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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, 1995 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, $1 PAR VALUE NEW YORK STOCK EXCHANGE
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XX No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
TITLE OF CLASS OUTSTANDING AT March 20, 1996
Common Stock, $1 Par Value 22,266,560 Shares
The aggregate market value of the voting common stock, par value $1 per
share, held by non-affiliates of the registrant (Based upon the closing sale
price on March 20, 1996), was approximately $420,281,320.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement related to the annual meeting of
security holders to be held April 20, 1996 are incorporated by reference
into Part III.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
First Commonwealth Financial Corporation
FORM 10-K
INDEX
PART I PAGE
ITEM 1. Business
Description of business.......................... 2
Competition...................................... 4
Supervision and regulation....................... 4
ITEM 2. Properties....................................... 7
ITEM 3. Legal Proceedings................................ 7
ITEM 4. Submission of Matters to a Vote of Security
Holders......................................... 7
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Security Holder Matters......................... 8
ITEM 6. Selected Financial Data.......................... 9
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.............. 10
ITEM 8. Financial Statements and Supplementary Data...... 26
ITEM 9. Disagreements on Accounting and Financial
Disclosures..................................... 53
PART III
ITEM 10. Directors and Executive Officers of the
Registrant..................................... 53
ITEM 11. Management Renumeration and Transactions........ 54
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management................................. 54
ITEM 13. Certain Relationships and Related Transactions.. 54
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................ 55
Signatures..................................... 57
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 ("PBWPA"), a Pennsylvania-chartered commercial bank in New
Castle, Lawrence County. On September 27, 1994 the Corporation affiliated
with United National Bancorporation, ("United"), a bank holding company, and
its wholly-owned subsidiaries. Unitas National Bank ("Unitas Bank") a
national bank headquartered in Chambersburg, Franklin County, Pennsylvania
and Unitas Mortgage Corporation ("Unitas Mortgage") were the only active
subsidiaries of United. Unitas Mortgage engaged in the origination of
mortgages for sale in the secondary mortgage market and is headquartered in
Carlisle, Pennsylvania. Upon merger, United was combined with the
Corporation and its subsidiaries became subsidiaries of the Corporation. On
September 29, 1994 the Corporation affiliated with Reliable Financial
Corporation ("RFC"), a savings and loan holding company and its wholly-owned
subsidiary, Reliable Savings Bank, PaSA ("RSB"), a state-chartered,
federally insured savings bank headquartered in Bridgeville, Pennsylvania.
As a result of the merger, RFC became a wholly-owned subsidiary of the
Corporation, with its principal places of business in Allegheny and
Washington Counties in western Pennsylvania.
Effective at the close of business November 13, 1995 seven wholly-owned
subsidiary banks of the Corporation including NBOC, Cenwest, Leechburg, PBT,
Central, PBWPA and Unitas Bank merged into Deposit, also a wholly-owned
subsidiary, under the Deposit charter. The name of the surviving bank was
immediately changed to First Commonwealth Bank ("FCB"); and the principal
place of business was moved to Indiana, Indiana County, Pennsylvania. The
subsidiary banks continue to operate in their local communities in central
and western Pennsylvania, as divisions of First Commonwealth Bank, doing
business under the following names: NBOC Bank, Deposit Bank, Cenwest Bank,
First Bank of Leechburg, Peoples Bank, Central Bank, Peoples Bank of Western
Pennsylvania and Unitas Bank.
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 1,060 persons (full-time equivalents) at December 31, 1995.
2
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Through FCB, the Corporation traces its banking origins to 1866. FCB and
RSB conduct their business through 81 community banking offices in 52
communities in the counties of Adams (1 office), Allegheny (2), Armstrong
(3), Beaver (1), Bedford (4), Blair (7), Cambria (11), Centre (4),
Clearfield (6), Elk (3), Franklin (2), Huntingdon (7), Indiana (8),
Jefferson (4), Lawrence (6), Somerset (6), Washington (1) and Westmoreland
(5).
FCB engages in general banking business and offers a full range of financial
services. FCB offers 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. RSB is a full
service savings association. Although approximately 80% of its loan
portfolio consists of loans secured by mortgages on 1-4 family residences,
it offers various loan services, including secured and unsecured, commercial
and consumer loans, construction and commercial mortgages and lease
financing. RSB also offers a full range of deposit products.
FCB and RSB (Banks) operate a network of 59 automated teller machines
("ATMs") which permit their customers to conduct routine banking
transactions 24 hours a day. Of the ATMS, 41 are located on the premises of
their main or branch offices and 18 are in remote locations. All the ATMs
are part of the MAC network which consist of over 19,000 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 Banks'
MAC customers may use the HONOR Network, which has 9,800 ATM's located
primarily in the southeast quadrant of the United States. The ATM's
operated by the Banks are also part of the global MasterCard/Cirrus network
which is comprised of more than 168,900 ATMs located in the United States,
Canada and 58 other countries and territories, which services over 365
million card holders. Such networks allow the Bank's customers to withdraw
cash and in certain cases conduct other banking transactions from ATMs of
all participating financial institutions.
In addition to funds access through the use of ATMs, the MAC debit card
offered to the Banks deposit customers may be used at 150,000 point of sale
terminals on the MAC system as well as being used on the global MasterCard
system for the purchase of goods and services. The MAC debit card provides
customers with the almost universal acceptability of a credit card combined
with the convenience of direct debit to the customers checking account.
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. CSC also acts as a centralized
purchasing agent for the purchase of computer hardware and software products
by the Corporation and subsidiaries as well as providing technical support
for the installation and use of these products. It competes, principally
with data processing subsidiaries of other, mostly larger, banks, on the
basis of the price and quality of its services and the speed with which such
services are delivered.
FCTC has four branch offices in the service areas of the 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 provides reinsurance for credit life and
credit and health insurance activities sold by the subsidiaries of the two
unrelated holding companies under a joint venture arrangement whereby the
net income derived from such reinsurance inures proportionally to the
benefit of the holding company selling the underlying insurance to its
banks' customers.
3
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
The Corporation does not engage in any significant business activities other
than holding the stock of its subsidiaries. The Corporation does not at
present have any plans to expand or modify its business or that of its
subsidiaries, other than as described herein. Nevertheless, it will be
receptive to and may actively seek out mergers and acquisitions in the event
opportunities which management considers advantageous to the development of
the Corporation's business arise, and may otherwise expand or modify its
business as management deems necessary to respond to changing market
conditions or the laws and regulations affecting the business of banking.
Competition
The Banks, FCTC and Unitas Mortgage face intense competition, both from
within and without their service areas, in all aspects of business. The
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 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 and institutions that offer annuities located throughout the United
States. Money market 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. Annuities accumulate interest on the
amounts deposited over a predetermined time period. The depositor is then
entitled to withdraw his funds for a fixed period of time or until death.
The effect of such competition has been to increase the costs of the rest of
deposits, which provide the funds with which loans are made. In addition to
savings and loan associations and credit unions, the Banks also compete for
consumer loans with local offices of national finance companies and finance
subsidiaries of automobile manufacturers and with national credit card
companies such as MasterCard and VISA, whose cards, issued through financial
institutions, are held by consumers throughout their service areas. The
Banks believe that the principal means by which they compete for deposits
and consumer and smaller commercial loans are the number and desirability of
the locations of their offices and ATMs, the sophistication and quality of
their services and the prices (primarily interest rates) of their services.
Additionally, the Banks intend to remain competitive by offering financial
services that target specific customer needs. Examples of such specialized
products include the "Sentry CD Watch" which provides certificate of deposit
rates of competitors to members of the Banks' "Senior Accent" club,
available to customers age 50 or better, and introduction of the "Too Good
To Be True" mortgage product, available to first time home buyers. Specific
customer needs are also met through an enhanced customer delivery system
that includes telephone banking, which provides convenient access to
financial services and hours of operation that extend past those of the
Banks' branch offices.
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.
4
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation (Continued)
The Bank Holding Company Act and Regulation Y of the Federal Reserve Board
require every bank holding company to obtain the prior approval of the
Federal Reserve Board before it may acquire direct or indirect ownership or
control of more than 5% of the outstanding voting shares or substantially
all of the assets of a bank or merge or consolidate with another bank
holding company. The Federal Reserve Board may not approve acquisitions by
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.
Upon the acquisition of RFC, the Corporation also became a savings and loan
holding company subject to regulation and supervision of the Office of
Thrift Supervision ("OTS") under the Savings and Loan Holding Company Act,
and by the Pennsylvania Department of Banking under the Pennsylvania Savings
Association Code of 1967, as amended. While the regulation and supervision
of multiple regulators increase the Corporation's cost of compliance with
federal and state banking laws and regulations, it is not excepted to have a
significant adverse effect on its operations or financial condition.
RFC is a unitary savings and loan holding company. Its only subsidiary, RSB
is a Qualified Thrift Lender ("QTL") because more than 65% of its portfolio
assets (as defined by law) are invested in residential mortgages, and
certain mortgage backed and housing related assets such as Federal Home Loan
Bank stock and stock issued by the Federal National Mortgage Association.
As a unitary savings and loan holding company, RFC and any subsidiary it
might create are not restricted to the statutorily prescribed list of
permissible activities found in the Savings and Loan Holding Company Act and
in certain regulations of the predecessor of the OTS, and the Savings and
Loan Holding Company Act imposes no limits on their direct or indirect non-
savings institutions operations.
If RFC were to acquire a second savings association and operate it as a
separate subsidiary, it would become a multiple savings and loan holding
company and its activities would be confined to a statutorily prescribed
list of activities regarded as closely related. If RSB were to lose its QTL
status, thereafter RFC would be regulated and supervised by the OTS as a
bank holding company, as described above for the Corporation, with each
savings institution subsidiary being treated as a bank for this purpose.
5
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
First Commonwealth Bank and Reliable Savings Bank
FCB is a Pennsylvania-chartered bank and is not a member of the Federal
Reserve System. FCB is 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. RSB is a Pennsylvania-chartered savings association and is
subject to the supervision of and is regularly examined by the Pennsylvania
Department of Banking and the OTS. FCB is a member of the FDIC while RSB is
a member of the Savings and Loan Insurance Fund of the FDIC. As such, both
FCB and RSB are subject to examination by the FDIC.
The areas of operation subject to regulation by Federal and Pennsylvania
laws, regulations and regulatory agencies include reserves against deposits,
maximum interest rates for specific classes of loans, truth-in-lending
disclosures, permissible types of loans and investments, trust operations,
mergers and acquisitions, issuance of securities, payment of dividends.
Community Reinvestment Act evaluations, mandatory external audits,
establishment of branches and other aspects of operations. Under the
Pennsylvania Banking Code, a state or national bank or a savings association
located in Pennsylvania may establish branches anywhere in the state.
