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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, 1993 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: (412) 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, $5 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 17, 1994
Common Stock, $5 Par Value 18,642,024 Shares
The aggregate market value of the voting common stock, par value $5 per
share, held by non-affiliates of the registrant (Based upon the closing sale
price on March 17, 1994), was approximately $323,905,167.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement related to the annual meeting of
security holders to be held April 23, 1994 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...................................... 3
Supervision and regulation....................... 4
ITEM 2. Properties....................................... 6
ITEM 3. Legal Proceedings................................ 6
ITEM 4. Submission of Matters to a Vote of Security
Holders......................................... 6
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Security Holder Matters......................... 7
ITEM 6. Selected Financial Data.......................... 8
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.............. 9
ITEM 8. Financial Statements and Supplementary Data...... 21
ITEM 9. Disagreements on Accounting and Financial
Disclosures..................................... 46
PART III
ITEM 10. Directors and Executive Officers of the
Registrant..................................... 46
ITEM 11. Management Renumeration and Transactions........ 47
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management................................. 47
ITEM 13. Certain Relationships and Related Transactions.. 47
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................ 47
Signatures..................................... 49
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. After its incorporation it became affiliated as a
result of statutory mergers with the following: On April 29, 1983 it
affiliated with National Bank of the Commonwealth ("NBOC"), a national bank
in Indiana, Indiana County; on March 19, 1984 with Deposit Bank ("Deposit"),
a Pennsylvania-chartered bank and trust company in DuBois, Clearfield
County; on August 16, 1985 with Dale, a national bank in Dale (Johnstown),
Cambria County; and on December 14, 1985 with the First National Bank of
Leechburg ("Leechburg"), a national bank in Leechburg, Armstrong County;
December 31, 1986 with CNB CORP, Inc. ("CNB"), a one-bank holding company
and its wholly-owned subsidiary, Citizens National Bank in Windber
("Citizens"). CNB was then combined with the corporation. Immediately
thereafter, and on the same day, Citizens was combined with Dale and the
resulting entity was named Cenwest National Bank ("Cenwest"). On May 31,
1990 the Corporation affiliated with Peoples Bank and Trust Company ("PBT"),
a Pennsylvania-chartered bank and trust company in Jennerstown, Somerset
County. On April 30, 1992 the Corporation affiliated with Central Bank
("Central"), a Pennsylvania-chartered bank in Hollidaysburg, Blair County.
On December 31, 1993 the Corporation affiliated with Peoples Bank of Western
Pennsylvania ("BPWPA"), a Pennsylvania-chartered commercial bank in New
Castle, Lawrence County. NBOC, Deposit, Cenwest, Leechburg, Peoples,
Central and PBWPA (the "Subsidiary Banks") are now wholly owned subsidiaries
of the Corporation with their principal; places of business in central
western Pennsylvania. 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 of NBOC. 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. The
Corporation and its subsidiaries employed approximately 906 persons (full-
time equivalents) at December 31, 1993.
Through the Subsidiary Banks, the Corporation traces its banking origins to
1880. The Subsidiary Banks conduct their business through 69 community
banking offices in 51 communities in the counties of Armstrong (3 offices),
Beaver (1), Bedford (3), Blair (8), Cambria (11), Centre (2), Clearfield
(6), Elk (3), Huntingdon (1), Indiana (9), Jefferson (4), Lawrence (6),
Somerset (7) and Westmoreland (5).
The Subsidiary Banks engage in a general banking business and offer a full
range of financial services. They offer such general retail banking
services as demand, savings and time deposits; mortgage, consumer
installment and commercial loans; and credit card loans through MasterCard
and VISA.
The Subsidiary Banks operate a network of 49 automated teller machines
("ATMs") which permit their customers to conduct routine banking
transactions 24 hours a day. Of the ATMS, 29 are located on the premises of
their main or branch offices and 20 are in remote locations. All the ATMs
are part of the MAC network which consist of nearly 13,000 ATMs owned by
numerous banks, savings and loan associations and credit unions located
throughout 16 states, of which 14 are east of Mississippi River. The
Subsidiary Banks' MAC customers may use the HONOR Network, which has 8,900
ATM's located primarily in the southeast quadrant of the United States. The
ATM's operated by the Subsidiary Banks are also part of the Cirrus network
which is national in scope. Cirrus comprised of more than 93,700 ATMs
located in the United States, Canada and 20 other countries and territories,
2
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
which services over 232 million card holders. Such networks allow the
Subsidiary Bank's customers to withdraw cash and in certain cases conduct
other banking transactions from ATMs of all participating financial
institutions.
FCTC has six 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.
On June 1, 1989 Commonwealth Trust Credit Life Insurance Company began
operations. The Corporation owns 50% of the voting common stock of the new
company. The Commonwealth Trust is authorized to engage in credit life
and/or disability reinsurance activities.
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 merges 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
Each of the Subsidiary Banks and FCTC faces intense competition, both from
within and without its service area, in all aspects of its 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 areas. With respect to
loans to larger businesses the Subsidiary Banks also complete with much
larger banks located outside of their service areas. They 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 they have encountered significant competition for deposits
from money market funds located throughout the United States. Such funds
pay dividends to their shareholders (which are the equivalent 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. 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 consumer throughout their
service areas. 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.
CSC is the data processing subsidiary of the Corporation. It provides on-
line general ledger accounting services and bookkeeping services for deposit
and loan accounts to the Corporation, the Subsidiary Banks and two other
bank customer located in Pennsylvania. 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.
3
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, 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 merger or consolidate with another bank
holding company. The Federal Reserve Board may not approve acquisitions by
FCFC 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 Federal Deposit Insurance Corporation Improvement Act of 1991 ("the
Act") was signed into law on December 19, 1991 and contains a number of
provisions that directly and indirectly affect banks and bank holding
companies such as the Corporation and the Subsidiary Banks. For example the
Act increased from $5 billion to $30 billion the amount the FDIC can borrow
from the Treasury Department to cover bank failures, the loans plus interest
to be repaid through increased deposit insurance premiums on banks over the
next 15 years; the FDIC was instructed to change the way it assesses banks
for deposit insurance by moving away from an across-the-board rate to risk-
based rates, with banks engaged in risky practices paying higher deposit
insurance premiums than those engaged in conservative operations; the bank
regulatory agencies are required to establish within one year a system
whereby five capital levels would be set for all banks and savings
institutions, ranging from well capitalized to critically undercapitalized,
with increased regulatory oversight and restrictions automatically occurring
as the capital level falls from one level to the next lower level; the scope
of deposit insurance is narrowed with the elimination of the "too big to
fail" doctrine, under which the FDIC has protected deposits even in excess
of $100,000, but all deposits could still be covered if the FDIC, the
Federal Reserve Board and the Treasury, in consultation with the President,
determined that a serious adverse economic impact would result from a denial
4
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
of insurance coverage, in which case a special premium would be assessed to
pay for the extended coverage; the regulators must adopt, effective December
1, 1993, a new set of noncapital measures of banks safety, such as
underwriting standards and minimum earning levels; the Federal Reserve
Board's ability to keep banks alive with extended loans from its discount
window is restricted starting two years after enactment of the law; and the
Act also requires annual, on-site federal bank examinations of most
institutions, places limits on real estate lending by banks, and tightens
auditing requirements. While FCFC and the Subsidiary Banks, in common with
all banks, will bear the costs of increased regulatory supervision resulting
from the Act, FCFC, because of its capital position, will benefit from a
movement to risk-based deposit insurance premiums and a fewer restrictions
and oversight for well capitalized banks.
Subsidiary Banks and FCTC
Of the Subsidiary Banks, NBOC, Cenwest, and Leechburg are subject to the
supervision of and are regularly examined by the Comptroller of the
Currency. In addition, because they are members of the Federal Reserve
System, they are subject to the supervision of and examination by that
System. Deposit, PBT and PBWPA are Pennsylvania-chartered banks and not
members of the Federal Reserve System, 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. Central is a member of the Federal Reserve
System. Central is subject to supervision of and are regularly examined by
the system. In addition, since they are a Pennsylvania-chartered bank, they
are subject to the supervision of the Pennsylvania Department of Banking.
All the Subsidiary Banks are members of the FDIC and, as such, are subject
to examination by the FDIC. FCTC is subject to the supervision of and is to
be regularly examined by the Pennsylvania Department of Banking.
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
disclosure, permissible types of loans and investments, trust operations,
mergers and acquisitions, issuance of securities, payment of dividends,
establishment of branches and other aspects of operations. Under the
Pennsylvania Banking Code, a state or national bank located in Pennsylvania
may establish branches in the county in which its principal office is
located, in the contiguous and bicontiguous counties.
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 it. 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, 1993 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, Michigan, Massachussets, New Hampshire, New
Jersey, New York, Ohio, Rhode Island, Tennessee, Vermont and West Virginia.
It is difficult to determine the precise effects that reciprocal regional
interstate banking will have on the Corporation, but the law has increased,
and as reciprocity becomes effective will increase further, the number of
potential buyers for Pennsylvania banks and bank holding companies. The law
also will permit Pennsylvania bank holding companies that desire to expand
5
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
outside Pennsylvania to acquire banks and bank holding companies located in
jurisdictions with which Pennsylvania has reciprocity.
Effects of Governmental Policies
The business and earnings of the Corporation is effected not only be general
economic conditions, but also by the monetary and fiscal policies of the
United State 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 State government securities, changes in the
discount rate on borrowings by member banks from the Federal Reserve System,
and changes in reserve requirements against member bank 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 effect 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 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 and CSC 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 which contains a renewal
option. 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. The building is now in excellent condition and provides ample
space for the Corporation, NBOC and CSC's operations. The Subsidiary Banks
have 69 banking facilities of which 23 are leased and 46 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
The information appearing in NOTE 17 of the Notes to the Consolidated
Financial Statements included in Item 8 of this filing is incorporated by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
6
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") has been listed
on the New York Stock Exchange (NYSE) since June 10, 1992 under the symbol
"FCF". 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.
