on the
debentures to the holders of the capital securities and the common
securities.
The original series A capital securities and series A junior subordinated
deferrable interest debentures have since been exchanged for registered
series B capital securities and registered series B junior subordinated
deferrable interest debentures having the same economic terms as the
original series A securities.
The Trust will redeem all of the outstanding capital securities when the
debentures are paid at maturity on September 1, 2029. Subject to receiving
prior approval of the Board of Governors of the Federal Reserve System the
Corporation may redeem the debentures, in whole or in part, at any time on
or after September 1, 2009, at a redemption price equal to 104.750% of the
principal amount of the debentures on September 1, 2009, declining ratably
on each September 1 thereafter to 100% on or after September 1, 2019, plus
accrued and unpaid interest to the date of redemption. The Corporation may
45
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 16--Company Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust (Continued)
also redeem the debentures prior to September 1, 2009, upon the occurrence
of certain tax and bank regulatory events, subject to receiving prior
approval of the Board of Governors of the Federal Reserve System. If the
Corporation redeems any debentures before their maturity, the Trust will use
the cash it receives on the redemption of the debentures to redeem, on a pro
rata basis, capital securities and common securities having an aggregate
liquidation amount equal to the aggregate principal amount of the debentures
redeemed.
The net proceeds (after deduction of offering expenses and the initial
purchaser's commission) from the sale of the debentures to the Trust were
approximately $34,200. The Corporation used the net proceeds from the
issuance of the debentures to partially finance the purchase of 3,819,420
shares of its outstanding common stock (approximately 6.5% of its
outstanding shares of common stock) pursuant to a "modified Dutch Auction"
tender offer. Unamortized deferred issuance costs associated with the
capital securities amounted to $909 as of December 31, 1999 and are being
amortized on a straight-line basis over the term of the capital securities.
The outstanding balance of the capital securities are included as a separate
component of long-term debt on the Consolidated Balance Sheets while
interest on the capital securities is included as a separate component of
interest expense on the Consolidated Statements of Income. The amortization
of the deferred issuance costs is included in interest expense from the
capital securities on the Consolidated Statements of Income.
NOTE 17--Other Long-term Debt
Other Long-term debt at December 31, follows:
2000 1999
Amount Rate Amount Rate
ESOP loan due December, 2005 $ 5,287 Libor +1% $ 6,193 Libor +1%
Bank loan due July, 2003 -0- 16,000 FF + 1.25%
Borrowings from FHLB due:
February, 2000 -0- 25,000 4.72%
July, 2000 -0- 25,000 4.72%
November, 2002 50,000 5.82% 50,000 5.82%
December, 2002 50,000 5.71% 50,000 5.71%
September, 2007 5,000 6.94% -0-
February, 2008 100,000 5.45% 100,000 5.45%
February, 2008 100,000 5.48% 100,000 5.48%
May, 2008 100,000 5.67% 100,000 5.67%
November, 2008 50,000 5.03% 50,000 5.03%
December, 2008 65,000 4.96% 65,000 4.96%
February, 2010 25,000 6.12% -0-
December, 2010 55,000 4.70% -0-
December, 2017 7,038 6.17% 7,264 6.17%
June, 2019 8,644 5.72% 8,898 5.72%
April, 2020 886 7.37% -0-
$621,855 $603,355
All Federal Home Loan Bank stock, along with an interest in unspecified
mortgage loans and mortgage-backed securities, with an aggregate statutory
value equal to the amount of the preceding advances, have been pledged as
collateral with the Federal Home Loan Bank of Pittsburgh.
Capital securities included in total long-term debt on the Consolidated
Balance Sheets are excluded from NOTE 17, but are described in NOTE 16.
46
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands, except per share data)
NOTE 17--Other Long-term Debt (Continued)
In October 1999, the parent company entered into an agreement with an
unrelated financial institution which enabled the parent company to borrow
up to $20,000 through October 2000. As of December 31, 1999, $16,000 was
outstanding and $4,000 remained available on this line of credit. During
the first and second quarters of 2000 the parent company borrowed the
remaining $4,000 available and during the fourth quarter of 2000 repaid the
entire $20,000 amount outstanding.
Scheduled loan payments for other long-term debt are summarized below:
2001 2002 2003 2004 2005 Thereafter
Loan payments $1,691 $101,634 $1,659 $1,492 $1,810 $513,569
During 1998, the Corporation incurred a cost of $960 for the prepayment of
FHLB term borrowings with original maturities scheduled for 2007. This
amount was recorded on the Consolidated Statements of Income as an
extraordinary item, net of $336 of applicable income taxes.
NOTE 18--Common Share Commitments
At December 31, 2000 and 1999, the Corporation had 100,000,000 common shares
authorized and 62,525,412 shares outstanding. Outstanding shares were
reduced by 4,329,962 shares of treasury stock at December 31, 2000 and
4,382,564 shares at December 31, 1999. The Corporation may be required to
issue additional shares to satisfy common share purchases related to the
employee stock ownership plan described in NOTE 21. The dilutive effect of
stock options outstanding on average shares outstanding in the diluted
earnings per share reported on the income statement were 59,742, 236,230 and
332,454 shares at December 31, 2000, 1999 and 1998 respectively.
During 2000 and 1999, 78,380 and 3,921,668 shares of treasury stock were
acquired at an average price of $11.14 and $13.09, respectively. Treasury
shares consisting of 41,240 and 188,570 were reissued during 2000 and 1999
upon exercise of stock options.