Reciprocal Regional Interstate Banking
As already noted, a bank holding company located in one state cannot acquire
a bank or a bank holding company located in another state unless the law of
such other state specifically permits such acquisition. On June 25, 1986,
Pennsylvania passed a law (Act No. 1986-69) which provides that a bank
holding company located in any state or the District of Columbia can acquire
a Pennsylvania bank or bank holding company if the jurisdiction where the
acquiring bank holding company is located has passed an enabling law that
permits a Pennsylvania bank holding company to acquire a bank or a bank
holding company in such jurisdiction. As of December 31, 1995 enabling laws
have been passed so that the required reciprocity presently exists with
approximately 34 states, of which the following 18 are east of the
Mississippi River: Connecticut, Delaware, Illinois, Indiana, Kentucky,
Louisiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New
Jersey, New York, Ohio, Rhode Island, Tennessee, Vermont and West Virginia.
A similar law is applicable to savings associations and savings and loan
holding companies.
It is difficult to determine the precise effects that reciprocal regional
interstate banking will have on the Corporation, 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 and Pennsylvania
savings and loan holding companies that desire to expand outside
Pennsylvania to acquire banks, savings institutions and bank holding
companies located in jurisdictions with which Pennsylvania has reciprocity.
Effects of Governmental Policies
The business and earnings of the Corporation are affected not only by
general economic conditions, but also by the monetary and fiscal policies of
the United States Government and its agencies, including the Federal Reserve
Board. An important function of the Federal Reserve Board is to regulate
the national supply of bank credit. Among the instruments of monetary
6
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Effects of Governmental Policies (Continued)
policy used by the Federal Reserve Board to implement these objectives are
open market operations in United States government securities, changes in
the discount rate on borrowings by member banks and savings institutions
from the Federal Reserve System and changes in reserve requirements against
bank and savings institution deposits. These instruments, together with
fiscal and economic policies of various governmental entities, influence
overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans, received on investments or paid for
deposits.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of bank holding companies and their
subsidiary banks in the past and are expected to continue to do so in the
future. In view of changing conditions in the national and Pennsylvania
economies and in the money markets, as well as the effect of actions by
monetary and fiscal authorities, including the Federal Reserve Board, no
prediction can be made as to possible future changes in interest rates,
deposit levels and loan demand or the effect of such changes on the business
and earnings 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. In order to support future expansion needs and centralization
of various functional areas such as loan processing, marketing, and
accounting, the Corporation also owns two additional structures, free of all
liens and encumbrances. These facilities currently provide office space for
the Corporation, CSC, FCTC and FCB. The Banks have 81 banking facilities of
which 27 are leased and 54 are owned in fee, free of all liens and
encumbrances. All of the facilities utilized by the Corporation and its
subsidiaries are used primarily for banking activities. Management believes
all such facilities to be in good repair and well suited to their uses.
Management presently expects that such facilities will be adequate to meet
the anticipated needs of the Corporation and its subsidiaries for the
immediate future.
ITEM 3. LEGAL PROCEEDINGS
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
7
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Part II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder
Matters
First Commonwealth Financial Corporation (the "Corporation") is listed on
the New York Stock Exchange under the symbol "FCF". The approximate number
of holders of record of the Corporation's common stock is 8,300. The table
below sets forth the high and low sales prices per share and cash dividends
declared per share for common stock of the Corporation.
Cash
Dividends
Period High Sale Low Sale Per Share
1995
First Quarter $14.750 $13.250 $0.160
Second Quarter $15.875 $13.875 $0.160
Third Quarter $16.375 $14.500 $0.160
Fourth Quarter $17.875 $15.750 $0.180
Cash
Dividends
Period High Sale Low Sale Per Share
1994
First Quarter $20.250 $16.750 $0.140
Second Quarter $18.500 $15.500 $0.140
Third Quarter $19.000 $15.000 $0.140
Fourth Quarter $15.375 $13.500 $0.160
8
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 6. Selected Financial Data (Dollar Amounts in Thousands, except per
share data)
The following selected financial data is not covered by the auditor's report
and should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations, which follows, and with
the consolidated financial statements and related notes. All amounts have
been restated to reflect the poolings of interests.
Years Ended December 31,
1995 1994 1993 1992 1991
Interest income....................... $175,701 $159,644 $154,990 $155,606 $150,627
Interest expense...................... 82,418 69,102 67,164 73,295 82,205
Net interest income................. 93,283 90,542 87,826 82,311 68,422
Provision for possible loan losses.... 4,125 2,896 2,920 3,744 5,451
Net interest income after provision
for possible loan losses.......... 89,158 87,646 84,906 78,567 62,971
Securities gains (losses)............. (603) 5,536 3,528 955 711
Other operating income................ 11,007 10,635 10,960 9,362 7,465
Other operating expenses.............. 62,062 60,855 59,405 54,957 46,147
Income before taxes and cumulative
effect of change in accounting
method......................... 37,500 42,962 39,989 33,927 25,000
Applicable income taxes............... 11,974 14,226 12,444 9,393 6,305
Income before cumulative effect
of change in accounting method. 25,526 28,736 27,545 24,534 18,695
Cumulative effect of change in
accounting method................... -0- -0- 865 -0- -0-
Net income............................ $ 5,526 $ 28,736 $ 28,410 $ 24,534 $ 18,695
Per Share Data
Net income before cumulative effect
of change in accounting method..... $1.16 $1.28 $1.23 $1.12 $0.89
Cumulative effect of change in
accounting method.................. 0.00 0.00 0.04 0.00 0.00
Net income.......................... $1.16 $1.28 $1.27 $1.12 $0.89
Dividends declared.................. $0.66 $0.58 $0.51 $0.55 $0.38
Average shares outstanding.......... 22,005,427 22,432,062 22,416,360 21,983,845 20,899,175
At End of Period
Total assets........................ $2,364,307 $2,334,921 $2,252,836 $2,077,824 $1,746,365
Investment securities............... 748,702 813,687 909,166 703,227 559,127
Loans and leases, net of unearned
income............................ 1,487,542 1,377,794 1,211,109 1,165,494 1,009,595
Reserve for possible loan losses.... 18,152 17,337 16,483 15,828 10,681
Deposits............................ 1,962,760 1,881,060 1,822,085 1,788,226 1,519,044
Long-term debt...................... 5,261 7,596 7,363 8,130 6,524
Shareholders' equity................ 252,276 225,135 228,910 210,687 178,984
Key Ratios
Return on average assets............ 1.10% 1.26% 1.32% 1.26% 1.12%
Return on average equity............ 10.55% 12.55% 12.86% 12.30% 11.82%
Net loans to deposit ratio.......... 74.86% 72.32% 65.56% 64.29% 65.78%
Dividends per share as a percent of
net income per share.............. 56.90% 45.31% 40.16% 49.11% 42.70%
Average equity to average assets
ratio............................. 10.39% 10.01% 10.23% 10.26% 9.52%
9
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
This discussion and the related financial data are presented to assist in
the understanding and evaluation of the consolidated financial condition and
the results of operations of First Commonwealth Financial Corporation (the
"Corporation") including its subsidiaries for the years ended December 31,
1995, 1994 and 1993 and are intended to supplement, and should be read in
conjunction with, the consolidated financial statements and related
footnotes.
The Corporation acquired United National Bancorporation and its subsidiaries
("United") and Reliable Financial Corporation and its subsidiary
("Reliable") effective September 27, 1994 and September 29, 1994,
respectively. Effective December 31, 1993, the Corporation acquired Peoples
Bank of Western Pennsylvania ("PBWPA"). The mergers were accounted for as
poolings of interests and accordingly, all financial statements have been
restated as though the mergers had occurred at the beginning of the earliest
period presented.
Results of Operations
Net income in 1995 was $25.5 million, a decrease of $3.2 million from the
1994 level of $28.7 million and compared to $28.4 million reported in 1993.
Earnings per share decreased $0.12 per share in 1995 to $1.16. Earnings per
share before the cumulative effect of the change in accounting method
increased $0.05 per share in 1994 to $1.28 from $1.23 reported in 1993. The
impact of net securities transactions decreased earnings per share $0.27 in
1995 while changes in net interest income increased earnings by $0.20 per
share. Merger costs in 1994 reduced earnings by $0.07 per share. Included
in the salary and benefits costs in 1995 were early retirement costs and
other benefit adjustments resulting in a $0.05 per share adjustment. Return
on average assets was 1.10% and return on average equity was 10.55% during
1995 compared to 1.26% and 12.55%, respectively for 1994. Return on average
assets was 1.32% during 1993 while return on average equity was 12.86%.
The following is an analysis of the impact of changes in net income on
earnings per share:
1995 1994
vs. vs.
1994 1993
Net income per share, prior year $1.28 $1.27
Increase (decrease) from changes in:
Net interest income 0.20 0.12
Provision for possible loan losses (0.06) 0.00
Security transactions (0.27) 0.09
Other income 0.02 (0.02)
Salaries and employee benefits (0.16) (0.03)
Occupancy and equipment costs (0.02) 0.01
Merger expenses 0.07 (0.07)
FDIC expense 0.08 0.00
Other expenses (0.07) 0.03
Provision for income taxes 0.09 (0.08)
Subtotal 1.16 1.32
Cumulative effect of change in accounting
method 0.00 (0.04)
Net income per share $1.16 $1.28
10
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 $93.3 million in 1995
compared to $90.5 million in 1994 and $87.8 million in 1993. 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, 1995.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
1995 1994 1993
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 $ 8,552 $ 486 5.69% $ 14,677 $ 600 4.09% $ 37,905 $ 1,275 3.36%
Investment securities 769,006 45,600 6.12 870,656 48,645 5.80 818,319 47,988 6.07
Federal funds sold 17,712 1,033 5.83 4,138 186 4.49 8,865 268 3.02
Loans (b) (c), net of
unearned income 1,421,004 128,582 9.11 1,283,866 110,213 8.66 1,187,236 105,459 9.01
Total interest-
earning assets 2,216,274 175,701 8.04 2,173,337 159,644 7.48 2,052,325 154,990 7.71
Noninterest-earning assets:
Cash 53,752 54,542 48,794
Reserve for loan losses (17,584) (17,120) (16,399)
Other assets 77,843 77,498 74,596
Total noninterest-
earning assets 114,011 114,920 106,991
Total Assets $2,330,285 $2,288,257 $2,159,316
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing
demand deposits $ 208,330 3,108 1.49% $ 226,824 3,764 1.66% $ 226,902 4,686 2.07%
Savings deposits 464,021 11,858 2.56 503,327 11,520 2.29 493,323 11,908 2.41
Time deposits 1,060,070 58,855 5.55 948,804 45,901 4.84 922,456 46,473 5.04
Short-term borrowings 141,474 8,013 5.66 168,929 7,394 4.38 99,943 3,641 3.64
Long-term debt 7,010 584 8.33 7,744 523 6.75 7,985 456 5.71
Total interest-
bearing liabilities 1,880,905 82,418 4.38 1,855,628 69,102 3.72 1,750,609 67,164 3.84
Noninterest-bearing
liabilities and capital:
Noninterest-bearing
demand deposits 185,889 185,058 170,293
Other liabilities 21,429 18,576 17,428
Shareholders' equity 242,062 228,995 220,986
Total noninterest-
bearing funding sources 449,380 432,629 408,707
Total Liabilities and
Shareholders' Equity $2,330,285 $2,288,257 $2,159,316
Net Interest Income and
Net Yield On Interest-
earning Assets $ 93,283 4.32% $ 90,542 4.30% $ 87,826 4.43%
(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes net loan fees.