Prices per share and dividends per share have been adjusted to reflect the
two-for-one stock split effected in the form of a 100% stock dividend
declared on January 18, 1994.
During the second quarter of 1992 the Board of Directors of the Corporation
began the practice of declaring dividends at the end of a quarter instead of
at the beginning of a quarter. The payable dates remained in the period
following the end of the quarter. This resulted in dividends being declared
twice in the second quarter of 1992, but only one dividend was paid. The
approximate number of holders of record of the Corporation's common stock is
5,500.
Cash
Dividends
Period High Sale Low Sale Per Share
1993
First Quarter $14.625 $12.375 $.125
Second Quarter $14.875 $13.250 $.125
Third Quarter $16.000 $13.313 $.125
Fourth Quarter $17.625 $14.875 $.135
Cash
Dividends
Period High Sale Low Sale Per Share
1992
First Quarter $10.500 $10.000 $.105
Second Quarter $12.250 $10.250 $.210
Third Quarter $14.875 $12.000 $.105
Fourth Quarter $15.688 $13.688 $.125
The prices contained in the table for the common stock for the periods prior
to June 10, 1992 are limited to transactions known to management, including
recent inquiries made of local brokers, and are not necessarily indicative
of the actual range of prices at which such stock was traded during the
periods indicated.
7
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 pooling of interests.
Years Ended December 31,
1993 1992 1991 1990 1989
Interest Income
Interest and fees on loans ......... $86,121 $84,612 $81,357 $83,993 $79,422
Interest and dividends on
investment securities............. 44,906 44,311 38,844 32,865 30,322
Interest on money market
investments....................... 691 2,494 5,600 7,906 8,014
Total interest income........... 131,718 131,417 125,801 124,764 117,758
Interest Expense
Interest on deposits................ 54,041 59,906 65,484 66,060 64,059
Interest on short-term borrowings... 3,496 1,723 1,569 3,001 3,291
Interest on long-term debt.......... 456 454 456 535 621
Total interest expense.......... 57,993 62,083 67,509 69,596 67,971
Net interest income................. 73,725 69,334 58,292 55,168 49,787
Provision for possible loan losses.. 2,197 3,219 4,946 3,933 2,310
Net interest income after provision
for possible loan losses.......... 71,528 66,115 53,346 51,235 47,477
Net securities gains (losses)....... 2,333 679 677 (269) (998)
Other operating income.............. 9,792 8,695 6,852 6,650 5,622
Other operating expenses............ 51,244 47,825 39,866 38,655 36,478
Income before taxes and cumulative
effect of change of accounting
method......................... 32,409 27,664 21,009 18,961 15,623
Applicable income taxes............ 9,719 7,076 5,025 4,475 2,749
Net income before cumulative
effect of change in accounting
method......................... 22,690 20,588 15,984 14,486 12,874
Cumulative effect of change in
accounting method................ 500 -0- -0- -0- -0-
Net income...................... $23,190 $20,588 $15,984 $14,486 $12,874
Per Share Data(a)
Net income before cumulative effect
of change in accounting method..... $ 1.22 $ 1.14 $ 0.94 $ 0.85 $ 0.76
Cumulative effect of change in
accounting method.................. $ 0.02 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net income.......................... $ 1.24 $ 1.14 $ 0.94 $ 0.85 $ 0.76
Dividends declared.................. $ 0.51 $ 0.55 $ 0.38 $ 0.33 $ 0.30
Average shares outstanding.......... 18,642,024 18,107,266 17,024,494 17,024,494 17,024,494
At End of Period
Total assets........................ $1,955,269 $1,787,548 $1,479,592 $1,346,028 $1,267,444
Securities.......................... 847,035 664,046 537,894 419,948 354,564
Loans and leases, net of unearned
income............................ 1,006,176 964,527 801,533 763,250 727,023
Reserve for possible loan losses.... 14,544 14,267 9,426 8,323 7,721
Deposits............................ 1,575,624 1,544,823 1,279,988 1,149,863 1,088,910
Long-term debt...................... 7,363 8,130 6,524 5,718 5,979
Shareholders' equity................ 186,453 170,403 140,992 130,762 122,957
Key Ratios
Return on average assets............ 1.25% 1.24% 1.14% 1.12% 1.10%
Return on average equity............ 12.91% 12.91% 11.75% 11.59% 10.82%
Net loans to deposit ratio.......... 62.94% 61.51% 61.88% 65.65% 66.06%
Dividend payout ratio............... 39.30% 45.11% 38.55% 36.88% 38.70%
Average shareholders' equity as
percentage of average assets...... 9.65% 9.60% 9.69% 9.66% 10.17%
(a) Average number of shares outstanding has been restated to reflect pooling
of interests. Restatements also reflect two-for-one stock split effected
in the form of a 100% stock dividend declared on January 18, 1994.
8
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 (the
"Corporation") including its subsidiaries for the years ended December 31,
1993, 1992 and 1991 and are intended to supplement, and should be read in
conjunction with, the consolidated financial statements and related
footnotes.
Effective December 31, 1993, the Corporation acquired all of the outstanding
common stock of Peoples Bank of Western Pennsylvania, a state-chartered
bank, headquartered in New Castle, Pennsylvania. 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.
Effective April 30, 1992, the Corporation acquired all of the outstanding
common stock of Central Bank ("Central"), a state-chartered bank
headquartered in Hollidaysburg, Pennsylvania. The merger was accounted for
as a purchase transaction, whereby the results of operations of Central from
the date of acquisition were included in the financial statements.
Results of Operations
Net income in 1993 was $23.2 million, an increase of $2.6 million over the
1992 level of $20.6 million and compared to $16.0 million which was reported
in 1991. Earnings per share before the cumulative effect of the change of
accounting method increased $0.08 per share in 1993 to $1.22. This compared
to $1.14 in 1992 and $0.94 in 1991. The cumulative effect of change in the
method of accounting for income taxes added $0.02 per share to result in
$1.24 earnings per share for 1993. Per share data has been restated to
reflect the two-for-one stock split effected in the form of a 100% stock
dividend declared on January 18, 1994. Return on average assets was 1.25%
during the 1993 period compared to 1.24% for 1992. Return on average equity
was 12.91% for both the 1993 and 1992 periods. During 1991 return on
average assets was 1.14% and return on average equity was 11.75%.
The following is an analysis of the impact of changes in net income on
earnings per share:
1993 1992
vs. vs.
1992 1991
Net income per share, prior year $1.14 $0.94
Increase (decrease) from changes in:
Net interest income 0.07 0.30
Provision for possible loan losses 0.06 0.10
Security transactions 0.09 0.00
Other income 0.04 0.05
Salaries and employee benefits (0.08) (0.06)
Occupancy and equipment costs (0.03) (0.01)
Settlement of lender liability claim 0.08 (0.08)
Other expenses (0.03) (0.06)
Provision for Federal income taxes (0.13) (0.08)
Subtotal 1.21 1.10
Inclusion of acquisition during year 0.01 0.04
Cumulative effect of change in accounting
method 0.02 0.00
Net income per share $1.24 $1.14
9
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 $73.7 million in 1993
compared to $69.3 million in 1992 and $58.3 million in 1991. 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, 1993.
10
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
1993 1992 1991
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 $ 10,294 $ 483 4.69% $ 29,902 $ 1,844 6.17% $ 50,100 $ 3,990 7.96%
Investment securities 762,562 44,906 6.10 622,869 44,311 7.45 477,168 38,844 8.59
Federal funds sold 6,832 208 3.04 18,265 650 3.56 28,151 1,610 5.72
Loans (b) (c), net of
unearned income 986,596 86,121 8.88 902,486 84,612 9.59 770,795 81,357 10.78
Total interest-
earning assets 1,766,284 131,718 7.63 1,573,522 131,417 8.61 1,326,214 125,801 9.78
Noninterest-earning assets:
Cash 45,496 41,104 36,083
Reserve for loan losses (14,683) (13,113) (8,723)
Other assets 64,766 59,726 49,554
Total noninterest-
earning assets 95,579 87,717 76,914
Total Assets $1,861,863 $1,661,239 $1,403,128
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing
demand deposits $ 169,423 3,050 1.80% $ 143,478 3,799 2.65% $ 104,632 4,006 3.83%
Savings deposits 421,626 9,681 2.30 396,733 12,150 3.06 317,904 13,312 4.19
Time deposits 816,920 41,310 5.06 763,264 43,957 5.76 681,662 48,166 7.07
Short-term borrowings 95,925 3,496 3.64 38,459 1,723 4.48 25,610 1,569 6.13
Long-term debt 7,985 456 5.71 7,803 454 5.82 6,338 456 7.19
Total interest-
bearing liabilities 1,511,879 57,993 3.84 1,349,737 62,083 4.60 1,136,146 67,509 5.94
Noninterest-bearing
liabilities and capital:
Noninterest-bearing
demand deposits 157,653 139,831 119,143
Other liabilities 12,660 12,196 11,832
Shareholders' equity 179,671 159,475 136,007
Total noninterest-
bearing funding sources 349,984 311,502 266,982
Total Liabilities and
Shareholders' Equity $1,861,863 $1,661,239 $1,403,128
Net Interest Income and
Net Yield On Interest-
earning Assets $73,725 4.35% $69,334 4.66% $ 58,292 4.69%
(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the
35% Federal income tax statutory rate in 1993, and 34% in 1992 and 1991.
(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.
11
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Both interest income and interest expense increased as volumes increased.
Average interest earning assets increased $192.8 million in 1993 to
$1,766,284 which is 94.9% of average total assets. Included in the 1993
growth was $41.8 million in investments, primarily mortgage-backed
securities, and these purchases were funded with borrowings from the Federal
Home Loan Bank and other banks. This leveraging strategy added
approximately $1.0 million to net interest income during 1993. Excluding
the earning assets resulting from the Central acquisition, average earning
assets grew $111.2 million in 1992. Average earning assets were 94.7% of
average total assets during 1992, compared to 94.5% during 1991. Average
interest-bearing liabilities increased $162.1 million during 1993, which
included $41.8 million related to the previously mentioned leveraging
strategy. The remainder of the increase occurred primarily through deposit
growth. Average interest-bearing liabilities grew $213.6 million during
1992 which included $90.7 million in addition to the Central acquisition.