During 2000, 89,742 shares of treasury stock were reissued to fund the buy-
out of the insurance agency's joint-venture partner, as described in NOTE 4.
NOTE 19--Income Taxes
The income tax provision consists of:
2000 1999 1998
Current tax provision for income
exclusive of securities
transactions:
Federal $12,155 $19,111 $13,097
State (10) 16 (11)
Securities transactions 611 198 547
Total current tax
provision 12,756 19,325 13,633
Deferred tax provision (benefit) 1,533 287 (1,404)
Total tax provision $14,289 $19,612 $12,229
47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands, except per share data)
NOTE 19--Income Taxes (Continued)
Temporary differences between financial statement carrying amounts and tax
bases of assets and liabilities that represent significant portions of the
deferred tax assets (liabilities) at December 31, 2000 and 1999, were as
follows:
2000 1999
Deferred tax assets:
Allowance for credit losses $11,765 $11,641
Postretirement benefits other than
pensions 996 985
Accumulated depreciation 439 242
Unrealized loss on securities
available for sale 4,204 21,702
Other 894 827
Total deferred tax assets 18,298 35,397
Deferred tax liabilities:
Accumulated accretion of bond discount (389) (250)
Lease financing deduction (10,643) (9,372)
Loan origination fees and costs (1,319) (628)
Basis difference in assets acquired (674) (892)
Pension expense (231) (200)
Other (280) (262)
Total deferred tax liabilities (13,536) (11,604)
Net deferred tax asset $ 4,762 $23,793
The total tax provision for financial reporting purposes differs from the
amount computed by applying the statutory income tax rate to income before
income taxes. The differences are as follows:
2000 1999 1998
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Tax at statutory rate $21,537 35.0 $25,425 35.0 $16,179 35.0
Increase (decrease)
resulting from:
Effect of
nontaxable
income (6,595)(10.7) (5,247) (7.2) (3,894) (8.4)
Merger expenses -0- 0.0 0 0.0 542 1.2
State income taxes (10) (0.0) 16 0.0 (11) (0.0)
Other (643) (1.1) (582) (0.8) (587) (1.3)
Total tax
provision $14,289 23.2 $19,612 27.0 $12,229 26.5
48
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 20--Retirement Plans
All employees with at least one year of service are eligible to participate
in the employee stock ownership plan ("ESOP"). Contributions to the plan
are determined by the board of directors, and are based upon a prescribed
percentage of the annual compensation of all participants. The ESOP
acquired 484,178 shares of the Corporation's common stock in 1998 at a
corresponding cost of $6,000, which the Corporation borrowed and
concurrently loaned this amount to the ESOP. This amount represents
leveraged and unallocated shares, and accordingly has been recorded as long-
term debt and the offset as a reduction of common shareholders' equity.
Compensation costs related to the plan were $1,005 in 2000, $1,555 in 1999
and $1,068 in 1998. (See NOTE 21).
The Corporation also has a savings plan pursuant to the provisions of
section 401(k) of the Internal Revenue Code. Under the terms of the plan,
each participant will receive an automatic employer contribution to the plan
in an amount equal to 3% of compensation. Each participating employee may
contribute up to 10% of compensation to the plan of which up to 4% is
matched 100% by the employer's contribution. Prior to 1999, each
participant could contribute up to 5% of compensation to the plan, which was
matched by the employer's contribution equal to 80% of the employee's
contribution. The 401(k) plan expense was $2,444 in 2000, $2,328 in 1999
and $2,261 in 1998.
Upon shareholder approval at the regular 1998 meeting the Corporation
established a "Supplemental Executive Retirement Plan" ("SERP") to provide
deferred compensation for a select group of management. The purpose of this
plan is to restore some of the benefits lost to the highly compensated
employees compared to other employees due to limits and restrictions
incorporated into the Corporation's 401(k) and ESOP plans. The
Corporation's 401(k) and ESOP plans include restrictions on maximum
compensation, actual deferral percentage, actual contribution, maximum
contribution and maximum salary reduction which are required in order to
meet specific legal requirements.
Participants in the SERP may elect to contribute up to 10% of plan
compensation (compensation in excess of limits of the Corporation's 401(k)
and ESOP plans) into the SERP, through salary reduction. The Corporation
will make an elective contribution to the SERP equal to the elective
contribution of the participant. Each participant of the SERP will also
receive a matching contribution equal to 100% of the employee's elective
contribution up to 4%, and an additional non-elective contribution from the
employer equal to 8% of plan compensation. For 1998, each participant could
make an elective contribution for up to 5% of plan compensation which was
matched by an employers' contribution equal to 80% of the employee's
contribution.
The SERP will continue to supplement the Corporation's 401(k) and ESOP plans
and will therefore be modified at the same time and in the same respect as
the basic plans are modified in future periods. The SERP plan expense was
$182 in 2000, $153 in 1999, and $62 in 1998.
Pension Plan of Acquired Subsidiary
Southwest's noncontributory defined benefit pension plan covers all eligible
employees and provides benefits that are based on each employee's years of
service and compensation.
49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 20--Retirement Plans (Continued)
Pension Plan of Acquired Subsidiary (Continued)
Effective December 31, 1998, participants' accrued benefit in the Southwest
Bank Pension Plan was frozen. Participants became participants in the First
Commonwealth Financial Corporation ESOP Plan with no lapse in credited
service, and no loss of accrued benefits. The Southwest Bank Plan is
expected to be terminated at some future date, with distribution made in
accordance with Plan provisions and applicable regulations.