12
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 $42.9 million in 1995. Average
loans increased $137.1 million in 1995 and were supported by deposit growth
and maturities of investment securities.
During 1995 average investment securities decreased $101.7 million,
primarily as a result of the sale of $74.0 million of U.S. Treasury
securities, the proceeds of which were used to pay off short-term
borrowings. The investment securities sold had an average yield of 4.91%
while the short-term borrowings had an average cost over the remainder of
the year of 5.74%. This transaction increased net interest income by $342
thousand in 1995. The sale of U.S. Treasury securities during 1995 also had
a favorable impact on total investment yields during the year as the
securities sold had a lower yield compared to other securities in the
portfolio.
Both asset yields and the cost of funds increased in 1995. Asset yields, on
a tax-equivalent basis, increased 56 basis points (0.56%) during 1995 while
the cost of funds increased 66 basis points (0.66%). Conversely, during
1994 both asset yields and cost of funds decreased. Asset yields decreased
23 basis points (0.23%) in 1994 while the cost of funds decreased 12 basis
points (0.12%). During 1995 loan yields increased 45 basis points (0.45%)
when compared to the year ended December 31, 1994, but may have reached
their peak. After improving each quarter of 1994 and 1995, loan yields
declined during the fourth quarter of 1995. Loan yields may decline further
as the portfolio is impacted by declining interest rates and innovative loan
product offerings which bear lower introductory interest rates. These loan
products are designed to initiate relationships in the early stages of a
customer's financial life cycle so they may be developed thereafter with
more traditional banking products and services. Any initial earnings
reduction related to the new products are expected to produce long-term
profitable relationships and loan yields.
Prepayments of mortgage backed securities ("MBS") remained steady during
1995 and have not been significantly impacted by declining interest rates.
The primary risk of owning MBS relates to the uncertainty of prepayments of
the underlying mortgages. Interest rate changes have a direct impact on
prepayment speeds. As interest rates increase, prepayment speeds generally
decline, resulting in a longer average life of a MBS. Conversely as
interest rates decline, prepayment speeds increase, resulting in a shorter
average life of a MBS. Using computer simulation models, the Corporation
tests the average life and yield volatility of all MBSs under various
interest rate scenarios on a continuing basis to insure that volatility
falls within acceptable limits. The Corporation holds no "high risk"
securities nor does the Corporation own any securities of a single issuer
exceeding 10% of shareholders' equity other than U.S. Government and Agency
securities.
Average interest-bearing deposits increased $53.5 million during 1995 as a
result of declines of $57.8 million in interest-bearing demand deposits and
savings accounts combined with increases of $111.3 million in time deposits.
Time deposits increased primarily in the 12 to 23 month maturity range.
Since renewal rates were higher than the expiring rates for most of 1995,
these deposits experienced a rate increase of 189 basis points (1.89%)
compared to 1994. Deposit costs increased 57 basis points (0.57%) during
1995 while deposit costs declined 20 basis points (0.20%) during 1994.
Although the cost of funds increased more rapidly than earning asset yields
during 1995, loan growth throughout the year maintained the margin. Net
interest margin (net interest income, on a tax-equivalent basis as a
percentage of average earning assets), was 4.32% during 1995 compared to
4.30% in 1994 and 4.43% in 1993. The Corporation's use of computer modeling
to manage interest rate risk is described in the "Interest Sensitivity"
section of this discussion herein.
13
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
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)
1995 Change from 1994 1994 Change from 1993
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 $ (114) $ (251) $ 137 $ (675) $ (780) $ 105
Securities (3,045) (5,896) 2,851 657 3,177 (2,520)
Federal funds sold 847 609 238 (82) (143) 61
Loans 18,369 11,876 6,493 4,754 8,706 (3,952)
Total interest income 16,057 6,338 9,719 4,654 10,960 (6,306)
Interest-bearing liabilities:
Deposits 12,636 4,176 8,460 (1,882) 1,567 (3,449)
Short-term borrowings 619 (1,202) 1,821 3,753 2,511 1,242
Long-term debt 61 (50) 111 67 (14) 81
Total interest expense 13,316 2,924 10,392 1,938 4,064 (2,126)
Net interest income $ 2,741 $ 3,414 $ (673) $2,716 $ 6,896 $(4,180)
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 $4.1 million in 1995 compared to $2.9 million in 1994 and 1993.
The provision for possible loan losses increased in 1995 as a result of
growth in the portfolio as a whole, combined with charge-offs and increased
delinquencies of consumer installment and revolving credit loans. Net
charge-offs against the reserve for possible loan losses were $3.3 million,
or 0.23% of average total loans in 1995. This compared to $2.0 million in
1994 and $2.3 million in 1993. Net charge-offs were 0.16% and 0.19% of
average total loans in 1994 and 1993, respectively. Although charge-offs as
a percentage of average total loans increased for 1995 in comparison to
prior periods, this increase has not exceeded peer averages. In response to
charge-offs during the fourth quarter of 1995 in the amount of $1.3 million,
of which more than half were loans to individuals, the provision for
possible loan losses in the fourth quarter of 1995 was $1.7 million. For an
analysis of credit quality, see the "Credit Review" section of this
discussion.
14
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The following table presents an analysis of the consolidated reserve for
possible loan losses for the five years ended December 31, 1995 (dollars in
thousands):
Summary of Loan Loss Experience
1995 1994 1993 1992 1991
Loans outstanding at end of year $1,487,542 $1,377,794 $1,211,109 $1,165,494 $1,009,595
Average loans outstanding $1,421,004 $1,283,866 $1,187,236 $1,094,197 $ 977,620
Reserve for possible loan losses:
Balance, beginning of year $ 17,337 $ 16,483 $ 15,828 $ 10,681 $ 9,277
Addition as result of acquisition -0- -0- -0- 4,501 -0-
Loans charged off:
Commercial, financial and agricultural 1,161 1,246 774 860 2,007
Loans to individuals 2,316 1,676 1,825 1,906 1,889
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial 218 23 791 706 447
Real estate-residential 423 179 357 650 424
Lease financing receivables 52 52 106 127 117
Total loans charged off 4,170 3,176 3,853 4,249 4,884
Recoveries of loans previously charged off:
Commercial, financial and agricultural 132 254 563 371 153
Loans to individuals 518 563 565 397 600
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial 56 249 276 317 27
Real estate-residential 55 61 177 47 47
Lease financing receivables 99 7 7 19 10
Total recoveries 860 1,134 1,588 1,151 837
Net loans charged off 3,310 2,042 2,265 3,098 4,047
Provision charged to expense 4,125 2,896 2,920 3,744 5,451
Balance, end of year $ 18,152 $ 17,337 $ 16,483 $ 15,828 $ 10,681
Ratios:
Net charge-offs as a percentage
of average loans outstanding 0.23% 0.16% 0.19% 0.28% 0.41%
Reserve for possible loan losses
as a percentage of average loans
outstanding 1.28% 1.35% 1.39% 1.45% 1.09%
Total other operating income declined $5.8 million in 1995 to $10.4 million
from $16.2 million reported in 1994 and can be compared to $14.5 million in
1993. Net securities losses of $603 thousand in 1995 compared to securities
gains of $5.5 million in 1994 resulted in a decrease of $6.1 million. The
securities losses during 1995 resulted from the sale of $77.6 million of
securities, primarily U.S. Treasury securities classified as "available for
sale". As previously described in this discussion, the proceeds from the
sale of $74.0 million of these U.S. Treasury securities were used to pay off
short-term borrowings. This transaction is expected to result in a net
improvement in net interest income in excess of the net loss on the sale.
Since the short-term borrowings were at a variable rate, the exact benefit
is not determinable until after the securities would have matured.
During 1994 $7.5 million of securities classified as "held-to-maturity" were
sold at a net gain of $16 thousand. All but one security were called and
were sold within three months of the call date. The remaining security was
sold because of a significant deterioration of the issuer's
creditworthiness. Also during 1994, the Corporation sold 115,000 shares of
Federal Home Loan Mortgage Corporation common stock with a book value of
$970 thousand for a gain of $5.3 million in anticipation of a market value
decline if interest rates continued to rise.
15
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
During 1993 marketable equity securities with a book value of $1.6 million
were sold for a $1.0 million gain. The remaining securities transactions
during 1994 and 1993 were primarily the sales of U.S. Treasury securities,
U.S. Government agency securities maturing within a year and proceeds were
reinvested in U.S. Treasury securities and U.S. Government agency securities
with maturities of 2-4 years.
Although the market values of assets managed increased during 1995, trust
income decreased by $53 thousand, primarily as a result of lower income on
estates than in prior periods. Trust income decreased $106 thousand during
1994 as the market value of assets managed declined, reflecting the
turbulent bond and stock markets, thereby reducing the billing basis for
many of the trust accounts. Service charges on deposits increased for all
periods reported, primarily as a result of increased average total deposits.
Total other operating expenses increased $1.2 million to $62.1 million in
1995 and compared to $60.9 million and $59.4 million in 1994 and 1993,
respectively. Results for the 1994 period included merger costs of $1.7
million.
Employee costs during 1995 were $33.0 million, an increase of $3.0 million
over the 1994 level of $30.0 million. Included in employee costs for 1995
were early retirement settlements and other benefit adjustments of $1.3
million. Excluding early retirement settlements and other benefit
adjustments, employee costs increased 5.8% during 1995 primarily because of
an increase in the number of full time equivalent employees in customer
service areas and the cost of employee insurances and hospitalization.
Employee costs as a percentage of average assets was 1.42% in 1995 up from
1.31% in 1994 and 1.36% in 1993. Salary levels are generally maintained
through attrition management programs. Cost savings for 1996 can be
anticipated in hospitalization expenses as a result of converting to a
managed health care plan beginning in January 1996. Employee costs will
also be impacted positively as various functional areas of the Corporation,
such as accounting, human resource and marketing are redesigned to more
efficiently support the new organizational structure resulting from the
merger of eight commercial bank subsidiaries into a single operating unit
during 1995.
Net occupancy expense and furniture and equipment increased $360 thousand in
1995 as a result of increased utilization of leased equipment. As various
operational areas of the organization such as loan processing are redesigned
for greater efficiency, leased equipment is being used until long-term
equipment requirements can be identified. Leased equipment although
increasing costs over the short-term will allow for flexibility in systems
design and save costs over the long-term as furniture and equipment will not
be purchased until the process redesign has been completed. Net occupancy
expense and furniture and equipment increased in 1994 as the costs of
maintenance and repairs decreased and depreciation increased as the process
of automating loan documentation and the branch network progressed. This
upgrade is expected to improve platform productivity and reduce loan
documentation risks.
The deposit insurance assessment from the Federal Deposit Insurance
Corporation ("FDIC") decreased by $1.8 million in 1995 to $2.4 million from
$4.2 million and $4.1 million in 1994 and 1993 respectively. Since the FDIC
Bank Insurance Fund has reached its regulatory cap the assessment rate for
banks was reduced from $0.23 per $100 of deposits to $0.04 per $100 of
deposits effective June, 1995. For 1996 the Corporation's commercial bank
subsidiary will be assessed the minimum FDIC assessment of $2 thousand. As
a result of the Savings and Loan Insurance Fund remaining underfunded,
Congress could enact an additional one-time pretax assessment against the
thrift deposits of the Corporation during 1996. While the amount and
likelihood of the assessment is uncertain the impact could be as much as
$1.0 million.