Both asset yields and the cost of funds declined in 1993 and 1992 as the
interest rates were generally lower during those periods when compared to
previous years. Asset yields, on a tax-equivalent basis, decreased 98 basis
points (0.98%) during 1993 and 117 basis points (1.17%) during 1992. The
cost of funds declined 76 basis points (0.76%) during 1993 and 134 basis
points (1.34%) during 1992. Earning asset yields declined in 1993 faster
than liability costs primarily because of lower mortgage rates. Mortgage
borrowers have been refinancing loans during the low interest rate
environment reducing loan yields. Additionally, mortgage loan refinancing
on a national scale had accelerated the repayments of mortgage backed
securities in excess of projections. Reinvestment of the proceeds at the
then current rates lowered the investment portfolio yields. This trend
should stabilize if interest rates remain constant or rise. Deposit
customers tended to extend maturities which locked in rates as deposit rates
fell, thereby preventing the cost of funds to decline as fast as asset
yields. Net interest margin, on a tax-equivalent basis, was 4.35% during
1993 compared to 4.66% in 1992 and 4.69% during 1991. The Corporation's use
of computer modeling to manage interest rate risk is further 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)
1993 Change from 1992 1992 Change from 1991
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 $(1,361) $(1,209) $ (152) $(2,146) $(1,608) $ (538)
Securities 595 10,407 (9,812) 5,467 12,516 (7,049)
Federal funds sold (442) (407) (35) (960) (565) (395)
Loans 1,509 8,066 (6,557) 3,255 14,196 (10,941)
Total interest income 301 16,857 (16,556) 5,616 24,539 (18,923)
Interest-bearing liabilities:
Deposits (5,865) 4,807 (10,672) (5,578) 11,817 (17,395)
Short-term borrowings 1,773 2,575 (802) 154 787 (633)
Long-term debt 2 11 (9) (2) 105 (107)
Total interest expense (4,090) 7,393 (11,483) (5,426) 12,709 (18,135)
Net interest income $ 4,391 $ 9,464 $ (5,073) $11,042 $11,830 $ (788)
12
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The provision for possible loan losses is an amount added to the reserve
against which loan 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 reserve in relation to the
risks inherent within the loan portfolio. The provision for possible loan
losses was $2.2 million in 1993 and $3.2 million and $4.9 million in 1992
and 1991, respectively. Net charge-offs against the reserve for possible
loan losses were $1.9 million, or 0.19% of average total loans in 1993.
This is compared to $2.9 million in 1992. Charge-offs were $510 thousand
less during 1993 while recoveries of previously charged off loans increased
$449 thousand. Net charge-offs were $3.8 million in 1991. Net charge-offs
were 0.32% and 0.50% of average total loans during 1992 and 1991,
respectively. For an analysis of credit quality, see the "Credit Review"
section of this discussion.
The following table presents an analysis of the consolidated reserve for
possible loan losses for the five years ended December 31, 1993 (dollars in
thousands):
Summary of Loan Loss Experience
1993 1992 1991 1990 1989
Loans outstanding at end of year $1,006,176 $964,527 $801,533 $763,250 $727,023
Average loans outstanding $ 986,596 $902,486 $770,795 $746,898 $706,858
Reserve for possible loan losses:
Balance, beginning of year $ 14,267 $ 9,426 $ 8,323 $ 7,721 $ 7,294
Addition as result of acquisition -0- 4,501 -0- -0- -0-
Loans charged off:
Commercial, financial and agricultural 731 816 1,981 1,883 1,226
Loans to individuals 1,662 1,840 1,849 2,055 1,006
Real estate 1,011 1,281 803 367 358
Lease financing receivables 80 57 35 205 9
Total loans charged off 3,484 3,994 4,668 4,510 2,599
Recoveries of loans previously charged off:
Commercial, financial and agricultural 559 360 153 447 369
Loans to individuals 552 388 595 506 124
Real estate 453 364 74 148 222
Lease financing receivables -0- 3 3 78 1
Total recoveries 1,564 1,115 825 1,179 716
Net loans charged off 1,920 2,879 3,843 3,331 1,883
Provision charged to expense 2,197 3,219 4,946 3,933 2,310
Balance, end of year $14,544 $14,267 $ 9,426 $ 8,323 $ 7,721
Ratios:
Net charge-offs as a percentage
of average loans outstanding 0.19% 0.32% 0.50% 0.45% 0.27%
Reserve for possible loan losses
as a percentage of average loans
outstanding 1.47% 1.58% 1.22% 1.11% 1.09%
Total other operating income increased $2.7 million in 1993 to $12.1
million. Net security gains increased $1.7 million to $2.3 million during
1993 compared to $679 thousand during 1992 and $677 thousand in 1991.
Security transactions during 1993 and 1992 were primarily the sale of U.S.
Treasury securities maturing within a year. Proceeds were reinvested in
U.S. Treasury securities and U.S. Government agency securities with
maturities of 2-3 years to continue to lock in yields while interest rates
were falling. Additionally, during 1993 marketable equity securities with a
book value of $1.6 million were sold for a $1.0 million gain. During 1991
13
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
the Corporation also sold low and marginal quality securities which improved
the marketability and liquidity of the portfolio. Gross gains of $2.3
million and gross losses of $17 thousand were recognized during 1993. Gross
gains of $803 thousand and $1.5 million were recognized during 1992 and
1991, respectively, while gross losses of $124 thousand and $779 thousand
were recognized in the corresponding periods.
Trust income increased $227 thousand during 1993 to $2.2 million as estate
fees decreased $67 thousand, and core revenues increased. Trust income
increased $664 thousand during 1992 as the 1991 restructuring of the
subsidiary banks' trust departments into a single trust company began to
produce benefits. Management of the trust company allows an opportunity to
focus on growth, since the specialized areas and back-office operations were
centralized. Service charges on deposits increased $320 thousand in 1993
and $1.0 million in 1992 primarily as a result of average total deposits
increasing. Additionally, new fee schedules established during the fourth
quarter of 1991 provided higher revenues during 1992.
Total other operating expenses increased $3.4 million to $51.2 million in
1993 and compared to $47.8 million and $39.9 million in 1992 and 1991,
respectively. Results for the 1992 period did not reflect any of Central's
results until the merger date of April 30, 1992. Operating expenses related
to Central in the first four months of 1993 were $2.2 million.
Employee costs experienced an increase of $2.4 million to $25.4 million. Of
this increase $946 thousand was a result of including Central for the full
year of 1993. Total employee costs were $23.0 million and $20.2 million in
1992 and 1991, respectively. Salary levels are generally maintained through
attrition management programs. Employee costs as a percentage of average
assets was 1.36% in 1993, reduced from 1.38% in 1992 and 1.44% in 1991.
Net occupancy expense and furniture and equipment increased over the three
year period primarily as the costs of maintaining branch operations,
including utilities, repairs and depreciation continued to increase.
Additionally, equipment depreciation increased as computer equipment that
was previously being leased was purchased and is being depreciated over a
shorter life than the original lease. Additionally, the process of
automating loan documentation and the branch network increased depreciation
costs but is expected to improve platform productivity and reduce loan
documentation risks. The deposit insurance assessment from the Federal
Deposit Insurance Corporation ("FDIC") increased as a result of deposit
increases. This assessment is not scheduled to increase again in 1994, but
the possibility of future increases cannot be eliminated. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") has
established a risk-based assessment system which went into effect January 1,
1993. This system designates an assessment rate for each insured
institution based on a combination of its capital and supervisory condition.
Because of the Corporation's strong capital position and supervisory
condition, only future rate changes will cause a significant change in the
related expense. A lender liability claim for which a subsidiary of the
Corporation was a defendant, was settled out of court in October 1992 in the
amount of $1.4 million. Other operating expenses increased $1.3 million in
1993 over the 1992 related period to $15.0 million. The inclusion of
Central for the entire period of 1993 increased this category $829 thousand.
An increase in the amortization of core deposit intangibles as a result of
the implementation of FAS No. 109 was $715 thousand. One of the subsidiary
banks agreed to a settlement of a PA shares tax claim resulting in a refund
of $298 thousand. The 1992 increase was primarily a result of including
Central for eight months. Cost increases occurred in the process of the
collection of loans or the disposition of real estate acquired in lieu of
loan repayment but was partially responsible for the increased recovery of
previously charged off loans.
14
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Federal income tax expense was $9.7 million during 1993 representing an
increase of $2.6 million over the 1992 total of $7.1 million. Taxable
income increased nearly $7.0 million during 1993. On August 10, 1993
President Clinton signed into law the Omnibus Budget Reconciliation Act of
1993 ("the Act"). The Act made several changes that will affect financial
institutions such as the Corporation and its subsidiaries. While it is
difficult to determine the short and long-range effects of the Act on the
Corporation and whether it will be able to change its operations and make
adaptations to maintain net income levels that would otherwise have
prevailed if the Act had not passed, it should be noted that the primary
focus of the Act was to raise taxes. One provision of the Act increased the
tax rate for corporate taxable income in excess of $10 million to 35 percent
from 34 percent. This provision was retroactively applied to taxable income
earned after January 1, 1993. The tax rate change increased the
Corporation's Federal income tax expense by $259 thousand.
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 and
borrowings from the Federal Reserve Bank. Additionally, six of the seven
banking subsidiaries are members of the Federal Home Loan Bank and may
borrow up to ten percent of their total assets at any one time. The sale of
earning assets may also provide an additional source of liquidity.