Net periodic pension cost of this plan for each of the last three years was
as follows:
2000 1999 1998
Service cost $ -0- $ -0- $ 365
Interest cost on projected benefit obligation 343 394 469
Actual return on plan assets (542) (261) (425)
Net amortization and deferral 93 (153) (179)
Net periodic pension cost (benefit) $(106) $ (20) $ 230
The following table sets forth the plan's funded status and the amounts
recognized on the Corporation's Consolidated Balance Sheet as of
December 31:
2000 1999
Market value of plan assets, primarily registered
investment companies, U.S. government and agency
obligations and money markets $6,785 $6,485
Projected benefit obligation 5,822 5,765
Plan assets greater than projected benefit obligation 963 720
Unrecognized net transition asset (62) (92)
Unrecognized net loss (gain) (223) (56)
Prepaid pension expense recognized on the balance sheet $ 678 $ 572
Actuarial present value of accumulated benefits,
including vested benefits of $5,665 and $5,588 $5,822 $5,765
The following table sets forth the change in benefit obligation:
2000 1999
Benefit obligation at beginning of year $5,765 $7,926
Service cost -0- -0-
Interest cost 343 394
Benefit payment (242) (908)
Actuarial loss (gain) (44) (1,647)
Benefit obligation at end of year $5,822 $5,765
The following table sets forth the change in plan assets:
2000 1999
Fair value of plan assets at beginning of year $6,485 $7,132
Return on plan assets 542 261
Employer contribution -0- -0-
Benefits paid (242) (908)
Fair value of plan assets at end of year $6,785 $6,485
50
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 20--Retirement Plans (Continued)
Pension Plan of Acquired Subsidiary (Continued)
Assumptions used in determining the actuarial present value of the projected
benefit obligation were as follows at December 31:
2000 1999
Discount rates 6.0% 6.0%
Rates of increase in compensation levels N/A N/A
Expected long-term rate of return on assets 6.5 6.5
Postretirement Benefits other than Pensions for Acquired Subsidiary
Employees of Southwest were covered by a postretirement benefit plan.
Net periodic benefit cost of this plan was as follows:
2000 1999 1998
Service cost $ 7 $ 13 $ 61
Interest cost on projected benefit obligation 190 197 259
Amortization of transition obligation 2 2 55
Loss amortization -0- 48 82
Net periodic benefit cost $199 $260 $457
The following table sets forth the plan's funded status and the amounts
recognized on the Corporation's Consolidated Balance Sheet as of
December 31:
2000 1999
Accumulated postretirement benefit obligation:
Retirees $3,413 $2,762
Fully eligible active plan participants 14 14
Other plan participants 163 183
Total accumulated postretirement benefit obligation 3,590 2,959
Plan assets at fair value -0- -0-
Accumulated postretirement benefit obligation in
excess of plan assets 3,590 2,959
Unrecognized transition obligation (19) (21)
Unrecognized net loss (729) (56)
Accrued benefit liability recognized on the
balance sheet $2,842 $2,882
The following table sets forth the change in benefit obligation:
2000 1999
Benefit obligation at beginning of year $2,959 $3,414
Service cost 7 13
Interest cost 190 197
Benefit payments (239) (225)
Actuarial loss (gain) 673 (440)
Benefit obligation at end of year $3,590 $2,959
51
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 20--Retirement Plans (Continued)
Postretirement Benefits other than Pensions for Acquired Subsidiary
(Continued)
The discount rates used in determining the actuarial present value of the
accumulated postretirement benefit obligation were 6.75% for 2000 and 1999.
The health care cost trend rates used for 2000 were projected at an initial
rate of 6.75% decreasing over time to an annual rate of 4.25% for
grandfathered participants and an initial rate of 6.00% decreasing over time
to an annual rate of 4.25% for non-grandfathered participants. The health
care cost trend rates used for 1999 were projected at an initial rate of
5.75% decreasing over time to an annual rate of 4.50% for grandfathered
participants and an initial rate of 5.00% decreasing over time to an annual
rate of 4.50% for non-grandfathered participants. This grandfathering is
related to cost sharing requirements for different groups of participants
for these benefits.
The health care cost trend rate assumption can have a significant impact on
the amounts reported for this plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Effect on total of service and interest
cost components $ 15 $ (13)
Effect on postretirement benefit
obligation $219 $(196)
Southwest amended this plan to discontinue participation for active
employees December 31, 1998 and to limit participation to employees retiring
before January 1, 2002. As the result of this plan curtailment, an
additional expense of $1,129 was recorded for 1998.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("FAS No. 132") which is
effective for years beginning after December 15, 1997. FAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans
but does not change the measurement or recognition of those plans.
The adoption of FAS No. 132 did not have a material impact on the
Corporation's financial condition or results of operations.
NOTE 21--Unearned ESOP Shares
The Corporation had borrowed amounts which were concurrently loaned to the
First Commonwealth Financial Corporation Employee Stock Ownership Plan Trust
("ESOP") on the same terms. The combined balances of the ESOP related loans
were $5,287 at December 31, 2000 and $6,193 at December 31, 1999.
The loans have been recorded as long-term debt on the Corporation's
Consolidated Balance Sheets. A like amount of unearned ESOP shares was
recorded as a reduction of common shareholders' equity. Unearned ESOP
shares, included as a component of shareholders' equity, represents the
Corporation's prepayment of future compensation expense. The shares
acquired by the ESOP are held in a suspense account and will be released to
the ESOP for allocation to the plan participants as the loan is reduced.