16
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Other operating expenses decreased $374 thousand in 1995 to $18.2 million
and can be compared to $18.6 million in 1994 and $17.7 million in 1993. The
1994 period contained merger related expenses in the amount of $1.7 million.
After adjusting the 1994 total for the $1.7 million of merger costs
deducted, other operating expenses really increased by $1.3 million in 1995
and decreased by $835 thousand in 1994. The amortization of core deposit
intangibles decreased $210 thousand in 1995 and $484 in 1994 as the
intangibles related to mergers which occurred in 1984 and 1985 became fully
amortized in 1995. The primary cost increases which occurred in 1995
included the collection of loans or the disposition of real estate acquired
in lieu of loan repayment. Additional expenses of $129 thousand were also
incurred during 1995 as a result of the conversion of computer systems of
recently acquired subsidiaries to those of the Corporation and conversion of
a new trust processing system by the Corporation's trust subsidiary.
Stationery and supplies expense increased by $196 thousand during 1995
primarily as a result of the merger of eight commercial bank subsidiaries
which caused some supplies to become obsolete. Aggressive marketing of
innovative products and specialized customer services during 1995 caused
increases in advertising, promotions and printing expenses totalling $299
thousand. Postage costs increased $131 thousand in 1995 as a result of rate
increases. Restructuring costs had an impact on legal and professional fees
which increased by $296 thousand during 1995 as organizational changes were
evaluated and implemented.
Income tax expense was $12.0 million during 1995 representing a decrease of
$2.3 million over the 1994 total of $14.2 million and compared to $12.4
million in 1993. Taxable income decreased $6.4 million during 1995 while
taxable income increased $5.3 million in 1994. The Corporation's effective
tax rate decreased to 31.9% in 1995 from 33.1% in 1994 and compares to 31.1%
in 1993. The most significant factor for the decrease in the 1995 effective
rate compared to 1994 is related to the nondeductibility of merger expenses
incurred in 1994 for income tax purposes.
Liquidity
Liquidity is a measure of the Corporation's ability to efficiently meet
normal cash flow requirements of both borrowers and depositors. In the
ordinary course of business, funds are generated from deposits (primary
source) and the maturity or repayment of earning assets, such as securities
and loans. As an additional secondary source, short-term liquidity needs
may be provided through the use of overnight Federal funds purchased,
borrowings through the use of lines available for repurchase agreements, and
borrowings from the Federal Reserve Bank. Additionally, all of the banking
subsidiaries are members of the Federal Home Loan Bank and may borrow up to
ten percent of their total assets at any one time. The sale of earning
assets may also provide an additional source of liquidity.
17
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
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 $81.7 in 1995 and included $42.3 million in
core deposits. Non-core deposits, which are time deposits in denominations
of $100 thousand or more represented 8.52% of total deposits at December 31,
1995. Non-core deposits increased by $39.4 million in 1995 primarily as a
result of an increase in public funds. Time deposits of $100 thousand or
more at December 31, 1995, 1994 and 1993 had remaining maturities as
follows:
Maturity Distribution of
Large Certificates of Deposit
(Dollar Amounts in Thousands)
1995 1994 1993
Amount Percent Amount Percent Amount Percent
Remaining Maturity:
3 months or less $ 40,377 24% $ 37,968 30% $ 21,229 20%
Over 3 months through 6 months 26,331 16 10,191 8 16,078 16
Over 6 months through 12 months 32,357 19 17,885 14 17,996 17
Over 12 months 68,241 41 61,841 48 48,645 47
Total $167,306 100% $127,885 100% $103,948 100%
Net loans increased $109.7 million during 1995 primarily in the categories
of consumer loans and real estate loans secured by residential properties.
In combination these categories represented over 70% of the loan growth
during 1995, reflecting a strengthening of consumer loan demand. Below is a
schedule of loans by classification for the five years ended December 31,
1995.
Loans by Classification
(Dollar Amounts in Thousands)
1995 1994 1993 1992 1991
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial,
agricultural and
other $ 192,530 13% $ 180,373 13% $ 179,227 14% $ 216,183 18% $ 274,799 26%
Real estate-construction 22,969 1 23,131 2 12,980 1 17,007 1 14,696 1
Real estate-commercial 293,095 19 268,417 19 238,864 19 204,853 17 121,578 12
Real estate-residential 616,661 40 587,734 41 511,889 41 484,218 40 405,078 39
Loans to individuals 381,729 25 332,167 23 279,357 23 259,419 22 212,323 20
Net leases 24,190 2 30,498 2 26,617 2 23,521 2 19,121 2
Gross loans and
leases 1,531,174 100% 1,422,320 100% 1,248,934 100% 1,205,201 100% 1,047,595 100%
Unearned income (43,632) (44,526) (37,825) (39,707) (38,000)
Total loans, and leases
net of unearned income $1,487,542 $1,377,794 $1,211,109 $1,165,494 $1,009,595
An additional source of liquidity are marketable securities that the
Corporation holds in its investment portfolio. These securities are
classified as "securities available for sale". While the Corporation does
not have specific intentions to sell these securities, they have been
designated as "available for sale" because they may be sold for the purpose
of obtaining future liquidity, for management of interest rate risk or as
part of the implementation of tax management strategies. As of December 31,
1995, securities available for sale had an amortized cost of $242.9 million
and a market value of $244.2 million. Gross unrealized gains were $2.3
million and gross unrealized losses were $1.1 million. Based upon the
Corporation's historical ability to fund liquidity needs from other sources,
the current available for sale portfolio is deemed more than adequate, as
the Corporation does not anticipate a need to liquidate the investments
until maturity.
18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Below is a schedule of the maturity distribution of securities held to
maturity and securities available for sale at December 31, 1995.
Maturity Distribution of Securities Held to Maturity
(Dollar Amounts in Thousands)
U.S. Treasury, and other States and Total Weighted
U.S. Government Agencies Political Other Amortized Average
and Corporations Subdivisions Securities Cost Yield*
Within 1 year $ 5,473 $ 5,122 $ 4,666 $ 15,261 6.51%
After 1 but within 5 years 121,844 19,905 8,092 149,841 5.94
After 5 but within 10 years 176,333 32,201 3,952 212,486 6.15
After 10 years 122,170 4,621 130 126,921 6.06
Total $425,820 $61,849 $16,840 $504,509 6.08%
Maturity Distribution of Securities Available for Sale
At Amortized Cost
(Dollar Amounts in Thousands)
U.S. Treasury, and other States and Total Weighted
U.S. Government Agencies Political Other Amortized Average
and Corporations Subdivisions Securities Cost Yield*
Within 1 year $ 37,168 $ 272 $ 499 $ 37,939 5.06%
After 1 but within 5 years 95,380 -0- 1,258 96,638 5.80
After 5 but within 10 years 1,113 -0- 1,717 2,830 7.65
After 10 years 79,372 -0- 26,147 105,519 6.70
Total $213,033 $ 272 $29,621 $242,926 6.10%
*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.
The primary components of ISA include adjustable rate loans and investments,
loan repayments, investment maturities and money market investments. The
primary components of ISL include maturing certificates of deposit, money
market deposits, savings deposits, NOW accounts and short-term borrowings.
19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Interest Sensitivity (Continued)
The following table lists the amounts and ratios of assets and liabilities
with rates or yields subject to change within the periods indicated as of
December 31, 1995 and 1994 (Dollar Amounts in Thousands):
1995
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
Loans $ 515,833 $ 82,754 $167,780 $ 766,367
Investments 18,351 33,319 42,960 94,630
Other interest-earning assets 91,408 6,698 6,272 104,378
Total interest-sensitive
assets 625,592 122,771 217,012 965,375
Certificates of deposit 223,659 130,053 257,833 611,545
Other deposits 680,303 -0- -0- 680,303
Short-term borrowings 102,527 10,164 6,838 119,529
Total interest-sensitive
liabilities 1,006,489 140,217 264,671 1,411,377
Gap $ (380,897) $(17,446) $(47,659) $ (446,002)
ISA/ISL 0.62 0.88 0.82 0.68
Gap/Total assets 16.11% 0.74% 2.02% 18.86%
1994
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
Loans $ 423,116 $ 95,292 $182,799 $ 701,207
Investments 20,298 24,414 55,647 100,359
Other interest-earning assets 92,845 6,696 6,707 106,248
Total interest-sensitive
assets 536,259 126,402 245,153 907,814
Certificates of deposit 166,557 114,482 125,588 406,627
Other deposits 687,882 -0- -0- 687,882
Short-term borrowings 174,728 16,554 4,074 195,356
Total interest-sensitive
liabilities 1,029,167 131,036 129,662 1,289,865
Gap $ (492,908) $ (4,634) $115,491 $ (382,051)
ISA/ISL 0.52 0.96 1.89 0.70
Gap/Total assets 21.11% 0.20% 4.95% 16.36%
20
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Final loan maturities and rate sensitivity of the loan portfolio excluding
consumer installment and mortgage loans and before unearned income at
December 31, 1995 were as follows (Dollar Amounts in Thousands):
Within One One to After
Year 5 Years 5 Years Total
Commercial and industrial $ 85,772 $ 39,145 $ 38,417 $163,334
Financial institutions 180 47 -0- 227
Real estate-construction 16,580 2,170 4,219 22,969
Real estate-commercial 74,053 66,772 152,270 293,095
Other 3,699 6,586 18,684 28,969
Totals $180,284 $114,720 $213,590 $508,594
Loans at fixed interest rates 77,995 134,155
Loans at variable interest rates 36,725 79,435
Totals $114,720 $213,590
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, 1995 indicated that a 300 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.
The Corporation's written lending policy requires certain underwriting
standards to be met prior to funding any loan, including requirements for
credit analysis, collateral value coverage, documentation, and terms. The
principal factor used to determine potential borrowers' creditworthiness is
business cash flows or consumer income available to service debt payments.
Secondary sources of repayment, including collateral or guarantees, are
frequently obtained.
21
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The lending policy provides limits for individual and bank committees
lending authorities. In addition to the bank loan approval process,
requests for borrowing relationships which will exceed one million dollars
must also be approved by the Corporation's Credit Committee. This Committee
consists of a minimum of three members of the Corporation's board of
directors.
Commercial and industrial loans are generally granted to small and middle
market customers for operating, expansion or asset acquisition purposes.
Operating cash flows of the business enterprise are identified as the
principal source of repayment, with business assets held as collateral.
Collateral margins and loan terms are based upon the purpose and structure
of the transaction as set forth in loan policy.
Commercial real estate loans are granted for the acquisition or improvement
of real property. Generally, commercial real estate loans do not exceed 75%
of the appraised value of property pledged to secure the transaction.
Repayment of such loans are expected from the operations of the subject real
estate and are carefully analyzed prior to approval.
Real estate construction loans are granted for the purposes of constructing
improvements to real property, both commercial and residential. On-site
inspections are conducted by qualified individuals prior to periodic
permanent project financing, which is generally committed prior to the
commencement of construction financing.