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 $30.8 million in 1993 primarily in core
customer deposit relationships. Non-core deposits, which are time deposits
in denominations of $100 thousand or more represented only 6.1% of total
deposits at December 31, 1993. Time deposits of $100 thousand or more at
December 31, 1993, 1992 and 1991 had remaining maturities as follows:
Maturity Distribution of
Large Certificates of Deposit
(Dollar Amounts in Thousands)
1993 1992 1991
Amount Percent Amount Percent Amount Percent
Remaining Maturity:
3 months or less $19,734 21% $ 25,289 25% $ 53,945 51%
Over 3 months through 6 months 12,543 13 15,906 15 24,726 23
Over 6 months through 12 months 16,542 17 11,140 11 13,196 12
Over 12 months 47,006 49 49,731 49 14,784 14
Total $95,825 100% $102,066 100% $106,651 100%
Net loans increased $41.4 million during 1993 as consumer loans and real
estate secured loans were the primary categories of increased volume
reflecting a strengthening of loan demand.
An additional source of liquidity are certain marketable securities that the
Corporation holds in its investment portfolio. These securities are
classified as "securities available for sale". While the Corporation does
not have specific intentions to sell these securities, they 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
15
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
part of the implementation of tax management strategies. As of December 31,
1993, securities available for sale had an amortized cost of $462.8 million
and a market value of $465.2 million. Gross unrealized gains were $3.7
million and gross unrealized losses were $1.3 million. Below is a schedule
of loans by classification for the five years ended December 31, 1993 and a
schedule of the maturity distribution of investment securities at December
31, 1993.
Loans by Classification
(Dollar Amounts in Thousands)
1993 1992 1991 1990 1989
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial,
agricultural and
other $ 153,039 15% $196,979 20% $255,525 31% $221,575 28% $204,933 27%
Real estate 643,321 62 573,076 58 394,002 47 384,347 48 358,000 48
Loans to individuals 239,904 23 220,085 22 177,390 21 179,610 23 184,152 24
Net leases 1,411 -0- 4,628 -0- 3,802 1 5,622 1 6,285 1
Gross loans and
leases 1,037,675 100% 994,768 100% 830,719 100% 791,154 100% 753,370 100%
Unearned income (31,499) (30,241) (29,186) (27,904) (26,347)
Total loans, and leases
net of unearned income $1,006,176 $964,527 $801,533 $763,250 $727,023
Maturity Distribution of Investment Securities
(Dollar Amounts in Thousands)
U.S. Treasury, and other States and Total Weighted
U.S. Government Agencies Political Other Book Average
and Corporations Subdivisions Securities Value Yield*
Within 1 year $ -0- $14,322 $ 3,289 $ 17,611 7.58%
After 1 but within 5 years 94,612 22,105 9,953 126,670 5.73
After 5 but within 10 years 81,550 27,058 1,566 110,174 5.93
After 10 years 116,758 9,880 718 127,356 5.95
Total $292,920 $73,365 $15,526 $381,811 5.95
*Yields are calculated on a tax-equivalent basis
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 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.
16
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
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, 1993 and 1992 (Dollar Amounts in Thousands):
1993
0-90 Days 0-180 Days 0-365 Days
Loans $ 384,639 $ 458,967 $ 593,225
Investments 162,510 210,823 276,518
Other interest-earning assets 1,974 2,172 2,469
Total interest-sensitive
assets 549,123 671,962 872,212
Certificates of deposit 160,487 278,868 404,764
Other deposits 503,288 503,288 503,288
Short-term borrowings 155,518 165,096 168,803
Total interest-sensitive
liabilities 819,293 947,252 1,076,855
Gap $(270,170) $(275,290) $ (204,643)
ISA/ISL 0.67 0.71 0.81
Gap/Total assets 13.82% 14.08% 10.47%
1992
0-90 Days 0-180 Days 0-365 Days
Loans $ 395,097 $ 463,995 $ 615,796
Investments 72,879 114,000 185,784
Other interest-earning assets 34,403 37,692 46,859
Total interest-sensitive
assets 502,379 615,687 848,439
Certificates of deposit 156,655 288,295 389,704
Other deposits 583,307 583,807 584,648
Short-term borrowings 44,801 50,135 51,492
Total interest-sensitive
liabilities 784,763 922,237 1,025,844
Gap $(282,384) $(306,550) $ (177,405)
ISA/ISL 0.64 0.67 0.83
Gap/Total assets 15.80% 17.15% 9.92%
Final loan maturities and rate sensitivity of the loan portfolio excluding
consumer installment and mortgage loans and before unearned income at
December 31, 1993 are as follows (Dollar Amounts in Thousands):
Within One One to After
Year 5 Years 5 Years Total
Commercial and industrial $ 92,566 $19,544 $ 14,403 $126,513
Financial institutions -0- 162 -0- 162
Real estate-construction 7,199 1,147 1,372 9,718
Real estate-commercial 99,684 40,003 81,119 220,806
Other 9,276 6,050 11,219 26,545
Totals $208,725 $66,906 $108,113 $383,744
Loans at fixed interest rates 43,902 49,367
Loans at variable interest rates 23,004 58,746
Totals $66,906 $108,113
17
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The Corporation has not experienced the kind of earnings volatility
indicated from the gap analysis. This is because assets and liabilities
with similar contractual repricing characteristics may not reprice at the
same time or to the same degree.
Therefore, to more precisely measure the impact of interest rate changes on
the Corporation's net interest margin, management simulates the potential
effects of changing interest rates through computer modeling. The
Corporation is then better able to implement strategies which would include
an acceleration of a deposit rate reduction or a lag in a deposit rate
increase. The repricing strategies for loans would be inversely related.
The analysis at December 31, 1993, indicated that a 200 basis point movement
in interest rates in either direction would not have a significant impact on
the Corporation's anticipated net interest income over the next twelve
months.
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 external
auditors, 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 a reserve for
possible credit losses that may exist in the portfolio at a point in time,
but have not been specifically identified.
Since all identified losses are immediately charged off, no portion of the
reserve is restricted to any individual credit or groups of credits, and the
entire reserve is available to absorb any and all credit losses. However,
for analytical purposes, the following table sets forth an allocation of the
reserve for possible loan losses at December 31 according to the categories
indicated:
Allocation of the Reserve for Possible Loan Losses
(Dollar Amounts in Thousands)
1993 1992 1991 1990 1989
Commercial, industrial, financial,
agricultural and other $ 2,177 $ 5,109 $ 4,226 $ 2,074 $ 2,536
Real estate 7,176 4,627 2,597 2,725 2,285
Loans to individuals 1,879 1,806 1,182 1,765 1,672
Lease financing receivables 32 39 21 28 25
Unallocated 3,277 2,686 1,400 1,731 1,203
Total $14,541 $14,267 $9,426 $8,323 $7,721
Reserve as percentage
of average total loans 1.47% 1.58% 1.22% 1.11% 1.09%
18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
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 which were contractually
past due 90 days or more as to interest or principal payments. Renegotiated
loans are those 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.
Nonperforming Loans and Effect on Interest
Income Due to Nonaccrual
(Dollar Amounts in Thousands)
1993 1992 1991 1990 1989
Loans on nonaccrual basis $ 8,166 $ 8,223 $ 5,458 $ 5,392 $ 6,281
Past due loans 6,011 4,881 4,561 3,065 4,536
Renegotiated loans 1,186 1,002 1,086 3,185 221
Total nonperforming loans $15,363 $14,106 $11,105 $11,642 $11,038
Nonperforming loans as a percentage of
total loans 1.53% 1.46% 1.38% 1.53% 1.52%
Gross income that would have been
recorded at original rates $706 $936 $521 $687 $425
Interest that was reflected in income 76 106 41 166 57
Net reduction to interest income due to
nonaccrual $630 $830 $480 $521 $368
The reduction of income due to renegotiated loans was less than $50 thousand
in any year presented.
The level of nonperforming loans has increased in recent years, principally
as nonaccrual loans increased. These loans are primarily secured by
residential and commercial real estate and no significant loss is expected.
Management believes that the reserve for possible loan losses and
nonperforming loans remained safely within acceptable levels during 1993.
Capital Resources
Equity capital increased $16.0 million in 1993. Dividends declared
decreased equity by $8.9 million. The retained net income remains in
permanent capital to fund future growth and expansion. Payments by the
Corporation's Employee Stock Ownership Plan ("ESOP") to reduce debt it
incurred to acquire the Corporation's common stock for future distribution
as employee compensation, net of additional advances, increased equity
capital by $464 thousand. The market value adjustment to securities
available for sale added $1.6 million to capital while the tax benefit of
dividends paid to the ESOP increased equity by $84 thousand and amounts paid
to fund the discount on reinvested dividends and optional cash payments
reduced equity by $159 thousand.
A capital base can be considered adequate when it enables the Corporation to
intermediate funds responsibly and provide related services while protecting
against future uncertainties. The evaluation of capital adequacy depends on
a variety of factors, including asset quality, liquidity, earnings history
and prospects, internal controls and management caliber. In consideration
of these factors, management's primary emphasis with respect to the
Corporation's capital position is to maintain an adequate and stable ratio
of equity to assets.
19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The Federal Reserve Board has issued risk-based capital adequacy guidelines
which went into effect in stages through 1992. The risk-based capital
standard is designed principally as a measure of credit risk. These
guidelines require: (1) at least 50% of a banking organization's total
capital be common and certain other "core" equity capital ("Tier I
Capital"); (2) assets and off-balance sheet items must be weighted according
to risk; (3) the total capital to risk-weighted assets ratio be at least 8%;
and (4) a minimum leverage ratio of Tier I capital to total assets. The
minimum leverage ratio is not specifically defined, but is generally
expected to be 4-5 percent for all but the most highly rated banks, as
determined by a regulatory rating system.
The table below presents the Corporation's capital position at December 31,
1993:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $169,546 16.29
Risk-Based Requirement 41,642 4.00
Total Capital 182,989 17.58
Risk-Based Requirement 83,285 8.00
Minimum Leverage Capital 169,546 8.88
Minimum Leverage Requirement 76,384 4.00
Inflation and Changing Prices
Management is aware of the impact inflation has on interest rates and
therefore the impact it can have on a bank's performance. The ability
of a financial institution to cope with inflation can only be determined
by analysis and monitoring of its asset and liability structure. The
Corporation monitors its asset and liability position with particular
emphasis on the mix of interest-sensitive assets and liabilities in
order to reduce the effect of inflation upon its performance. However,
it must be remembered that the asset and liability structure of a
financial institution is substantially different from an industrial
corporation in that virtually all assets and liabilities are monetary in
nature, meaning that they have been or will be converted into a fixed
number of dollars regardless of changes in general price levels.