Repayment of the loans are scheduled to occur over a five year period from
contributions to the ESOP by the Corporation and dividends on unallocated
ESOP shares.
52
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands, except per share data)
NOTE 21--Unearned ESOP Shares (Continued)
The following is an analysis of ESOP shares held in suspense:
(See NOTE 1 for the definition of "old" and "new shares").
Old New
Total Shares Shares
Shares in suspense December 31, 1998 730,614 178,878 551,736
Shares allocated during 1999 (131,927) (32,300) (99,627)
Shares in suspense December 31, 1999 598,687 146,578 452,109
Shares allocated during 2000 (105,166) (25,748) (79,418)
Shares in suspense December 31, 2000 493,521 120,830 372,691
The fair market value of the new shares remaining in suspense was
approximately $3,727 and $5,425 at December 31, 2000 and 1999 respectively.
Interest on ESOP loans was $446 in 2000, $460 in 1999 and $255 in 1998.
During 2000, 1999 and 1998, dividends on unallocated shares in the amount of
$354, $369 and $196 respectively were used for debt service while all
dividends on allocated shares were allocated to the participants.
NOTE 22--Stock Option Plan
At December 31, 2000, the Corporation had a stock-based compensation plan,
which is described below. All of the exercise prices and related number of
shares have been restated to reflect the previously described stock split.
The plan permits the executive compensation committee to grant options for
up to 4.5 million shares of the Corporation's common stock through
October 15, 2005. Although the vesting requirements and terms of future
options granted are at the discretion of the executive compensation
committee, all options granted during 1997 became vested at December 31,
1997 and expire ten years from the grant date, all options granted during
1998 became vested at December 31, 1998 and expire ten years from the grant
date, all options granted during 1999 became vested on December 31, 1999 and
expire ten years from the grant date and all options granted during 2000
became vested on or before December 31, 2000 and expire ten years from the
grant date. The Corporation has elected, as permitted by FAS No. 123, to
apply APB Opinion 25 and related Interpretations in accounting for its plan.
Accordingly, no compensation cost has been recognized for its stock options
outstanding. Had compensation cost for the Corporation's stock option plan
been determined based upon the fair value at the grant dates for awards
under the plan consistent with the method of FASB Statement 123, the
Corporation's net income and earnings per share would have been reduced to
the pro forma amounts shown below:
2000 1999 1998
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
Net Income $47,246 $47,130 $53,030 $52,197 $33,374 $33,374
Basic earnings per share $ 0.82 $ 0.82 $ 0.88 $ 0.87 $ 0.54 $ 0.54
Diluted earnings per share $ 0.82 $ 0.82 $ 0.88 $ 0.86 $ 0.54 $ 0.54
53
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands, except per share data)
NOTE 22--Stock Option Plan (Continued)
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes options pricing model with the following weighted
average assumptions used:
2000 1999 1998
Dividend yield 5.65% per annum 4.29% per annum 3.75% per annum
Expected volatility 61.7% 31.4% 90.0%
Risk-free interest rate 5.3% 6.3% 5.1%
Expected option life 9.1 years 9.1 years 9.1 years
A summary of the status of the Corporation's outstanding stock options as of
December 31, 2000, 1999 and 1998 and changes for the years ending on those
dates is presented below:
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 1,680,178 $11.07 1,306,346 $10.53 1,052,548 $ 8.75
Granted 705,429 $11.06 610,416 $11.56 404,016 $14.69
Exercised (41,240) $ 7.93 (188,570) $ 8.66 (131,138) $ 8.72
Forfeited (133,716) $11.63 (48,014) $12.08 (19,080) $ 9.81
Outstanding at end of year 2,210,651 $11.12 1,680,178 $11.07 1,306,346 $10.53
Exercisable at end of year 2,210,651 $11.12 1,680,178 $11.07 956,058 $11.06
The following table summarizes information about the stock options
outstanding at December 31, 2000.
Options Outstanding Options Exercisable
Weighted-Average
Range of Number Outstanding Remaining Contract Weighted-Average Number Exercisable Weighted-Average
Exercise Prices at 12/31/00 Life Exercise Price at 12/31/00 Exercise Price
$2.79 9,680 1.3 $ 2.79 9,680 $ 2.79
$4.035 8,800 2.2 $ 4.04 8,800 $ 4.04
$9.1875-9.25 649,364 6.0 $ 9.22 649,364 $ 9.22
$11.0625 658,709 9.1 $11.06 658,709 $11.06
$11.1825-11.5625 553,902 8.1 $11.56 553,902 $11.56
$14.6875 330,196 7.2 $14.69 330,196 $14.69
Total 2,210,651 $11.12 2,210,651 $11.12
54
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 23--Commitments and Contingent Liabilities
There are 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 any material adverse effect on the
consolidated operations or financial position of the Corporation and its
subsidiaries.
NOTE 24--Related Party Transactions
Some of the Corporation's or its subsidiaries' directors, executive
officers, principal shareholders and their related interests, had
transactions with the subsidiary banks in the ordinary course of business.
All loans and commitments to loans in such transactions were made on
substantially the same terms, including collateral and interest rates, as
those prevailing at the time for comparable transactions. In the opinion of
management, these transactions do not involve more than the normal risk of
collectibility nor do they present other unfavorable features. It is
anticipated that further such extensions of credit will be made in the
future.