Real estate loans secured by 1-4 family residential housing properties are
granted subject to statutory limits in effect for each bank regarding the
maximum percentage of appraised value of the mortgaged property.
Residential loan terms are normally established in compliance with secondary
market requirements. Residential mortgage portfolio interest rate risk is
controlled by secondary market sales, variable interest rate loans and
balloon maturities.
Loans to individuals represent financing extended to consumers for personal
or household purposes, including automobile financing, education, home
improvement, and personal expenditures. These loans are granted in the form
of installment, credit card, or revolving credit transactions. Consumer
creditworthiness is evaluated on the basis of ability to repay, stability of
income sources, and past credit history.
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)
1995 1994 1993 1992 1991
Commercial, industrial, financial,
agricultural and other $ 1,800 $ 2,443 $ 2,541 $ 5,488 $ 4,579
Real estate-construction 220 215 146 98 124
Real estate-commercial 3,253 3,328 3,389 1,750 1,405
Real estate-residential 4,334 4,532 4,151 3,186 1,481
Loans to individuals 2,377 2,417 1,978 1,991 1,343
Lease financing receivables 162 243 552 182 139
Unallocated 6,006 4,159 3,726 3,133 1,610
Total $18,152 $17,337 $16,483 $15,828 $10,681
Reserve as percentage
of average total loans 1.28% 1.35% 1.39% 1.45% 1.09%
22
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The unallocated portion of the reserve for possible loan losses increased
during 1995 in both total dollars and as a percentage of the total reserve.
Various factors impacted this increase but most notably were an amount set
aside to provide for loan growth and an increase in net charge-offs in the
fourth quarter of 1995 which reduced the balances for which a specific
reserve had been allocated.
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 but are well
secured and in the process of collection. 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 and Impaired Assets and Effect on Interest
Income Due to Nonaccrual
(Dollar Amounts in Thousands)
1995 1994 1993 1992 1991
Loans on nonaccrual basis $ 7,419 $ 9,575 $ 9,672 $ 9,328 $ 6,089
Past due loans 7,881 6,936 9,106 7,578 6,266
Renegotiated loans 803 733 1,413 1,229 1,086
Total nonperforming loans $16,103 $17,244 $20,191 $18,135 $13,441
Nonperforming loans as a percentage of
total loans 1.08% 1.25% 1.67% 1.56% 1.33%
Reserve as percentage of nonperforming
loans 112.72% 100.54% 81.64% 87.28% 79.47%
Other real estate owned $ 1,408 $ 2,269 $5,590 $4,894 $2,599
Gross income that would have been
recorded at original rates $ 857 $ 1,085 $ 929 $ 1,080 $ 579
Interest that was reflected in income 161 164 204 139 41
Net reduction to interest income due to
nonaccrual $ 696 $ 921 $ 725 $ 941 $ 538
The reduction of income due to renegotiated loans was less than $50 thousand
in any year presented.
The ratio of the reserve for possible loan losses as a percentage of
nonperforming loans has steadily increased over the past five years
strengthening the reserve's ability to absorb credit losses. At December
31, 1995 the ratio of the reserve for possible loan losses as a percentage
of nonperforming loans remains lower than the Corporation's peers and
although this ratio is an indicator of the strength of the reserve for
possible loan losses it does not in itself measure loan loss reserve
adequacy. Other factors to be considered include historical loan losses and
nonperforming loan levels. These measurements were favorable when compared
to peer group levels over the past five years. Management believes that the
reserve for possible loan losses and nonperforming loans remains safely
within acceptable levels.
23
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Effective January 1, 1995 the Corporation adopted Financial Accounting
Standards Board Statement No. 114 "Accounting by Creditors for Impairment of
a Loan" ("FAS No. 114"), as amended by Statement No. 118 "Accounting by
Creditors for Impairment of a Loan Income Recognition and Disclosures" ("FAS
No. 118"). This statement addresses the accounting by creditors for
impairment of a loan by specifying how allowances for credit losses related
to certain loans should be determined. For an analysis of the impact of
implementation of FAS No. 118 see NOTE 7 to the consolidated financial
statements.
Capital Resources
Equity capital increased $27.1 million in 1995 to $252.3 million. Dividends
declared decreased equity by $14.8 million, an increase over the 1994 period
as the dividend rate was increased. 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, and fair value
adjustments to unearned ESOP shares, increased equity capital by $675
thousand. The market value adjustment to securities available for sale
increased capital by $17.3 million as market values rebounded. Amounts paid
to fund the discount on reinvested dividends and optional cash payments
reduced equity by $342 thousand. The cost of purchasing treasury shares
decreased equity by $1.6 million while proceeds from the reissuance of
treasury shares to provide for stock options exercised increased equity
capital by $316 thousand during 1995.
A capital base can be considered adequate when it enables the Corporation to
intermediate funds responsibly and provide related services while protecting
against future uncertainties. The evaluation of capital adequacy depends on
a variety of factors, including asset quality, liquidity, earnings history
and prospects, internal controls and management caliber. In consideration
of these factors, management's primary emphasis with respect to the
Corporation's capital position is to maintain an adequate and stable ratio
of equity to assets.
The Federal Reserve Board 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.
24
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Capital Resources (Continued)
The table below presents the Corporation's capital position at December 31,
1995:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $238,186 16.5
Risk-Based Requirement 57,607 4.0
Total Capital 256,331 17.8
Risk-Based Requirement 115,214 8.0
Minimum Leverage Capital 238,186 10.2
Minimum Leverage Requirement 93,369 4.0
Inflation and Changing Prices
Management is aware of the impact inflation has on interest rates and
therefore the impact it can have on a bank's performance. The ability of a
financial institution to cope with inflation can only be determined by
analysis and monitoring of its asset and liability structure. The
Corporation monitors its asset and liability position with particular
emphasis on the mix of interest-sensitive assets and liabilities in order to
reduce the effect of inflation upon its performance. However, it must be
remembered that the asset and liability structure of a financial institution
is substantially different from an industrial corporation in that virtually
all assets and liabilities are monetary in nature, meaning that they have
been or will be converted into a fixed number of dollars regardless of
changes in general price levels. Examples of monetary items include cash,
loans and deposits. Nonmonetary items are those assets and liabilities
which do not gain or lose purchasing power solely as a result of general
price level changes. Examples of nonmonetary items are premises and
equipment.
Inflation can have a more direct impact on categories of noninterest
expenses such as salaries and wages, supplies and employee benefit costs.
These expenses are very closely monitored by management for both the effects
of inflation and increases relating to such items as staffing levels, usage
of supplies and occupancy costs.
25
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
(Dollar Amounts in Thousands)
December 31,
1995 1994
Assets
Cash and due from banks on demand...........$ 62,381 $ 66,055
Interest-bearing deposits with banks........ 8,288 13,686
Federal funds sold.......................... 4,800 -0-
Securities available for sale, at market.... 244,193 443,189
Securities held to maturity, at cost, market
value $503,568 in 1995 and $348,074 in 1994 504,509 370,498
Loans....................................... 1,531,174 1,422,320
Unearned income........................... (43,632) (44,526)
Reserve for possible loan losses.......... (18,152) (17,337)
Net loans............................ 1,469,390 1,360,457
Property and equipment...................... 29,435 29,196
Other real estate owned..................... 1,408 2,269
Other assets................................ 39,903 49,571
Total assets.........................$2,364,307 $2,334,921
Liabilities
Deposits (All Domestic):
Noninterest-bearing.......................$ 200,939 $ 199,172
Interest-bearing.......................... 1,761,821 1,681,888
Total deposits....................... 1,962,760 1,881,060
Short-term borrowings....................... 120,774 201,706
Other liabilities........................... 23,236 19,424
Long-term debt.............................. 5,261 7,596
Total liabilities.................... 2,112,031 2,109,786
Shareholders' Equity
Preferred stock, $1 par value per
share, 3,000,000 shares authorized
and unissued.............................. -0- -0-
Common stock, $1 par value per share,
100,000,000 shares authorized, 22,436,628
shares issued and 22,371,626 outstanding
in 1995; 22,436,628 shares issued and
22,430,728 shares outstanding in 1994..... 22,437 22,437
Additional paid-in capital.................. 77,226 77,964
Retained earnings........................... 157,576 146,814
Unrealized gain (loss) on securities
available for sale, net of taxes.......... 511 (16,802)
Treasury stock (65,002 and 5,900 shares at
December 31, 1995 and 1994, respectively
at cost).................................. (929) (82)
Unearned ESOP shares........................ (4,545) (5,196)
Total shareholders' equity........... 252,276 225,135
Total liabilities and
shareholders' equity..........$2,364,307 $2,334,921
The accompanying notes are an integral part of these consolidated
financial statements.
26
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,
1995 1994 1993
Interest Income
Interest and fees on loans................ $128,582 $110,213 $105,459
Interest and dividends on investments:
Taxable interest........................ 41,775 44,187 44,068
Interest exempt from Federal
income taxes.......................... 2,785 3,430 3,068
Dividends............................... 1,040 1,028 852
Interest on Federal funds sold............ 1,033 186 268
Interest on bank deposits................. 486 600 1,275
Total interest income................. 175,701 159,644 154,990
Interest Expense
Interest on deposits..................... 73,821 61,185 63,067
Interest on short-term borrowings........ 8,013 7,394 3,641
Interest on long-term debt............... 584 523 456
Total interest expense............... 82,418 69,102 67,164
Net interest income........................ 93,283 90,542 87,826
Provision for possible loan losses......... 4,125 2,896 2,920
Net interest income after provision for
possible loan losses..................... 89,158 87,646 84,906
Other Income
Net securities gains (losses)............ (603) 5,536 3,528
Trust income............................. 2,173 2,226 2,332
Service charges on deposit accounts...... 5,601 5,382 5,208
Other income............................. 3,233 3,027 3,420
Total other income................... 10,404 16,171 14,488
Other Expenses
Salaries and employee benefits........... 33,034 30,035 29,369
Net occupancy expense.................... 4,347 4,238 4,165
Furniture and equipment expense.......... 4,110 3,859 4,085
FDIC expense............................. 2,373 4,151 4,051
Other operating expenses................. 18,198 18,572 17,735
Total other expenses................. 62,062 60,855 59,405
Income before taxes and cumulative
effect of change in accounting
method................................... 37,500 42,962 39,989
Applicable income taxes.................... 11,974 14,226 12,444
Net income before cumulative effect
of change in accounting method........... 25,526 28,736 27,545
Cumulative effect of change in
accounting method....................... -0- -0- 865
Net Income................................. $25,526 $28,736 $28,410
Average Shares Outstanding................. 22,005,427 22,432,062 22,416,360
Per share data:
Net income before cumulative effect
of change in accounting method......... $1.16 $1.28 $1.23
Cumulative effect of change in
accounting method...................... 0.00 0.00 0.04
Net income............................... $1.16 $1.28 $1.27
The accompanying notes are an integral part of these consolidated financial
statements.