Examples of monetary items include cash, loans and deposits.
Nonmonetary items are those assets and liabilities which do not gain or
lose purchasing power solely as a result of general price level changes.
Examples of nonmonetary items are premises and equipment.
Inflation can have a more direct impact on categories of noninterest
expenses such as salaries and wages, supplies and employee benefit
costs. These expenses are very closely monitored by management for both
the effects of inflation and increases relating to such items as
staffing levels, usage of supplies and occupancy costs.
20
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
(Dollar Amounts in Thousands)
December 31,
1993 1992
Assets
Cash and due from banks on demand...........$ 51,044 $ 63,337
Interest-bearing deposits with banks........ 2,569 18,196
Federal funds sold.......................... -0- 30,555
Securities available for sale............... 465,224 -0-
Investment securities, market value
$383,943 in 1993 and $674,066 in 1992..... 381,811 664,046
Loans....................................... 1,037,675 994,768
Unearned income........................... (31,499) (30,241)
Reserve for possible loan losses.......... (14,544) (14,267)
Net loans............................ 991,632 950,260
Property and equipment...................... 21,911 21,107
Other real estate owned..................... 4,929 4,044
Other assets................................ 36,149 36,003
Total assets.........................$1,955,269 $1,787,548
Liabilities
Deposits (All Domestic):
Noninterest-bearing.......................$ 167,306 $ 167,486
Interest-bearing.......................... 1,408,318 1,377,337
Total deposits....................... 1,575,624 1,544,823
Short-term borrowings....................... 171,497 52,676
Other liabilities........................... 14,332 11,516
Long-term debt.............................. 7,363 8,130
Total liabilities.................... 1,768,816 1,617,145
Shareholders' Equity
Preferred stock, $1 par value per
share, 3,000,000 shares authorized
and unissued.............................. -0- -0-
Common stock, $5 par value per share,
25,000,000 shares authorized, 9,321,012
issued and outstanding.................... 46,605 46,605
Additional paid-in capital.................. 35,296 35,455
Retained earnings........................... 107,417 93,256
Unrealized gain on securities available
for sale.................................. 1,584 -0-
190,902 175,316
Deferred compensation....................... (4,449) (4,913)
Total shareholders' equity........... 186,453 170,403
Total liabilities and
shareholders' equity..........$1,955,269 $1,787,548
The accompanying notes are an integral part of these consolidated
financial statements.
21
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,
1993 1992 1991
INTEREST INCOME
Interest and fees on loans................ $86,121 $84,612 $81,357
Interest and dividends on investments:
Taxable interest........................ 41,323 39,922 34,494
Interest exempt from Federal
income taxes.......................... 2,955 4,118 4,184
Dividends............................... 628 271 166
Interest on Federal funds sold............ 208 650 1,610
Interest on bank deposits................. 483 1,844 3,990
Total interest income................. 131,718 131,417 125,801
INTEREST EXPENSE
Interest on deposits..................... 54,041 59,906 65,484
Interest on short-term borrowings........ 3,496 1,723 1,569
Interest on long-term debt............... 456 454 456
Total interest expense............... 57,993 62,083 67,509
NET INTEREST INCOME........................ 73,725 69,334 58,292
Provision for possible loan losses....... 2,197 3,219 4,946
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES..................... 71,528 66,115 53,346
OTHER INCOME
Net securities gains..................... 2,333 679 677
Trust income............................. 2,194 1,967 1,303
Service charges on deposit accounts...... 4,720 4,400 3,397
Other income............................. 2,878 2,328 2,152
Total other income................... 12,125 9,374 7,529
OTHER EXPENSES
Salaries and employee benefits........... 25,397 22,968 20,154
Net occupancy expense.................... 3,595 3,235 2,796
Furniture and equipment expense.......... 3,710 3,246 2,762
FDIC expense............................. 3,521 3,222 2,474
Settlement of lender liability claim..... -0- 1,400 -0-
Other operating expenses................. 15,021 13,754 11,680
Total other expenses................. 51,244 47,825 39,866
INCOME BEFORE TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
METHOD................................... 32,409 27,664 21,009
Applicable income taxes................ 9,719 7,076 5,025
NET INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING METHOD........... 22,690 20,588 15,984
Cumulative effect of change in
accounting method....................... 500 -0- -0-
NET INCOME................................. $23,190 $20,588 $15,984
Average Shares Outstanding................. 18,642,024 18,107,266 17,024,494
PER SHARE DATA:
NET INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING METHOD......... $1.22 $1.14 $0.94
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD...................... $0.02 $0.00 $0.00
NET INCOME............................... $1.24 $1.14 $0.94
The accompanying notes are an integral part of these consolidated financial
statements.
22
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,
1993 1992 1991
Operating Activities
Net income............................................ $23,190 $20,588 $15,984
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses................. 2,197 3,219 4,946
Depreciation and amortization...................... 4,701 3,547 2,954
Net gains on sales of assets....................... (2,617) (273) (904)
Changes net of acquisition:
Decrease (increase) in interest receivable......... 145 2,712 (209)
Increase in interest payable....................... (896) (2,336) (3)
Increase (decrease) in income taxes payable........ 308 (567) 354
Provision for deferred taxes....................... (1,189) (406) (478)
Other - net........................................ (719) (2,363) (663)
Net cash provided by operating activities....... 25,120 24,121 21,981
Investing Activities
Proceeds from investment securities transactions:
Sales.............................................. 95,658 16,840 65,362
Maturities and redemptions......................... 329,606 170,301 119,994
Proceeds from sales of loans and other assets......... 14,661 17,866 245
Acquisition of affiliate.............................. -0- (3,950) -0-
Changes net of acquisition:
Net decrease in time deposits with banks........... 15,627 39,945 3,583
Purchases of investment securities................. (603,637) (263,036) (301,778)
Net increase in loans.............................. (57,044) (22,614) (42,239)
Purchases of premises and equipment................ (3,425) (3,728) (1,936)
Net cash used by investing activities........... (208,554) (48,376) (156,769)
Financing Activities
Proceeds from issuance of long-term debt.............. 202 2,500 -0-
Repayments of long-term debt.......................... (505) (179) -0-
Tax benefit of ESOP dividend.......................... 84 119 97
Discount on dividend reinvestment plan purchases...... (159) (124) (80)
Dividends paid........................................ (8,571) (6,860) (5,899)
Dividends paid by subsidiary prior to merger.......... (169) (285) (263)
Changes net of acquisition:
Net increase in deposits........................... 30,883 65,441 130,020
Net increase (decrease) in Federal funds purchased. 45,955 (10,550) 3,150
Net increase (decrease) in other short-term
borrowings...................................... 72,866 15,482 (11,112)
Net cash provided by financing activities....... 140,586 65,544 115,913
Net increase (decrease) in cash and cash
equivalents................................... (42,848) 41,289 (18,875)
Cash and cash equivalents acquired with acquisition..... -0- 6,300 -0-
Cash and cash equivalents at January 1.................. 93,892 46,303 65,178
Cash and cash equivalents at December 31................ $51,044 $93,892 $46,303
The accompanying notes are an integral part of these consolidated financial
statements.
23
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Changes in Shareholders' Equity
(Dollar Amounts in Thousands)
Unrealized
Gain (Loss)
on
Additional Securities Total
Common Paid-in Retained Available Deferred Shareholders'
Stock Capital Earnings For Sale Compensation Equity
Balance at December 31, 1990.......... $42,561 $22,719 $ 71,918 $(1,615) $(4,821) $130,762
Net income............................ -0- -0- 15,984 -0- -0- 15,984
Cash dividends declared............... -0- -0- (5,899) -0- -0- (5,899)
Cash dividends declared by
subsidiary prior to merger.......... -0- -0- (263) -0- -0- (263)
Decrease in unrealized loss on
marketable equity securities........ -0- -0- -0- 1,197 -0- 1,197
Tax benefit on ESOP dividends......... -0- -0- 97 -0- -0- 97
Increase in deferred compensation..... -0- -0- -0- -0- (806) (806)
Discount on dividend reinvestment
plan purchases...................... -0- (80) -0- -0- -0- (80)
Balance at December 31, 1991.......... 42,561 22,639 81,837 (418) (5,627) 140,992
Net income............................ -0- -0- 20,588 -0- -0- 20,588
Cash dividends declared............... -0- -0- (9,003) -0- -0- (9,003)
Cash dividends declared by
subsidiary prior to merger.......... -0- -0- (285) -0- -0- (285)
Decrease in unrealized loss on
marketable equity securities........ -0- -0- -0- 418 -0- 418
Tax benefit on ESOP dividends......... -0- -0- 119 -0- -0- 119
Decrease in deferred compensation..... -0- -0- -0- -0- 714 714
Discount on dividend reinvestment
plan purchases...................... -0- (124) -0- -0- -0- (124)
Acquisition of subsidiary............. 4,044 12,940 -0- -0- -0- 16,984
Balance at December 31, 1992.......... 46,605 35,455 93,256 -0- (4,913) 170,403
Net income............................ -0- -0- 23,190 -0- -0- 23,190
Cash dividends declared............... -0- -0- (8,944) -0- -0- (8,944)
Cash dividends declared by
subsidiary prior to merger.......... -0- -0- (169) -0- -0- (169)
Increase in unrealized gain on
securities available for sale, net
of tax effect....................... -0- -0- -0- 1,584 -0- 1,584
Tax benefit on ESOP dividends......... -0- -0- 84 -0- -0- 84
Decrease in deferred compensation..... -0- -0- -0- -0- 464 464
Discount on dividend reinvestment
plan purchases...................... -0- (159) -0- -0- -0- (159)
Balance at December 31, 1993.......... $46,605 $35,296 $107,417 $1,584 $(4,449) $186,453
The accompanying notes are an integral part of these consolidated financial statements.