The following is an analysis of loans to those parties whose aggregate loan
balances exceeded $60 during 2000.
Balances December 31, 1999 $8,404
Advances 8,394
Repayments (7,114)
Other (268)
Balances December 31, 2000 $ 9,416
"Other" primarily reflects the change in those classified as a "related
party" as a result of mergers, resignations and retirements.
NOTE 25--Regulatory Restrictions and Capital Adequacy
The amount of funds available to the parent from its subsidiary banks is
limited by restrictions imposed on all financial institutions by banking
regulators. At December 31, 2000, dividends from subsidiary banks were
restricted not to exceed $91,344. These restrictions have not had, and are
not expected to have, a significant impact on the Corporation's ability to
meet its cash obligations.
The Corporation is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific
capital guidelines that involve quantitative measures of the Corporation's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of total and
Tier I capital (common and certain other "core" equity capital) to risk
weighted assets, and of Tier I capital to average assets. As of
December 31, 2000, the Corporation and its banking subsidiaries meet all
capital adequacy requirements to which they are subject.
55
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 25--Regulatory Restrictions and Capital Adequacy (Continued)
As of December 31, 2000, the most recent notifications from the Federal
Reserve Board and Federal Deposit Insurance Corporation categorized First
Commonwealth Bank and Southwest Bank as well capitalized under the
regulatory framework for prompt corrective action. To be considered as well
capitalized, the banks must maintain minimum total risk-based capital, Tier
I risk-based capital and Tier I leverage ratios as set forth in the table
below. There are no conditions or events since that notification that
management believes have changed the institutions' category.
To Be Well Capitalized
Under Prompt Corrective
Actual Regulatory Minimum Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2000
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $401,516 14.5% $221,294 8.0% Not Applicable Not Applicable
First Commonwealth Bank $283,624 12.9% $175,783 8.0% $219,728 10.0%
Southwest Bank $ 91,416 16.9% $ 43,261 8.0% $ 54,077 10.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $367,915 13.3% $110,647 4.0% Not Applicable Not Applicable
First Commonwealth Bank $257,789 11.7% $ 87,891 4.0% $131,837 6.0%
Southwest Bank $ 84,656 15.7% $ 21,631 4.0% $ 32,446 6.0%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $367,915 8.5% $129,749 3.0% Not Applicable Not Applicable
First Commonwealth Bank $257,789 7.8% $ 98,994 3.0% $164,990 5.0%
Southwest Bank $ 84,656 8.5% $ 29,758 3.0% $ 49,596 5.0%
As of December 31, 1999
Total Capital to Risk Weighted Assets
First Commonwealth Financial
Corporation $384,368 14.4% $213,009 8.0% Not Applicable Not Applicable
First Commonwealth Bank $287,968 13.7% $168,687 8.0% $210,859 10.0%
Southwest Bank $ 92,933 17.6% $ 42,308 8.0% $ 52,886 10.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial
Corporation $351,085 13.2% $106,504 4.0% Not Applicable Not Applicable
First Commonwealth Bank $261,744 12.4% $ 84,344 4.0% $126,515 6.0%
Southwest Bank $ 86,322 16.3% $ 21,154 4.0% $ 31,731 6.0%
Tier I Capital to Average Assets
First Commonwealth Financial
Corporation $351,085 7.4% $141,488 3.0% Not Applicable Not Applicable
First Commonwealth Bank $261,744 7.2% $108,724 3.0% $181,207 5.0%
Southwest Bank $ 86,322 8.2% $ 31,790 3.0% $ 52,983 5.0%
56
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 26--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only)
Balance Sheets
December 31,
2000 1999
Assets
Cash $ 6,169 $ 5,122
Securities available for sale 81 103
Loans to affiliated parties 479 480
Investment in subsidiaries 355,680 330,400
Investment in jointly-owned company 3,980 3,477
Premises and equipment 6,813 7,064
Dividends receivable from subsidiaries 3,757 2,786
Receivable from subsidiaries 7,325 3,574
Other assets 2,174 2,639
Total assets $386,458 $355,645
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 2,493 $ 2,544
Dividends payable 8,439 8,141
Loans payable 5,287 22,193
Subordinated debentures payable 36,083 36,083
Shareholders' equity 334,156 286,684
Total liabilities and
shareholders' equity $386,458 $355,645
Statements of Income
Years Ended December 31,
2000 1999 1998
Interest and dividends $ 41 $ 149 $ 251
Dividends from subsidiaries 61,664 36,506 28,559
Interest expense (5,335) (1,758) (255)
Net securities gains -0- 57 203
Other revenue 31 15 1,008
Operating expenses (7,451) (11,476) (8,111)
Income before taxes and equity
in undistributed earnings of
subsidiaries 48,950 23,493 21,655
Applicable income tax benefits 4,340 4,421 2,348
Income before equity in
undistributed earnings of
subsidiaries 53,290 27,914 24,003
Equity in undistributed
earnings of subsidiaries (6,044) 25,116 9,371
Net income $47,246 $53,030 $33,374
57
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 26--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only) (Continued)
Statements of Cash Flows
Years Ended December 31,
2000 1999 1998
Operating Activities
Net income $ 47,246 $ 53,030 $ 33,374
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 1,263 1,655 1,470
Net (gains) losses on sale of
assets -0- 144 (203)
Decrease (increase) in prepaid
income taxes 212 (242) 13
Undistributed equity in
subsidiaries 6,044 (25,116) (9,371)
Other - net 97 (803) (1,627)
Net cash provided by
operating activities 54,862 28,668 23,656
Investing Activities
Transactions with securities
available for sale:
Purchases of investment
securities -0- -0- (10,091)
Sales of investment