27
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 Unearned Total
Common Paid-in Retained Available ESOP Treasury Shareholders'
Stock Capital Earnings For Sale Shares Stock Equity
Balance at December 31, 1992........... $22,517 $79,253 $114,277 $ -0- $(4,913) $ (447) $210,687
Net income............................ -0- -0- 28,410 -0- -0- -0- 28,410
Cash dividends declared............... -0- -0- (8,944) -0- -0- -0- (8,944)
Cash dividends declared by pooled
subsidiaries prior to merger......... -0- -0- (2,356) -0- -0- -0- (2,356)
Unrealized gain on securities available
for sale, net of tax effect.......... -0- -0- -0- 1,584 -0- -0- 1,584
Tax benefit on ESOP dividends......... -0- -0- 84 -0- -0- -0- 84
Decrease in unearned ESOP shares...... -0- -0- -0- -0- 464 -0- 464
Discount on dividend reinvestment
plan purchases....................... -0- (159) -0- -0- -0- -0- (159)
Treasury stock acquired by pooled
subsidiary........................... -0- -0- -0- -0- -0- (973) (973)
Treasury stock reissued by pooled
subsidiary........................... -0- -0- (91) -0- -0- 204 113
Balance at December 31, 1993........... 22,517 79,094 131,380 1,584 (4,449) (1,216) 228,910
Net income............................ -0- -0- 28,736 -0- -0- -0- 28,736
Cash dividends declared............... -0- -0- (11,950) -0- -0- -0- (11,950)
Cash dividends declared by pooled
subsidiaries prior to merger......... -0- -0- (1,328) -0- -0- -0- (1,328)
Change in market value of securities
available for sale, net of tax effect -0- -0- -0- (18,386) -0- -0- (18,386)
Tax benefit on ESOP dividends......... -0- -0- 81 -0- -0- -0- 81
Increase in unearned ESOP shares...... -0- -0- -0- -0- (747) -0- (747)
Discount on dividend reinvestment
plan purchases....................... -0- (212) -0- -0- -0- -0- (212)
Treasury stock acquired............... -0- -0- -0- -0- -0- (82) (82)
Treasury stock reissued by pooled
subsidiary........................... -0- -0- (105) -0- -0- 218 113
Treasury stock cancelled in merger.... (80) (918) -0- -0- -0- 998 -0-
Balance at December 31, 1994........... 22,437 77,964 146,814 (16,802) (5,196) (82) 225,135
Net income............................ -0- -0- 25,526 -0- -0- -0- 25,526
Cash dividends declared............... -0- -0- (14,764) -0- -0- -0- (14,764)
Change in market value of securities
available for sale, net of tax
effect.............................. -0- -0- -0- 17,313 -0- -0- 17,313
Decrease in unearned ESOP shares...... -0- 24 -0- -0- 651 -0- 675
Discount on dividend reinvestment
plan purchases....................... -0- (342) -0- -0- -0- -0- (342)
Treasury stock acquired............... -0- -0- -0- -0- -0- (1,583) (1,583)
Treasury stock reissued............... -0- (420) -0- -0- -0- 736 316
Balance at December 31, 1995........... $22,437 $77,226 $157,576 $ 511 $(4,545) $ (929) $252,276
The accompanying notes are an integral part of these consolidated financial statements.
28
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Years Ended December 31,
1995 1994 1993
Operating Activities
Net income............................................ $25,526 $28,736 $28,410
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses................. 4,125 2,896 2,920
Depreciation and amortization...................... 5,126 5,126 5,086
Net losses (gains) on sales of assets.............. 427 (5,555) (4,050)
Increase in interest receivable.................... (765) (1,123) (2)
Increase (decrease) in interest payable............ 3,349 631 (986)
Increase (decrease) in income taxes payable........ (2,168) 135 945
Change in deferred taxes........................... 863 849 (1,181)
Other - net........................................ 544 (3,917) (697)
Net cash provided by operating activities....... 37,027 27,778 30,445
Investing Activities
Transactions with securities held to maturity:
Sales.............................................. -0- 7,476 99,479
Maturities and redemptions......................... 49,859 104,915 341,171
Purchases of investment securities................. (38,462) (70,246) (640,777)
Transactions with securities available for sale:
Sales.............................................. 76,999 51,427 -0-
Maturities and redemptions......................... 46,965 73,296 -0-
Purchases of investment securities................. (44,342) (94,197) -0-
Proceeds from sales of loans and other assets......... 21,180 13,488 20,406
Net decrease in time deposits with banks.............. 5,398 6,848 34,653
Net increase in loans................................. (132,610) (178,299) (66,864)
Purchases of premises and equipment................... (4,095) (5,578) (4,099)
Net cash used by investing activities........... (19,108) (90,870) (216,031)
Financing Activities
Proceeds from issuance of long-term debt.............. -0- -0- 202
Repayments of long-term debt.......................... (1,684) (515) (505)
Tax benefit of ESOP dividend.......................... -0- 81 84
Discount on dividend reinvestment plan purchases...... (342) (212) (159)
Dividends paid........................................ (14,326) (10,878) (8,571)
Dividends paid by pooled subsidiaries prior to merger. -0- (1,328) (2,351)
Acquisition of treasury stock......................... (1,583) (82) (973)
Reissuance of treasury stock.......................... 316 113 113
Net increase in deposits.............................. 81,759 59,079 33,940
Net increase (decrease) in Federal funds purchased.... (34,940) 20,220 45,955
Net increase (decrease) in other short-term borrowings (45,993) 5,302 74,355
Net cash provided (used) by financing activities (16,793) 71,780 142,090
Net increase (decrease) in cash and cash
equivalents................................... 1,126 8,688 (43,496)
Cash and cash equivalents at January 1.................. 66,055 57,367 100,863
Cash and cash equivalents at December 31................ $67,181 $66,055 $ 57,367
The accompanying notes are an integral part of these consolidated financial
statements.
29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
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.
The financial information is presented in accordance with generally accepted
accounting principles and general practice for financial institutions. In
preparing financial statements management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. In addition, these estimates and assumptions affect revenues
and expenses in the financial statements and as such, actual results could
differ from those estimates.
Through its subsidiaries which include a commercial bank, savings bank and
nondepository trust company, the Corporation provides a full range of loan,
deposit and trust services primarily to individuals and small to middle-
market businesses in eighteen counties in central and western Pennsylvania.
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.
As part of the Corporation's long-term strategic plan, eight commercial
banking subsidiaries began operating under a single banking charter during
the fourth quarter of 1995. The merger was accounted for in a manner
similar to a pooling of interests and accordingly the combined entity was
recorded at historic cost.
Investments of 20 to 50 percent of the outstanding common stock of investees
are accounted for using the equity method of accounting.
Securities
Debt securities that the Corporation has the positive intent and ability to
hold to maturity are classified as securities held-to-maturity and are
reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are to be
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings. Debt and equity securities not
classified as either held-to-maturity securities or trading securities are
classified as securities available-for-sale and are reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of deferred taxes.
The Corporation had securities classified as either held-to-maturity or
available-for-sale. The Corporation does not engage in trading activities.
Net gain or loss on the sale of securities was determined by using the
specific identification method.
Prior to the implementation of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities
("FAS No. 115"), effective December 31, 1993, investment securities were
stated at cost adjusted for amortization of premium and accretion of
discount. Marketable equity securities were carried at the lower of
aggregate cost or market value.
30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(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.
Effective January 1, 1995 the Corporation adopted Financial Accounting
Standards Board Statement No. 114 "Accounting by Creditors for Impairment of
a Loan", as amended by Statement No. 118 "Accounting By Creditors for
Impairment of a Loan Income Recognition and Disclosures", ("FAS No. 118").
These statements address the accounting by creditors, such as banks, for the
impairment of certain loans. The Corporation considers a loan to be
impaired when, based on current information and events, it is probable that
a creditor will be unable to collect principal or interest due according to
the contractual terms of the loan. Loan impairment is measured based on the
present value of expected cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loans observable market
price or the fair value of the collateral if the loan is collateral
dependent.
Payments received on impaired loans are applied against the recorded
investment in the loan. For loans other than those that the Corporation
expects repayment through liquidation of the collateral, when the remaining
recorded investment in the impaired loan is less than or equal to the
present value of the expected cash flows, income is recorded on a cash
basis.
The adoption of FAS No. 118 did not have a material impact on the
Corporation's financial condition or results of operations.
Loan Fees
Loan origination and commitment fees, net of associated direct costs, are
deferred and the net amount is amortized as an adjustment to the related
loan yield on the interest method, generally over the contractual life of
the related loans or commitments.
Other Real Estate Owned
Real estate, other than bank premises, is recorded at the lower of cost or
fair value less selling costs at the time of acquisition. Expenses related
to holding the property, net of rental income, are generally charged against
earnings in the current period.
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.
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
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.
Income Taxes
The Corporation records taxes in accordance with the asset and liability
method utilized by Statement of Financial Accounting Standards No. 109 ("FAS
No. 109"), whereby deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities and
their respective tax bases given the provisions of the enacted tax laws.
Deferred tax assets are reduced, if necessary, by the amount of such
benefits that are not expected to be realized based upon available evidence.
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:
1995 1994 1993
Interest $79,069 $68,576 $68,379
Income taxes $13,266 $13,234 $11,334
Noncash investing and financing activities:
ESOP borrowings $ 500 $ 1,730 $ 250
ESOP loan reductions $ 1,151 $ 983 $ 714
32
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Supplemental Disclosures (Continued)
1995 1994 1993
Gross increase (decrease)
in Market Value adjustment
to securities available
for sale pursuant to FAS
No. 115 $ 26,635 $(28,285) $ 2,438
Net securities available
for sale transferred to
securities held to
maturity $145,723 $ -0- $ -0-
Net securities held to
maturity transferred to
securities available for
sale upon implementation
of FAS No. 115 $ -0- $ 31,011 $462,786
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 poolings of
interests. Average number of shares for prior periods reflect the two-for-
one stock split effected in the form of a 100% stock dividend declared on
January 18, 1994.
Employee Stock Ownership Plan
In November 1993 the Accounting Standards Division of the American Institute
of Certified Public Accountants issued Statement of Position 93-6 ("SOP 93-
6") "Employers' Accounting for Employee Stock Ownership Plans". This
statement affects the accounting treatment of the Corporation's Employee
Stock Ownership Plan ("ESOP") described in NOTE 15. The Corporation
prospectively adopted SOP 93-6 for ESOP shares acquired after December 31,
1992 (new shares). As permitted by the Statement of Position the
Corporation has elected not to adopt this statement for ESOP shares acquired
on or before December 31, 1992 (old shares).
ESOP shares purchased subject to debt guaranteed by the Corporation are
recorded as a reduction of common shareholders' equity by charging unearned
ESOP shares. As shares are committed to be released to the ESOP trust for
allocation to plan participants unearned ESOP shares is credited for the
cost of the shares to the ESOP. Compensation cost recognized for new shares
in accordance with the provisions of SOP 93-6 is based upon the fair market
value of the shares committed to be released. Additional paid-in capital is
charged or credited for the difference between the fair value of the shares
committed to be released and the cost of those shares to the ESOP.
Compensation cost recognized for old shares committed to be released is
recorded at the cost of those shares to the ESOP.