24
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
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 (the "Corporation") and its subsidiaries contained in this
report. Such policies conform to generally accepted accounting principles
and to general practice within the banking industry.
The Corporation and its subsidiaries are on the accrual basis of accounting
except for certain trust related revenues which are recorded on a cash
basis. Recording income from such activities on a cash basis does not
materially affect net income.
Certain items of the consolidated statements for the years ended December
31, 1992 and 1991 have been reclassified to conform with the December 31,
1993 presentation.
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.
Securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 ("FAS No. 115"), Accounting for
Certain Investments in Debt and Equity Securities. This statement addresses
the accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
Those investments are to be classified in three categories and accounted for
as follows: (a) securities held-to-maturity, (b) trading securities and (c)
securities available-for-sale.
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
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.
The Corporation adopted FAS No. 115 effective December 31, 1993 and
classified securities as either held-to-maturity or available-for-sale. The
Corporation does not engage in trading activities (see NOTES 4 and 5).
Prior to the implementation of FAS No. 115, investment securities consisted
of debt and equity securities. Debt securities were stated at cost adjusted
for amortization of premium and accretion of discount. These securities
were principally purchased with the intent of holding them until maturity.
Marketable equity securities were carried at the lower of aggregate cost or
market value. Net gain or loss on the sale of investment securities was
determined by using the specific identification method.
25
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Loans
Loans are carried at the principal amount outstanding. Unearned income on
installment loans is taken into income on a declining basis which results in
an approximately level rate of return over the life of the loan. Interest
is accrued as earned on nondiscounted loans. When a loan becomes past due
and doubt exists as to the ultimate collection of principal and interest,
the accrual of income is discontinued and is only recognized at the time
payment is received.
Renegotiated loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
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
market at the time of acquisition. Expenses related to holding the
property, net of rental income, are generally charged against earnings in
the current period. Other real estate also includes properties that have in
substance been foreclosed. In-substance foreclosed properties are those
properties where the borrower has little or no remaining equity in the
property considering its fair market value; where repayment can only be
expected to come from the operation or sale of the property; and where the
borrower has effectively abandoned control of the property or it is doubtful
that the borrower will be able to rebuild equity in the property. In-
substance foreclosed properties included in other real estate owned were
$111 and $1,514 at December 31, 1993 and 1992, respectively.
Reserve for Possible Loan Losses
The reserve for possible loan 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 reserve based on
historical patterns of loan charge-offs and recoveries, the relationship of
the reserve to outstanding loans, industry experience, current economic
trends and other factors relevant to the collectibility of loans currently
in the portfolio.
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.
26
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109 ("FAS No. 109"), Accounting for
Income Taxes (see NOTE 14). Under the asset and liability method utilized
by FAS No. 109, 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.
Effective January 1, 1993, the Corporation adopted FAS No. 109 and has
reported the cumulative effect of that change in method of accounting for
income taxes in the 1993 consolidated statement of income.
Cash Flow Statement
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.
Supplemental Disclosures
Cash paid during the year for:
1993 1992 1991
Interest $59,119 $64,546 $67,518
Income taxes $ 9,245 $ 8,175 $ 5,187
Noncash Investing and Financing Activities
The Corporation borrowed $250 in 1993 and $1,520 in 1991 and concurrently
loaned these amounts to the First Commonwealth Financial Corporation
Employee Stock Ownership Plan Trust ("ESOP") on identical terms. The loan
has been recorded as long-term debt on the Corporation's books and the
offset was recorded as a reduction in common shareholders' equity. Loan
payments in the amount of $714 were made by the ESOP in each of the three
years ending in 1993, thereby reducing the outstanding amount related to
deferred compensation to $4,449 at December 31, 1993.
Earnings Per Common Share
Earnings per share have been calculated on the weighted average number of
common shares outstanding during each year, restated to reflect pooling of
interests. Additionally, average number of shares has been restated to
reflect the two-for-one stock split effected in the form of a 100% stock
dividend declared on January 18, 1994 (see NOTE 22).
Fair Values of Financial Instruments
The financial statements include various estimated fair values at December
31, 1993, as required by Statement of Financial Accounting Standards No. 107
("FAS No. 107"). Such information, which pertains to the Corporation's
27
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
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 investment securities 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 Reserve Bank stock and Federal Home Loan Bank
stock, is considered a reasonable estimate of fair value.
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.
28
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
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.
NOTE 2--Business Combination
Effective December 31, 1993 the Corporation acquired all of the outstanding
common shares of Peoples Bank of Western Pennsylvania, a state-chartered
bank headquartered in New Castle, Pennsylvania. Each of the 375,000
outstanding shares of common stock were exchanged for two shares of the
Corporation's common stock. 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.
Effective April 30, 1992, the Corporation acquired all of the outstanding
common shares of Central Bank ("Central"), a state-chartered bank
headquartered in Hollidaysburg, Pennsylvania, for 808,765 shares of the
Corporation's common stock and $3,950 in cash. The acquisition was
accounted for as a purchase transaction, whereby the identifiable tangible
and intangible assets and liabilities of Central have been recorded at their
fair values at the acquisition date. Goodwill of $4,858 and core deposit
intangibles of $2,873 acquired in the transaction are being amortized on a
straight-line basis over respective periods of fifteen and ten years. Under
the purchase method of accounting, the results of operations of Central from
the date of acquisition were included in the financial statements.
NOTE 3--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 $3,355 during 1993 and $3,971 during 1992.
29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 4--Investment Securities
Below is an analysis of the book values and approximate fair values of debt
securities at December 31:
1993 1992
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 $ -0- $ -0- $ -0- $ -0- $ 62,958 $ 1,562 $ (16) $ 64,504
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities 207,349 923 (805) 207,467 380,749 6,143 (612) 386,280
Other 85,570 425 (121) 85,874 89,362 1,170 (126) 90,406
Obligations of States and
Political Subdivisions 73,366 1,646 (349) 74,663 72,642 1,639 (209) 74,072
Debt Securities Issued By
Foreign Governments 745 4 -0- 749 350 -0- (2) 348
Corporate Securities 10,722 442 (73) 11,091 21,768 285 (152) 21,901
Other Mortgage Backed
Securities 4,059 40 -0- 4,099 22,522 221 (92) 22,651
Total Debt Securities $381,811 $3,480 $(1,348) $383,943 $650,351 $11,020 $(1,209) $660,162
Mortgage backed securities include mortgage backed obligations of the 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 5 to 34 years and have an
anticipated average life to maturity ranging from less than one year to 10
years.
The amortized cost and estimated market value of debt securities at
December 31, 1993, 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.
Estimated
Amortized Market
Cost Value
Due within 1 year $ 20,174 $ 20,326
Due after 1 but within 5 years 111,271 112,482
Due after 5 but within 10 years 30,439 30,662
Due after 10 years 8,519 8,907
170,403 172,377
Mortgage backed securities 211,408 211,566
Total debt securities $381,811 $383,943
Proceeds from the sales of investment securities were $16,840 and $65,362 in
1992 and 1991, respectively. Gross gains of $803 and $1,456 were recognized
during 1992 and 1991, respectively, while gross losses of $124 and $779 were
recognized in the corresponding periods.
30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 4-Investment Securities (Continued)
Marketable equity securities included in investment securities at December
31, 1992 with a cost basis of $6,219 had gross unrealized gains of $331 and
gross unrealized losses of $122. The Corporation also held nonmarketable
equity securities in the amount of $7,476 at December 31, 1992, primarily
Federal Home Loan Bank stock and Federal Reserve Bank stock. At December
31, 1993 equity securities have been classified as securities available for
sale.
Investment securities with a book value of $249,160 and $181,787 were
pledged at December 31, 1993 and 1992, respectively, to secure public
deposits and for other purposes required or permitted by law.
NOTE 5--Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of
securities available for sale at December 31, 1993:
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury Securities $103,253 $ 862 $ (125) $103,990
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed
Securities 285,854 2,507 (978) 287,383
Other 49,726 323 (133) 49,916
Obligations of States and
Political Subdivisions 97 -0- -0- 97
Corporate Securities 4,688 50 -0- 4,738
Other Mortgage Backed
Securities 6,327 25 (9) 6,343
Total Debt Securities 449,945 3,767 (1,245) 452,467
Equity Securities 12,841 -0- (84) 12,757
Total Securities
Available for Sale $462,786 $3,767 $(1,329) $465,224
Mortgage backed securities include mortgage backed obligations of the 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 5 to 34 years and have an
anticipated average life to maturity ranging from less than one year to 10
years.
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 5--Securities Available for Sale (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 1993, 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.
Estimated
Amortized Fair
Cost Value
Due within 1 year $ 4,960 $ 5,083
Due after 1 but within 5 years 141,804 142,652
Due after 5 but within 10 years 8,815 8,804
Due after 10 years 2,185 2,202
157,764 158,741
Mortgage backed securities 292,181 293,726
Total debt securities $449,945 $452,467
Proceeds from the sales of investment securities during 1993 were $95,658.
Gross gains of $2,350 and gross losses of $17 were realized on those sales.
NOTE 6--Loans (all domestic)
Loans at year end were divided among these general categories:
December 31,
1993 1992
Commercial, financial,
agricultural and other $ 153,039 $196,979
Real estate loans:
Construction and land
development 9,718 11,676
1-4 Family dwellings 412,799 373,174
Other real estate loans 220,804 188,226
Loans to individuals for household,
family and other personal
expenditures 239,904 220,085
Leases, net of unearned income 1,411 4,628
Subtotal 1,037,675 994,768
Unearned income (31,499) (30,241)
Total loans and leases $1,006,176 $964,527
Management's estimate of the fair value of loans was $1,035,850 and $991,491
at December 31, 1993 and 1992, respectively.
Most of the Corporation's business activity was with customers located
within Pennsylvania. The portfolio is well diversified, and as of December
31, 1993, there were no significant concentrations of credit.