securities -0- 102 13,709
Net change in loans to
affiliated parties 1 17 (28)
Purchases of premises and
equipment (337) (1,491) (2,051)
Additional net investment
in subsidiary (3,861) (2,406) (1,770)
Sale of subsidiary -0- 1,709 -0-
Net cash used by
investing activities (4,197) (2,069) (231)
Financing Activities
Issuance of subordinated
debentures -0- 36,083 -0-
Issuance of other long-term debt 4,000 16,000 -0-
Repayment of other long-term debt (20,000) -0- -0-
Discount on dividend reinvestment
plan purchases (593) (358) (1,016)
Treasury stock acquired (873) (51,331) (2,123)
Treasury stock reissued 326 1,453 2,217
Cash dividends paid (32,553) (27,825) (25,746)
Stock option tax benefit 75 -0- -0-
Net cash used by
financing activities (49,618) (25,978) (26,668)
Net increase (decrease) in cash 1,047 621 (3,243)
Cash at beginning of year 5,122 4,501 7,744
Cash at end of year $ 6,169 $ 5,122 $ 4,501
58
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 26--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only) (Continued)
Supplemental disclosures
Proceeds from the issuance of subordinated debentures and other long-term
debt during 1999 were used primarily to fund the purchase of 3,819,420
shares of the Corporation's common stock pursuant to a "modified Dutch
Auction" tender offer.
Noncash investing and financing activities:
2000 1999 1998
ESOP borrowings $-0- $ -0- $6,000
ESOP loan reductions $906 $1,814 $ 429
The Corporation borrowed $6,000 in 1998 and concurrently loaned this amount
to the ESOP on identical terms. The loan was recorded as long-term debt and
the offset was recorded as a reduction of common shareholders' equity. Loan
payments in the amount of $906 in 2000, $1,814 in 1999 and $429 in 1998 were
made by the ESOP thereby reducing the outstanding amount related to unearned
ESOP shares to $5,287 at December 31, 2000.
NOTE 27--Fair Values of Financial Instruments
Below are various estimated fair values at December 31, 2000 and 1999, as
required by Statement of Financial Accounting Standards No. 107 ("FAS No.
107"). Such information, which pertains to the Corporation's financial
instruments, is based on the requirements set forth in FAS No. 107 and does
not purport to represent the aggregate net fair value of the Corporation.
It is the Corporation's general practice and intent to hold its financial
instruments to maturity, except for certain securities designated as
securities available for sale, and not to engage in trading activities. Many
of the financial instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Therefore, the Corporation had to use significant estimations
and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and the methodologies in absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
The following methods and assumptions were used by the Corporation in
estimating financial instrument fair values:
Cash and short-term instruments: The balance sheet carrying amounts for
cash and short-term instruments approximate the estimated fair values of
such assets.
Securities: Fair values for securities held to maturity and securities
available for sale are based on quoted market prices, if available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments. The carrying value of
nonmarketable equity securities, such as Federal Home Loan Bank stock, is
considered a reasonable estimate of fair value.
59
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999 and 1998
(Dollar Amounts in Thousands)
NOTE 27--Fair Values of Financial Instruments (Continued)
Loans receivable: Fair values of variable rate loans subject to frequent
repricing and which entail no significant credit risk are based on the
carrying values. The estimated fair values of other loans are estimated by
discounting the future cash flows using interest rates currently offered for
loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest is considered a reasonable estimate of
fair value.
Off-balance-sheet instruments: Many of the Corporation's off-balance-sheet
instruments, primarily loan commitments and standby letters of credit, are
expected to expire without being drawn upon, therefore the commitment
amounts do not necessarily represent future cash requirements. Management
has determined that due to the uncertainties of cash flows and difficulty in
predicting the timing of such cash flows, fair values were not estimated for
these instruments.
Deposit liabilities: For deposits which are payable on demand at the
reporting date, representing all deposits other than time deposits,
management estimates that the carrying value of such deposits is a
reasonable estimate of fair value. The carrying amounts of variable rate
time deposit accounts and certificates of deposit approximate their fair
values at the report date. Fair values of fixed rate time deposits are
estimated by discounting the future cash flows using interest rates
currently being offered and a schedule of aggregated expected maturities.
The carrying amount of accrued interest approximates its fair value.
Short-term borrowings: The carrying amounts of short-term borrowings such
as Federal funds purchased, securities sold under agreements to repurchase,
borrowings from the Federal Home Loan Bank and treasury, tax and loan notes
approximate their fair values.
Long-term debt: The carrying amounts of variable rate debt approximate
their fair values at the report date. Fair values of fixed rate debt are
estimated by discounting the future cash flows using the Corporation's
estimated incremental borrowing rate for similar types of borrowing
arrangements.
The following table presents carrying amounts and estimated fair values of
the Corporation's financial instruments at December 31, 2000 and 1999.