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Employee Stock Ownership Plan (Continued)
Dividends on both old and new unallocated ESOP shares are used for debt
service and are reported as a reduction of debt and accrued interest
payable. Dividends on allocated ESOP shares are charged to retained
earnings and allocated to the plan participants accounts. The average
number of common shares outstanding used in calculating earnings per share
excludes all unallocated ESOP shares.
NOTE 2--Business Combinations
Effective September 29, 1994 the Corporation acquired all of the outstanding
common shares of Reliable Financial Corporation ("Reliable"), a savings and
loan holding company headquartered in Bridgeville, Pennsylvania. Each of
the 1,410,194 outstanding shares were exchanged for 1.6 shares of the
Corporation's common stock. Effective September 27, 1994 the Corporation
acquired all of the outstanding common shares of United National
Bancorporation ("United"), a bank holding company headquartered in
Chambersburg, Pennsylvania. Each of the 769,147 outstanding shares were
exchanged for two shares of the Corporation's common stock. 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 mergers were accounted for as poolings of interests, and
accordingly, all financial statements were restated as though the mergers
had occurred at the beginning of the earliest period presented.
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 $6,827 during 1995 and $6,359 during 1994.
34
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 4--Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of
securities available for sale at December 31, 1995 and 1994:
1995 1994
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 $ 66,052 $ 472 $ (226) $ 66,298 $116,618 $ 31 $ (5,094) $111,555
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities 79,540 747 (109) 80,178 265,365 123 (16,581) 248,907
Other 67,441 264 (399) 67,306 61,367 40 (3,398) 58,009
Obligations of States and
Political Subdivisions 272 -0- -0- 272 128 -0- -0- 128
Debt Securities Issued
by Foreign Governments 710 -0- -0- 710 -0- -0- -0- -0-
Corporate Securities 2,763 3 (1) 2,765 3,228 5 (15) 3,218
Other Mortgage Backed
Securities 2,429 2 (3) 2,428 7,348 1 (60) 7,289
Total Debt Securities 219,207 1,488 (738) 219,957 454,054 200 (25,148) 429,106
Equities 23,719 829 (312) 24,236 14,822 -0- (739) 14,083
Total Securities
Available for Sale $242,926 $2,317 $(1,050) $244,193 $468,876 $200 $(25,887) $443,189
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 less than one year to 31 years and
have an anticipated average life to maturity ranging from less than one year
to 25 years. All mortgage backed securities contain a certain amount of
risk related to the uncertainty of prepayments of the underlying mortgages.
Interest rate changes have a direct impact upon prepayment speeds, therefore
the Corporation uses computer simulation models to test the average life and
yield volatility of all mortgage backed securities under various interest
rate scenarios to insure that volatility falls within acceptable limits. At
December 31, 1995 and 1994 the Corporation owned no high risk mortgage
backed securities as defined by the Federal Financial Institutions
Examination Council's Supervisory Policy Statement on Securities Activities.
35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 4--Securities Available For Sale (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or repay obligations with or without call or
prepayment penalties.
Approximate
Amortized Fair
Cost Value
Due within 1 year $ 37,939 $ 37,907
Due after 1 but within 5 years 96,469 96,613
Due after 5 but within 10 years 2,830 2,831
Due after 10 years -0- -0-
137,238 137,351
Mortgage backed securities 81,969 82,606
Total debt securities $219,207 $219,957
Proceeds from the sales of securities available for sale were $76,999 and
$51,427 during 1995 and 1994 respectively. Gross gains of $136 and $5,610
and gross losses of $739 and $90 were realized on those sales during 1995
and 1994 respectively.
In November of 1995 the Financial Accounting Standards Board issued
implementation guidance for FAS No. 115 which permitted organizations to
reassess the appropriateness of the classifications of all securities
currently held. During the fourth quarter of 1995 the Corporation
transferred securities with amortized cost of $19,803 from the held to
maturity portfolio to the available for sale portfolio and securities with
an amortized cost of $165,526 from the available for sale portfolio to the
held to maturity portfolio. Gross unrealized gains of $285 and gross
unrealized losses of $38 related to these transferred securities are
included in securities available for sale at December 31, 1995. Gross
unrealized gains of $628 and gross unrealized losses of $1,041 related to
these transferred securities are included in securities held to maturity at
December 31, 1995 and will be amortized over the remaining life of the
securities.
36
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 5--Securities Held to Maturity
Below is an analysis of the amortized cost and approximate fair values of
debt securities held to maturity at December 31:
1995 1994
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- $ 4,934 $-0- $ (41) $ 4,893
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities 324,355 188 (1,297) 323,246 181,032 36 (13,206) 167,862
Other 101,465 288 (689) 101,064 100,047 19 (6,056) 94,010
Obligations of States and
Political Subdivisions 61,681 754 (241) 62,194 69,658 368 (3,231) 66,795
Debt Securities Issued By
Foreign Governments 15 -0- (1) 14 743 -0- (4) 739
Corporate Securities 6,196 19 (4) 6,211 6,277 8 (128) 6,157
Other Mortgage Backed
Securities 10,797 47 (5) 10,839 7,807 -0- (189) 7,618
Total Debt Securities $504,509 $1,296 $(2,237) $503,568 $370,498 $431 $(22,855) $348,074
The amortized cost and estimated market value of debt securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or repay obligations with or without call or
prepayment penalties.
Approximate
Amortized Fair
Cost Value
Due within 1 year $ 14,288 $ 14,331
Due after 1 but within 5 years 118,113 117,814
Due after 5 but within 10 years 32,452 32,770
Due after 10 years 4,504 4,568
169,357 169,483
Mortgage backed securities 335,152 334,085
Total debt securities $504,509 $503,568
37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 5--Securities Held to Maturity (Continued)
There were no sales of securities held to maturity in 1995. Proceeds from
the sales of securities held to maturity were $7,476 in 1994. Gross gains
of $42 and gross losses of $26 were recognized during 1994. Most of these
securities were called and sold within three months of the call date. One
security was sold because of a significant deterioration of the issuer's
creditworthiness. Proceeds from the sale of securities held to maturity
were $99,479 during 1993. Gross gains of $3,545 and gross losses of $17
were realized on those sales during 1993.
Securities held to maturity and available for sale with a book value of
$297,540 and $336,273 were pledged at December 31, 1995 and 1994,
respectively, to secure public deposits and for other purposes required or
permitted by law.
NOTE 6--Loans (all domestic)
Loans at year end were divided among these general categories:
December 31,
1995 1994
Commercial, financial,
agricultural and other $ 192,530 $ 180,373
Real estate loans:
Construction and land
development 22,969 23,131
1-4 Family dwellings 616,661 587,734
Other real estate loans 293,095 268,417
Loans to individuals for household,
family and other personal
expenditures 381,729 332,167
Leases, net of unearned income 24,190 30,498
Subtotal 1,531,174 1,422,320
Unearned income (43,632) (44,526)
Total loans and leases $1,487,542 $1,377,794
Most of the Corporation's business activity was with customers located
within Pennsylvania. The portfolio is well diversified, and as of
December 31, 1995 and 1994, there were no significant concentrations of
credit.
The Federal Home Loan Bank had a security interest in qualifying
residential mortgage loans with an aggregate estimated fair value of
$15,155 at December 31, 1995 as collateral for short-term borrowings by
the Corporation's banking subsidiaries.
NOTE 7--Reserve for Possible Loan Losses
Description of changes:
1995 1994 1993
Reserve balance at January 1 $17,337 $16,483 $15,828
Additions:
Recoveries of previously
charged off loans 860 1,134 1,588
Provision charged to operating
expense 4,125 2,896 2,920
Deductions:
Loans charged off 4,170 3,176 3,853
Reserve balance at December 31 $18,152 $17,337 $16,483
38
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 7--Reserve for Possible Loan Losses (Continued)
As of December 31, 1995, the Corporation had a recorded investment in
impaired loans of $8,222 with an average balance of $8,192 for the year. An
allocation of the reserve for possible loan losses in the amount of $591
relates to $3,858 of the impaired loans pursuant to FAS No. 118. Impaired
loans totalling $4,364 have no reserve allocation. Income recorded on
impaired loans during 1995 was $161.
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.
As of December 31, 1995 and 1994 the Corporation did not own or trade any
other financial instruments with significant off-balance-sheet risk
including derivatives such as futures, forwards, interest rate swaps, option
contracts and the like, although such instruments may be appropriate to use
in the future to manage interest rate risk.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party of the financial instrument for commitments to extend
credit, standby letters of credit and commercial letters of credit written
is represented by the contract or notional amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The
following table identifies the notional amount of those instruments at
December 31, 1995 and 1994.
1995 1994
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $236,929 $212,751
Standby letters of credit $ 8,027 $ 18,505
Commercial letters of credit $ 55 $ 65
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
counter-party. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, 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.
39
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 9--Premises and Equipment
Premises and equipment are described as follows:
Estimated
Useful Life 1995 1994
Land Indefinite $ 4,373 $ 4,453
Buildings and improvements 19 - 40 Years 28,781 28,818
Leasehold improvements 5 - 40 Years 4,567 4,429
Furniture and equipment 3 - 7 Years 27,232 24,988
Subtotal 64,953 62,688
Less accumulated depreciation
and amortization 35,518 33,492
Total premises and
equipment $29,435 $29,196
Depreciation and amortization related to premises and equipment was $3,536
in 1995, $3,499 and $3,393 in 1994 and 1993, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of". This statement requires long-lived assets,
such as premises and equipment to be reviewed for impairment whenever events
or changes in circumstances, such as a significant decrease in the market
value of an asset or change in the extent or manner in which an asset is
used, indicate that the carrying amount of an asset may not be recoverable.
If there is an indication that the carrying amount of an asset may not be
recoverable, future cash flows expected to result from the use of the asset
are estimated. If the sum of the expected cash flows is less than the
carrying value of the asset a loss is recognized for the difference between
the carrying value and fair market value of the asset.
The Corporation is required to adopt FAS No. 121 in its fiscal year
beginning January 1, 1996. Adoption of this statement is not expected to
have a material impact on the Corporation's financial condition or results
of operations.
NOTE 10--Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
1995 1994
NOW and Super NOW accounts $ 216,811 $ 223,915
Savings and MMDA accounts 463,492 463,906
Time deposits 1,081,518 994,067
Total interest-bearing deposits $1,761,821 $1,681,888
Included in time deposits at December 31 were certificates of deposit in
denominations of $100 or more maturing as follows:
1995 1994
3 months or less $ 40,377 $ 37,968
3 to 6 months 26,331 10,191
6 to 12 months 32,357 17,885
Over 12 months 68,241 61,841
Total $167,306 $127,885
Interest expense related to $100 or greater certificates of deposit amounted
to $9,643 in 1995, $6,148 in 1994, and $5,750 in 1993.