32
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 7--Reserve for Possible Loan Losses
Description of changes:
1993 1992 1991
Reserve balance at January 1 $14,267 $ 9,426 $8,323
Additions:
Recoveries of previously
charged off loans 1,564 1,115 825
Provision charged to operating
expense 2,197 3,219 4,946
From acquisition -0- 4,501 -0-
Deductions:
Loans charged off 3,484 3,994 4,668
Reserve balance at December 31 $14,544 $14,267 $9,426
For Federal tax purposes, the reserve for possible loan losses was $1,911 in
1993 and $2,222 in 1992.
NOTE 8--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. The Corporation does not issue any other instruments with
significant off-balance-sheet 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, 1993 and 1992.
1993 1992
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $182,013 $153,319
Standby letters of credit $ 17,900 $ 11,858
Commercial letters of credit $ 65 $ 10
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
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 8--Financial Instruments with Off-Balance-Sheet Risk (Continued)
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, and income-producing commercial
properties.
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 9--Premises and Equipment
Premises and equipment are described as follows:
1993 1992
Land $ 3,615 $ 2,977
Buildings and improvements 22,200 21,084
Leasehold improvements 3,312 3,254
Furniture and equipment 20,377 19,221
Subtotal 49,504 46,536
Less accumulated depreciation and
amortization 27,593 25,429
Total premises and
equipment $21,911 $21,107
Depreciation and amortization related to premises and equipment was $3,008
in 1993, $2,637 and $1,901, in 1992 and 1991, respectively.
34
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 10--Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
1993 1992
N.O.W. and Super N.O.W. accounts $ 169,897 $ 168,130
Savings and MMDA accounts 426,640 411,380
Time deposits 811,781 797,827
Total interest-bearing deposits $1,408,318 $1,377,337
Included in time deposits at December 31 were certificates of deposit in
denominations of $100 or more maturing as follows:
1993 1992
3 months or less $19,734 $ 25,289
3 to 6 months 12,543 15,906
6 to 12 months 16,542 11,140
Over 12 months 47,006 49,731
Total $95,825 $102,066
Interest expense related to $100 or greater certificates of deposit amounted
to $5,426 in 1993, $7,389 in 1992, and $7,566 in 1991.
Management's estimated fair value of deposits was $1,590,502 and $1,565,065
at December 31, 1993 and 1992, respectively.
NOTE 11--Short-term Borrowings
Short-term borrowings at December 31 were as follows:
1993 1992
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
Federal funds
purchased $ 46,155 $ 22,782 3.10% $ -0- $ 2,505 6.75%
Borrowings from
FHLB 62,276 22,673 3.32 -0- -0- -0-
Securities sold
under agreements
to repurchase 43,498 41,714 4.28 34,272 25,595 4.69
Treasury, tax and
loan note option 19,568 8,756 2.91 18,404 10,359 3.41
Total $171,497 $95,925 3.64 $52,676 $38,459 4.48
Maximum total at
any month-end $171,497 $67,056
35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 11--Short-term Borrowings (Continued)
Interest expense on short-term borrowings for the years ended December 31 is
detailed below:
1993 1992 1991
Federal funds purchased $ 705 $ 169 $ 58
Borrowings from FHLB 753 -0- -0-
Securities sold under agreements to
repurchase 1,783 1,201 1,089
Treasury, tax and loan note option 255 353 422
Total interest on
short-term borrowings $3,496 $1,723 $1,569
NOTE 12--Long-Term Debt
Long-term debt at December 31, 1993 follows:
Amount Rate
Bank subordinated notes due September, 1997 $ 716 8.38%
ESOP loan due September, 1997 2,678 80% of Prime
Bank loan due December, 1997 2,000 Prime
ESOP loan due March, 2001 1,770 Prime
Mortgage note due October, 2003 199 6.26%
Total long-term debt $7,363
All subordinated notes are unsecured and equally subordinated in right of
payment to depositors and other creditors. The notes are redeemable at 102%
of principal until maturity, at the bank's option. The subordinated notes
do not provide for sinking fund obligations. Scheduled loan payments and
subordinated note maturities are summarized below:
1994 1995 1996 1997 1998 Thereafter
Loan payments $1,419 $1,483 $1,484 $1,307 $272 $682
Note maturities -0- -0- -0- 716 -0- -0-
Total $1,419 $1,483 $1,484 $2,023 $272 $682
Management estimated the fair value of long-term debt at December 31, 1993
to be $7,433 and $8,207 at December 31, 1992.
NOTE 13--Common Share Commitments
At December 31, 1993 the Corporation had 25,000,000 common shares authorized
and 18,642,024 shares outstanding after reflecting the two-for-one stock
split effected in the form of a 100% stock dividend (see NOTE 22). The
Corporation may be required to issue additional shares to satisfy common
share purchases related to the employee stock ownership plan described in
NOTE 15.
36
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 14--Federal Income Taxes
As discussed in Note 1, effective January 1, 1993 the Corporation adopted
FAS No. 109. As permitted under FAS No. 109, prior years' financial
statements have not been restated. The adoption of this statement resulted
in a cumulative benefit of $500 in 1993. This benefit was primarily due to
lower tax rates in the year that FAS No. 109 was adopted than tax rates were
in the years of purchase business combinations.
The income tax provision consists of:
1993 1992 1991
Current tax provision for income
before securities transactions $9,591 $7,229 $5,273
Securities transactions 817 231 230
Total current tax
provision 10,408 7,460 5,503
Deferred tax provision (credit) on:
Loan loss provision (327) (72) (404)
Bond discount (53) (130) (62)
Leasing income (432) (236) (44)
Purchase accounting valuations (209) -0- -0-
Depreciation (15) 110 31
Loan origination fees and costs 185 47 172
Other 162 (103) (171)
Total deferred tax benefit (689) (384) (478)
Total tax provision $9,719 $7,076 $5,025
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 January 1, 1993 and December 31, 1993
were as follows:
December January
31, 1,
Reserve for possible loan losses $4,422 $4,095
Accumulated accretion of bond discount (278) (331)
Lease financing deduction (149) (581)
Purchase accounting valuations, other
than excess purchase price (2,191) (2,400)
Accumulated depreciation (348) (363)
Unrealized gain on securities
available for sale (851) -0-
Loan origination fees and costs (192) (7)
Other - net 325 487
Deferred tax asset balance $ 738 $ 900
Management does not feel a need to establish a valuation allowance against
the deferred tax asset because of the Corporation's ability to recover
previously paid taxes through carrybacks.
37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 14--Federal Income Taxes (Continued)
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:
1993 1992 1991
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Tax at statutory rate $11,343 35.0 $9,406 34.0 $7,143 34.0
Increase (decrease)
resulting from:
Effect of
nontaxable
interest (1,979) (6.1) (2,406) (8.7) (2,346) (11.2)
Other 355 1.1 76 0.3 228 1.1
Total tax
provision $ 9,719 30.0 $7,076 25.6 $5,025 23.9
NOTE 15--Retirement Plans
All employees with at least one year of service are eligible to participate
in the employee stock ownership plan. 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. These
contributions are used to purchase the Corporation's common shares.
Contributions to the plan were $622 in 1993, $680 in 1992 and $518 in 1991.
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 5% of compensation to the plan which is matched by the
employer's contribution equal to 60% of the employee's contribution. The
401(k) plan expense was $1,158 in 1993, $984 in 1992, $875 in 1991.
Statement of Financial Accounting Standards No. 106 ("FAS No. 106"),
Employers' Accounting for Postretirement Benefits Other than Pensions
established standards for accounting for postretirement benefits, primarily
health care benefits. FAS No. 106 was effective for all fiscal years
beginning after December 15, 1992. Since the Corporation generally does not
offer these benefits, the impact on net income is not considered material.
Employees of Central were covered by a noncontributory defined benefit plan,
which covered substantially all of its employees. The plan was fully
funded, and no contributions were made during the past three years. The net
periodic cost was $16 during 1992. The plan was terminated during 1993 and
Central employees were included in the Corporation's employee stock
ownership plan and 401(k) plan. The plan termination resulted in a gain of
$186 thousand recorded during 1993.
38
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 16--Deferred Compensation
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 $4,449 at December 31, 1993.
The loans have been recorded as long-term debt on the Corporation's
consolidated balance sheets. A like amount of deferred compensation was
recorded as a reduction of common shareholders' equity. Deferred
compensation, included as a component of shareholders' equity, represents
the Corporation's prepayment of future compensation expense. As the
Corporation makes annual contributions to the ESOP, these contributions,
plus dividends accumulated on the Corporation's common stock held by the
ESOP, will be used to repay the loan to the Corporation. As the loan is
repaid, common stock is allocated to the ESOP participants and deferred
compensation is reduced by the amount of the principal payment on the loan.
Interest on this loan was $245 in 1993 and $286 in 1992 and $382 in 1991.
Dividends on common shares held in the ESOP used for debt service were $417
in 1993, $351 in 1992 and $289 in 1991.
NOTE 17--Commitments and Contingent Liabilities
During 1990, a subsidiary bank was named as a defendant in a forgery claim
where the bank allegedly allowed checks bearing forged endorsements to be
negotiated. Management feels that its maximum exposure is not significant
and that it has adequate defenses for the claim. This action is being
vigorously defended and, in the opinion of management, should be resolved in
the bank's favor.
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 financial position of the Corporation and its subsidiaries.
The Corporation leases various premises and assorted equipment under
noncancelable agreements. Total future minimum rental commitments at
December 31, 1993 were as follows:
1994 1995 1996 1997 1998 Thereafter Total
Premises $451 $352 $255 $212 $148 $805 $2,223
Equipment 171 36 17 1 -0- -0- 225
Total $622 $388 $272 $213 $148 $805 $2,448
Under the terms of various lease agreements, increases in utilities and
taxes may be passed on to the lessee. Such adjustments are not reflected in
the above table. Additionally, various lease renewal options are available
and are not included in the minimum lease commitments until such options are
exercised. Total lease expense amounted to $1,034 in 1993, $1,326 in 1992
and $1,248 in 1991.
39
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 18--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
during 1993. 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 1993.