2000 1999
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and due from banks $ 90,723 $ 90,723 $ 92,673 $ 92,673
Interest-bearing deposits with
banks $ 427 $ 427 $ 1,218 $ 1,218
Federal funds sold $ 11,125 $ 11,125 $ 8,700 $ 8,700
Securities available for sale $1,238,230 $1,238,230 $1,144,042 $1,144,042
Investments held to maturity $ 398,107 $ 398,661 $ 448,347 $ 435,000
Loans, net of allowance $2,457,226 $2,530,430 $2,466,520 $2,547,096
Financial liabilities
Deposits $3,064,146 $3,047,713 $2,948,829 $2,913,140
Short-term borrowings $ 272,171 $ 272,171 $ 424,827 $ 424,827
Long-term debt $ 656,855 $ 630,511 $ 638,355 $ 581,254
60
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of First Commonwealth Financial
Corporation:
We have audited the accompanying consolidated balance sheets of First
Commonwealth Financial Corporation and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The 1998 consolidated
financial statements give retroactive effect to the merger of First
Commonwealth Financial Corporation and Southwest National Corporation on
December 31, 1998, which has been accounted for as a pooling of interests as
described in Note 6 to the consolidated financial statements. We did not
audit the statements of income, shareholders' equity, and cash flows of
Southwest National Corporation for the year ended December 31, 1998, which
statements reflect net interest income of 25% of the related consolidated
total for the year then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for Southwest National Corporation for
1998, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits and the report of the other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements present fairly, in all material
respects, the financial position of First Commonwealth Financial Corporation
and subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/S/Deloitte & Touche, LLP
Pittsburgh, Pennsylvania
January 25, 2001
61
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Southwest National Corporation:
We have audited the consolidated statements of income, changes in
shareholders' equity and cash flows of Southwest National Corporation and
subsidiary for the year ended December 31, 1998 (not presented separately
herein). These consolidated financial statements are the responsibility of
Southwest National Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, Southwest National Corporation and
subsidiary's results of operations and their cash flows for the year ended
December 31, 1998, in conformity with accounting principles generally
accepted in the United States of America.
/S/KPMG LLP
Pittsburgh, Pennsylvania
February 17, 1999
62
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Quarterly Summary of Financial Data - Unaudited
(Dollar Amounts in Thousands, except per share data)
The unaudited quarterly results of operations for the years ended
December 31, 2000 and 1999 are as follows (amounts in prior periods have
been reclassified to conform to the presentation format used at December 31,
2000. The reclassifications had no effect on net income or earnings per
share.):
2000
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income................................................. $76,943 $77,317 $78,471 $79,151
Interest expense................................................ 41,504 42,443 44,734 45,858
Net interest income........................................ 35,439 34,874 33,737 33,293
Provision for credit losses..................................... 2,505 2,415 2,505 2,605
Net interest income after provision for credit losses........... 32,934 32,459 31,232 30,688
Securities gains................................................ -0- 1,686 -0- 59
Other operating income.......................................... 7,358 8,254 8,242 8,084
Other operating expenses........................................ 25,150 25,048 24,709 24,554
Income before income taxes................................. 15,142 17,351 14,765 14,277
Applicable income taxes......................................... 3,691 4,261 3,209 3,128
Net income................................................. $11,451 $13,090 $11,556 $11,149
Basic earnings per share........................................ $ 0.20 $ 0.23 $ 0.20 $ 0.19
Diluted earnings per share...................................... $ 0.20 $ 0.23 $ 0.20 $ 0.19
Average shares outstanding......................................57,505,462 57,515,772 57,565,411 57,648,021
Average shares outstanding assuming dilution....................57,606,948 57,566,079 57,601,162 57,699,795
1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income................................................. $71,463 $73,266 $74,939 $76,421
Interest expense................................................ 36,740 36,989 38,154 40,770
Net interest income........................................ 34,723 36,277 36,785 35,651
Provision for credit losses..................................... 2,213 2,337 2,363 2,537
Net interest income after provision for credit losses........... 32,510 33,940 34,422 33,114
Securities gains................................................ 563 -0- 2 -0-
Other operating income.......................................... 8,140 10,834 7,476 7,210
Other operating expenses........................................ 24,674 24,010 23,344 23,541
Income before income taxes................................. 16,539 20,764 18,556 16,783
Applicable income taxes......................................... 4,534 5,938 4,804 4,336
Net income................................................. $12,005 $14,826 $13,752 $12,447
Basic earnings per share (a).................................... $ 0.20 $ 0.24 $ 0.22 $ 0.22
Diluted earnings per share (a).................................. $ 0.20 $ 0.24 $ 0.22 $ 0.21
Average shares outstanding (a)..................................61,152,708 61,203,388 61,290,374 57,713,182
Average shares outstanding assuming dilution (a)................61,432,570 61,376,932 61,491,946 58,003,391
(a) Where applicable, per share amounts have been restated to reflect the two-for-one stock split effected in
the form of a 100% stock dividend declared on October 19, 1999.
63
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Information appearing in the definitive Proxy Statement related to
the annual meeting of security holders to be held April 23, 2001
is incorporated herein by reference in response to the listing of
directors.
The table below lists the current executive officers of the Corporation.
Name Age Positions Held During the Past Five Years
E. James Trimarchi 78 Chairman of the Board of the Corporation,
Chairman of the Board of CSC, FCB and
FCIA; Director of CTCLIC, FCPRI and FCTC;
Former President and Chief Executive
Officer of the Corporation
Joseph E. O'Dell 55 President, Chief Executive Officer and
director of the Corporation; Director of
FCB, FCTC, Southwest Bank and FCIA; Vice
Chairman of the Board of CSC and FCPRI;
Former Senior Executive Vice President
and Chief Operating Officer of the
Corporation; former President and Chief
Executive Officer of FCB
David S. Dahlmann 51 Vice Chairman of the Corporation;
President and Chief Executive Officer of
Southwest Bank; Former President and
Chief Executive Officer of Southwest
National; Director of Southwest Bank
and FCPRI
Johnston A. Glass 51 Vice Chairman, Growth of the Corporation;
President and Chief Executive Officer of
FCB; Director of FCB, FCTC, FCIA and
FCPRI
Gerard M. Thomchick 45 Senior Executive Vice President and Chief
Operating Officer of the Corporation;
President, Chief Executive Officer and
Director of CTCLIC; President and
Director of FCPRI; Director of FCB,
FCTC and FCIA
John J. Dolan 44 Executive Vice President and Chief
Financial Officer of the Corporation;
Chief Financial Officer of FCB;
Comptroller and Chief Financial Officer
of CTCLIC; Treasurer and Assistant
Secretary of FCTC; Chief Financial
Officer of FCPRI; Treasurer of
FCIA; Administrative Trustee of First
Commonwealth Capital Trust I
David R. Tomb, Jr. 69 Senior Vice President, Secretary,
Treasurer and Director of the
Corporation; Secretary and Cashier of
FCB; Secretary of FCIA, FCTC, FCPRI and
CSC; Director of FCB, CSC, FCTC, FCPRI,
FCIA and CTCLIC
64
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT (Continued)
Thaddeus J. Clements 44 Senior Vice President, Human Resources
of the Corporation
William R. Jarrett 66 Senior Vice President, Risk Management of
the Corporation
Sue McMurdy 44 Senior Vice President and Chief
Information Officer of the Corporation;
President, Chief Executive Officer and
Director of CSC; Director of FCPRI;
former Senior Vice President,
Technical Services of Commonwealth
Systems Corporation
R. John Previte 51 Senior Vice President, Investments of the
Corporation; Investment Officer of FCB
and Southwest; Senior Vice President of
FCPRI
Each of the officers identified above has held the position indicated above
or other executive positions with the same entity (or a subsidiary thereof)
for at least the past five years except where noted.
Executive officers of the Corporation serve at the pleasure of the Board of
Directors of the Corporation and for a term of office extending through the
election and qualification of their successors.
ITEM 11 - MANAGEMENT RENUMERATION
Information appearing in the definitive Proxy Statement related to
the annual meeting of security holders to be held April 23, 2001
is incorporated herein by reference in response to this item.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information appearing in the definitive Proxy Statement related to
the annual meeting of security holders to be held April 23, 2001
is incorporated herein by reference in response to this item.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing in the definitive Proxy Statement related to
the annual meeting of security holders to be held April 23, 2001
is incorporated herein by reference in response to this item.
65
FIRST COMMONWEALTH FINANCIAL CORPORATION
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K
(A) Documents Filed as Part of this Report
1) Financial Statements
All financial statements of the registrant as set forth under
Item 8 of this Report on Form 10-K.
2) Financial Statement Schedules
Schedule
Number Description Page
I Indebtedness to Related Parties N/A
II Guarantees of Securities of Other Issuers N/A
Page Number or
Exhibit Incorporated by
3) Number Description Reference to
3.1 Articles of Incorporation Exhibit 3(i) to the
Corporation's quarterly
report on Form 10Q for the
quarter ended March 31,
1994
3.2 By-Laws of Registrant Exhibit 3.2 to Form S-4
filed October 15, 1993
10.1 Change in Control Exhibit 10.4 to Form 10-K
Agreement dated filed March 21, 1996
October 27, 1995
Joseph E. O'Dell
10.2 Change in Control Exhibit 10.5 to Form 10-K
Agreement dated filed March 21, 1996
October 27, 1995
Gerard M. Thomchick
10.3 Change in Control Exhibit 10.6 to Form 10-K
Agreement dated filed March 21, 1996
October 30, 1995, entered
into between First Commonwealth
Financial Corporation and
John J. Dolan, together with a
schedule listing substantially
identical Change in Control
Agreements with the following
individuals: William R. Jarrett,
R. John Previte, David L. Dawson,
Johnston A. Glass, Domenic P.
Rocco and Robert C. Wagner.
10.4 Employment Contract Exhibit 10.4 to Form S-4
David S. Dahlmann filed November 2, 1998
10.5 Supplemental Executive Exhibit 10.7 to Form 10-K
Retirement Plan filed March 31, 1999
10.6 Deferred Compensation Exhibit 10.8 to Form 10-K
Plan filed March 31, 1999
10.7 Cash Incentive Bonus Exhibit 10.9 to Form 10-K
Program filed March 31, 1999
66
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K
PART IV (Continued)
10.8 Change in Control Page 69
Agreement dated
November 22, 2000,
entered into between
First Commonwealth
Financial Corporation
and Sue McMurdy
21.1 Subsidiaries of the Page 75
Registrant
23.1 Consent of Deloitte & Page 76
Touche LLP Certified
Public Accountants
23.2 Consent of KPMG LLP Page 77
Certified Public
Accountants
24.1 Power of Attorney Page 78
(B) Report on Form 8-k
None
67
FIRST COMMONWEALTH FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Indiana,
Pennsylvania, on the 29th day of March 2001.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
/S/JOSEPH E. O'DELL
Joseph E. O'Dell, President and Chief Executive Officer
68