Balances December 31, 1992 $34,840
Advances 7,599
Repayments (17,307)
Other 102
Balances December 31, 1993 $25,234
Three loans to two directors, or their related interests were placed on a
nonaccrual status during 1992 due to cash flow deficiencies. The original
loans were made on substantially the same terms as those prevailing at the
time for comparable transactions. One loan to a director has been in
compliance with the terms of the loan and has been removed from a nonaccrual
status. The original amount of this loan was $616 and the balance at
December 31, 1993 was $500. The remaining two loans to one director
remained on a nonaccrual status during 1993. The original balances of these
loans were $1,969 and the recorded balance of these loans at December 31,
1993 was reduced to $987. In the opinion of management, adequate amounts
have been provided in the reserve for possible loan losses for these loans.
NOTE 19--Dividend Restrictions
The amount of funds available to the parent from its subsidiary banks is
limited by restrictions imposed on all national banks by the Comptroller of
the Currency and on all state chartered banks by the Pennsylvania Department
of Banking.
During 1993, dividends from subsidiary banks were restricted not to exceed
$44,908. These restrictions have not had, and are not expected to have, a
significant impact on the Corporation's ability to meet its cash
obligations.
NOTE 20--Jointly-Owned Company
Investment in Commonwealth Trust Credit Life Insurance Company
("Commonwealth Trust"), a jointly-owned credit life reinsurance company in
which the Corporation has a 50% interest in the voting common stock, is
carried at cost, adjusted for the Corporation's proportionate share of the
earnings. Dividends, if any, reduce the basis of the investment.
Commonwealth Trust has been in operation since June of 1989. The
Corporation's net investment in Commonwealth Trust at December 31, 1993 was
$1,162 and income from its investment was $221 during 1993.
40
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1993, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only)
Balance Sheets
December 31,
1993 1992
Assets
Cash $ 2,571 $ 2,625
Investment in subsidiaries 187,054 171,568
Investment in jointly-owned company 1,162 941
Premises and equipment 1,181 890
Dividends receivable from subsidiaries 3,679 3,095
Receivable from subsidiaries 440 842
Other assets 279 397
Total assets $196,366 $180,358
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 947 $ 399
Dividends payable 2,517 2,143
Loans payable 6,449 7,413
Shareholders' equity, exclusive of
deferred compensation 190,902 175,316
Deferred compensation (4,449) (4,913)
Total liabilities and
shareholders' equity $196,366 $180,358
Statements of Income
Years Ended December 31,
1993 1992 1991
Dividends from subsidiaries $13,490 $11,082 $11,085
Operating expenses (5,598) (4,893) (4,378)
Income before taxes and equity
in undistributed earnings of
subsidiaries 7,892 6,189 6,707
Applicable income tax benefits 1,782 1,433 1,250
Income before equity in
undistributed earnings of
subsidiaries 9,674 7,622 7,957
Equity in undistributed
earnings of subsidiaries 13,516 12,966 8,027
Net income $23,190 $20,588 $15,984
41
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1991, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only) (Continued)
Statements of Cash Flows
Years Ended December 31,
1993 1992 1991
Operating Activities
Net income $ 23,190 $ 20,588 $ 15,984
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 1,190 865 723
Decrease (increase) in
prepaid income taxes (262) (298) 911
Undistributed equity in
subsidiaries (13,516) (12,966) (8,027)
Other - net (11) (165) (618)
Net cash provided by
operating activities 10,591 8,024 8,973
Investing Activities
Purchases of premises and
equipment (499) (106) (300)
Acquisition and additional
investment in subsidiary (1,000) (3,950) -0-
Net cash used by
investing activities (1,499) (4,056) (300)
Financing Activities
Proceeds from issuance of
long-term debt -0- 2,500 -0-
Repayment of long-term
debt (500) -0- -0-
Tax benefit of ESOP dividend 84 119 97
Discount on dividend reinvestment
plan purchases (159) (124) (80)
Cash dividends paid (8,571) (6,860) (5,899)
Net cash used by
financing activities (9,146) (4,365) (5,882)
Net increase (decrease) in cash (54) (397) 2,791
Cash at beginning of year 2,625 3,022 231
Cash at end of year $2,571 $2,625 $3,022
Supplemental schedule of noncash investing and financing activities
The Corporation borrowed $250 in 1993 and $1,520 in 1991 and concurrently
loaned these amounts to the ESOP on identical terms. The loans were
recorded as long-term debt and the offset was recorded as a reduction of the
common shareholders' equity. Loan payments in the amount of $714 were made
during each of the three years ended 1993 thereby reducing the outstanding
amount related to deferred compensation to $4,449 at December 31, 1993.
42
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1991, 1992 and 1991
(Dollar Amounts in Thousands)
NOTE 22--Subsequent Event
On January 18, 1994, the Board of Directors declared a two-for-one stock
split effected in the form of a 100% stock dividend in the amount of
9,321,012 shares payable on February 10, 1994. Accordingly, the average
number of shares and all per share amounts have been restated to reflect the
stock split on a retroactive basis.
43
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
AUDITOR'S REPORT
Report of Jarrett Stokes & Co.
Independent Certified Public Accountants
Board of Directors and Shareholders of
First Commonwealth Financial Corporation
Indiana, Pennsylvania
We have audited the accompanying consolidated balance sheets of First
Commonwealth Financial Corporation and subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1993. These consolidated financial statements are
the responsibility of the 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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, the financial position of First
Commonwealth Financial Corporation and subsidiaries as of December 31, 1993
and 1992, and the results of their operations and cash flows for each of the
three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in NOTE 1 to the consolidated financial statements, the
Corporation changed its method of accounting for income taxes and
investments.
JARRETT STOKES & CO.
Indiana, Pennsylvania
March 2, 1994
44
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, 1993 and 1992 are as follows. All amounts have been restated to reflect
pooling of interests.
1993
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income.............................. $33,014 $33,098 $32,623 $32,983
Interest expense............................. 14,572 14,562 14,351 14,508
Net interest income..................... 18,442 18,536 18,272 18,475
Provision for possible loan losses........... 593 519 484 601
Net interest income after provision for
possible loan losses....................... 17,849 18,017 17,788 17,874
Other operating income....................... 2,999 2,914 2,578 3,634
Other operating expenses..................... 12,649 12,967 12,676 12,952
Income before taxes and cumulative
effect of change in accounting method. 8,199 7,964 7,690 8,556
Applicable income taxes...................... 2,360 2,292 2,474 2,593
Net income before cumulative effect of
change in accounting method........... 5,839 5,672 5,216 5,963
Cumulative effect of change in accounting
method..................................... 500 -0- -0- -0-
Net income.............................. $6,339 $5,672 $5,216 $5,963
Earnings per share before cumulative effect
of change in accounting method(a).......... $ 0.31 $ 0.30 $ 0.28 $ 0.32
Earnings per share(a)........................ $ 0.33 $ 0.30 $ 0.28 $ 0.32
1992
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income.............................. $30,733 $33,188 $33,937 $33,559
Interest expense............................. 15,275 16,042 15,741 15,025
Net interest income..................... 15,458 17,146 18,196 18,534
Provision for possible loan losses........... 977 847 601 794
Net interest income after provision for
possible loan losses....................... 14,481 16,299 17,595 17,740
Other operating income....................... 2,267 2,684 2,213 2,210
Other operating expenses..................... 10,701 11,578 13,106 12,440
Income before taxes..................... 6,047 7,405 6,702 7,510
Applicable income taxes...................... 1,458 1,837 1,801 1,980
Net income.............................. $4,589 $5,568 $4,901 $5,530
Earnings per share(a)........................ $ 0.27 $ 0.31 $ 0.26 $ 0.30
(a) Average number of shares outstanding has been restated to reflect two-for
-one stock split effected in the form of a 100% stock dividend declared
January 18, 1994.
45
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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, 1994
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 71 Chairman of the Board, President and
Chief Executive Officer of the
Corporation, Chairman of the Board of
FCTC and Chairman of the Board of CSC;
Director of NBOC, Central, PBWPA and
CTCLIC
Joseph E. O'Dell 48 Senior Executive Vice President,
Chief Operating Officer and Assistant
Secretary/Treasurer of the Corporation,
Director of Cenwest and FCTC, Vice
Chairman of the Board of CSC
Gerard M. Thomchick 38 Executive Vice President of the
Corporation, President, Chief Executive
Officer and Director of CTCLIC; Director
of Deposit, Central and FCTC
David R. Tomb, Jr. 62 Vice President, Secretary and Treasurer
of the Corporation; Director of
Leechburg, CSC, NBOC and CTCLIC
John J. Dolan 37 Senior Vice President, Comptroller and
Chief Financial Officer of the
Corporation, Chief Financial
Officer/Comptroller of CTCLIC,
Treasurer and Assistant Secretary of
FCTC, Director of Peoples
George E. Dash 43 Senior Vice President/Sales and
Marketing, Director of Central
Johnston A. Glass 44 President and Chief Executive Officer of
NBOC, Director of the Corporation
William Miksich 58 President and Chief Executive Officer of
Deposit Bank
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.
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.
46
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 11 - MANAGEMENT RENUMERATION
Information appearing in the definitive Proxy Statement related to
the annual meeting of security holders to be held April 23, 1994
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, 1994
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, 1994
is incorporated herein by reference in response to this item.
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 2 to Form 8-A
filed May 8, 1992
3.2 By-Laws of Registrant Exhibit 3.2 to Form
S-4 filed October 15,
1993
10.1 Employment Contract Exhibit 10.1 to Form
Ronald C. Geiser S-14 Registration
Statement dated
July 19, 1985.
10.2 Employment Contract Exhibit 10.2 to Form
Sumner E. Brumbaugh S-4 Filed October 15,
1993
21.1 Subsidiaries of the
Registrant
23.1 Consent of Jarrett.Stokes & Co.
Certified Public Accountants
24.1 Power of Attorney
(B) Report of Form 8-K
Not applicable.
47
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 18th day of March 1994.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
/S/DAVID R. TOMB, JR.
David R. Tomb, Jr., Vice President Secretary/Treasurer