40
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 11--Short-term Borrowings
Short-term borrowings at December 31 were as follows:
1995 1994
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
Federal funds
purchased $ 31,235 $ 37,261 6.06% $ 66,175 $ 54,222 4.39%
Borrowings from
FHLB 12,198 26,369 6.00 66,944 57,488 4.60
Securities sold
under agreements
to repurchase 75,109 69,054 5.29 61,564 49,359 4.18
Treasury, tax and
loan note option 2,232 8,790 5.89 7,023 7,860 3.88
Total $120,774 $141,474 5.66% $201,706 $168,929 4.38%
Maximum total at
any month-end $212,342 $201,706
Interest expense on short-term borrowings for the years ended December 31 is
detailed below:
1995 1994 1993
Federal funds purchased $2,259 $2,381 $ 715
Borrowings from FHLB 1,583 2,646 753
Securities sold under agreements to
repurchase 3,653 2,062 1,918
Treasury, tax and loan note option 518 305 255
Total interest on
short-term borrowings $8,013 $7,394 $3,641
NOTE 12--Long-Term Debt
Long-term debt at December 31, follows:
1995 1994
Amount Rate Amount Rate
Bank subordinated notes due September, 1997 $ 716 8.38% $ 716 8.38%
ESOP loan due September, 1997 1,250 80% of Prime 1,964 80% of Prime
ESOP loan due March, 2001 1,875 Prime 2,232 Prime
ESOP loan due March, 2004 1,420 Prime 1,000 Prime
Bank loan due December, 1997 -0- 1,500 Prime
Mortgage note due October, 2003 -0- 184 6.26%
Total long-term debt $5,261 $7,596
At December 31, 1995 the ESOP loan due March, 2004 had an unused line of
credit in the amount of $1,080 which expires in June 1997. 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:
1996 1997 1998 1999 2000 Thereafter
Loan payments $1,071 $ 974 $571 $571 $571 $787
Note maturities -0- 716 -0- -0- -0- -0-
Total $1,071 $1,690 $571 $571 $571 $787
41
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands except per share data)
NOTE 13--Common Share Commitments
At December 31, 1995 the Corporation had 100,000,000 common shares
authorized and 22,371,626 shares outstanding. Outstanding shares were
reduced by 65,002 shares of treasury stock at December 31, 1995. 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.
During 1995 and 1994, 111,522 and 5,900 shares of treasury stock were
acquired at an average price per share of $14.19 and $13.88 respectively,
for the purpose of funding stock options upon exercise. Treasury shares
consisting of 52,420 were reissued during 1995 upon exercise of various
stock option plans assumed by the Corporation in the merger transactions
with Reliable and United.
In March of 1994, 18,131 shares of treasury stock held by Reliable were
reissued to fund stock options exercised. The remaining 80,077 treasury
shares held by Reliable were cancelled at the merger date.
NOTE 14--Income Taxes
As discussed in NOTE 1, effective January 1, 1993 the Corporation adopted
FAS No. 109. The adoption of this statement resulted in a cumulative
benefit of $865 in 1993. This benefit was primarily due to lower tax rates
in the year that FAS No. 109 was adopted compared to the tax rates in the
prior years when the timing differences were recognized.
The income tax provision consists of:
1995 1994 1993
Current tax provision for income
exclusive of securities
transactions:
Federal $11,309 $10,599 $11,228
State 15 455 224
Securities transactions (213) 2,323 1,308
Total current tax
provision 11,111 13,377 12,760
Deferred tax provision (benefit) 863 849 (316)
Total tax provision $11,974 $14,226 $12,444
42
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 14--Income Taxes (Continued)
Temporary differences between financial statement carrying amounts and tax
bases of assets and liabilities that represent significant portions of the
deferred tax assets (liabilities) at December 31, 1995 and 1994 were as
follows:
1995 1994
Deferred tax assets:
Reserve for possible loan losses $ 5,491 $ 4,909
Alternative minimum tax
carryforward -0- 591
Unrealized loss on securities
available for sale -0- 9,047
Other 332 352
Deferred tax liabilities:
Accumulated accretion
of bond discount (365) (277)
Unrealized gain on securities
available for sale (275) -0-
Lease financing deduction (2,784) (3,429)
Loan origination fees and costs (360) (154)
Accumulated depreciation (333) (397)
Basis difference in assets acquired (1,635) (2,065)
Other (120) (167)
Net deferred tax asset (liability) $ (49) $ 8,410
Management does not feel a need to establish a valuation allowance against
the deferred tax asset because of the Corporation's ability to recover these
future deductions through carrybacks.
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:
1995 1994 1993
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Tax at statutory rate $13,125 35.0 $15,037 35.0 $13,997 35.0
Increase (decrease)
resulting from:
Effect of
nontaxable
interest (1,408) (3.8) (1,643) (3.8) (1,922) (4.8)
Merger expenses -0- 0.0 590 1.4 59 0.1
State income taxes 13 0.0 566 1.3 204 0.5
Other 244 0.7 (324) (0.8) 106 0.3
Total tax
provision $11,974 31.9 $14,226 33.1 $12,444 31.1
The Corporation has not recognized a deferred tax liability for differences
resulting from the bad debt reserve for tax purposes prior to January 1,
1988 for Reliable Savings Bank, PaSA, its savings bank subsidiary. Should
amounts previously claimed as bad debt deductions for Reliable be used for
any purpose other than to absorb bad debts or if the separate savings bank
subsidiary is eliminated (which is not currently anticipated), a tax
liability of approximately $1,369 would be incurred, using tax rates in
effect as of December 31, 1995.
43
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 15--Retirement Plans
All employees with at least one year of service are eligible to participate
in the employee stock ownership plan ("ESOP"). Contributions to the plan
are determined by the board of directors, and are based upon a prescribed
percentage of the annual compensation of all participants. The ESOP
acquired 36,880 shares and 110,225 shares of the Corporation's common stock
in 1995 and 1994, respectively, at a corresponding cost of $500 and $1,730,
which the Corporation borrowed and concurrently loaned these amounts to the
ESOP. These amounts represent leveraged and unallocated shares, and
accordingly have been recorded as long-term debt and the offset as a
reduction of the common shareholders' equity. Compensation cost related to
the plan was $1,908 in 1995, $1,070 in 1994 and $622 in 1993. (See NOTE
16).
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.
Beginning January 1, 1996 the employer's matching contribution was increased
to 80% of the employees contribution. The 401(k) plan expense was $1,294 in
1995, $1,137 in 1994 and $1,181 in 1993.
NOTE 16--Unearned ESOP Shares
The Corporation had borrowed amounts which were concurrently loaned to the
First Commonwealth Financial Corporation Employee Stock Ownership Plan Trust
("ESOP") on the same terms. The combined balances of the ESOP related loans
were $4,545 at December 31, 1995 and $5,196 at December 31, 1994.
The loans have been recorded as long-term debt on the Corporation's
consolidated balance sheets. A like amount of unearned ESOP shares was
recorded as a reduction of common shareholders' equity. Unearned ESOP
shares, included as a component of shareholders' equity, represents the
Corporation's prepayment of future compensation expense. The shares
acquired by the ESOP are held in a suspense account and will be released to
the ESOP for allocation to the plan participants as the loan is reduced.
Repayment of the loans will occur over a nine year period from contributions
to the ESOP by the Corporation and dividends on unallocated ESOP shares.
For 1995 a total of 103,714 shares were allocated to participants resulting
in 329,068 shares remaining in suspense at December 31, 1995. Allocated
shares included 84,537 old shares and 19,177 new shares, while the remaining
suspense at December 31, 1995 were 194,459 old shares and 134,609 new
shares.
The fair market value of the 134,609 and 116,906 new shares remaining in
suspense was approximately $2,356 and $1,578 at December 31, 1995 and 1994
respectively.
Interest on ESOP loans was $434 in 1995, $312 in 1994 and $245 in 1993.
During 1995 dividends on unallocated shares in the amount of $285 were used
for debt service while all dividends on allocated shares were allocated to
the participants. Dividends on common shares held in the ESOP used for debt
service were $478 in 1994 and $417 in 1993.
44
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 17--Commitments and Contingent Liabilities
There are no material legal proceedings to which the Corporation or its
subsidiaries are a party, or of which any of their property is the subject,
except proceedings which arise in the normal course of business and, in the
opinion of management, will not have any material adverse effect on the
consolidated operations or financial position of the Corporation and its
subsidiaries.
NOTE 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.
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 1995.
Balances December 31, 1994 $24,345
Advances 13,285
Repayments (17,618)
Other (10,727)
Balances December 31, 1995 $ 9,285
"Other" primarily reflects the change in those classified as a "related
party" as a result of mergers, resignations and retirements. During 1995
the most significant portion of "other" resulted from the merger of eight
commercial bank subsidiaries described in NOTE 1 thereby reducing the number
of persons classified as a related party. Also included in "other" are two
loans to a director which were included in the December 31, 1994 balances
and which were past due and carried on a nonaccrual status during 1994 and
1995 due to cashflow deficiencies. The original loans were made on
substantially the same terms as those prevailing at the time for comparable
transactions. These loans remain outstanding at December 31, 1995 but are
no longer classified as related party loans as a result of the director's
resignation in March, 1995.
NOTE 19--Regulatory Restrictions
The amount of funds available to the parent from its subsidiary banks is
limited by restrictions imposed on all financial institutions by banking
regulators. During 1995, dividends from subsidiary banks were restricted
not to exceed $69,879. These restrictions have not had, and are not
expected to have, a significant impact on the Corporation's ability to meet
its cash obligations.
The Corporation is subject to capital adequacy guidelines of various federal
regulatory agencies. At December 31, 1995 the Corporation and its banking
subsidiaries are considered well capitalized as defined by the Federal
Deposit Insurance Corporation Improvement Act of 1991.
45
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
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, 1995 was
$1,768 and income from its investment was $322 during 1995.
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only)
Balance Sheets
December 31,
1995 1994
Assets
Cash $ 7,730 $ 2,120
Securities available for sale 3,918 -0-
Loans and receivables from
affiliates 518 275
Investment in subsidiaries 239,834 224,522
Investment in jointly-owned company 1,768 1,446
Premises and equipment 2,835 2,283
Dividends receivable from subsidiaries 4,443 4,638
Other assets 1,164 1,575
Total assets $262,210 $236,859
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 1,362 $ 1,439
Dividends payable 4,027 3,589
Loans payable 4,545 6,696
Shareholders' equity 252,276 225,135
Total liabilities and
shareholders' equity $262,210 $236,859
Statements of Income
Years Ended December 31,
1995 1994 1993
Interest and dividends $ 53 $ -0- $ -0-
Dividends from subsidiaries 31,194 17,260 13,490
Operating expenses (8,929) (7,561) (5,598)
Income before taxes and equity
in undistributed earnings of
subsidiaries 22,318 9,699 7,892
Applicable income tax benefits 2,781 2,673 1,782
Income before equity in
undistributed earnings of
subsidiaries 25,099 12,372 9,674
Equity in undistributed
earnings of subsidiaries 427 16,364 18,736
Net income $25,526 $28,736 $28,410
46
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(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,
1995 1994 1993
Operating Activities
Net income $ 25,526 $ 28,736 $ 28,410
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 1,223 1,001 1,190
Increase in prepaid
income taxes (156) (112) (262)
Undistributed equity in
subsidiaries (427) (16,364) (18,736)
Other - net 224 (935) (11)
Net cash provided by
operating activities 26,390 12,326 10,591
Investing Activities
Purchases of securities
available for sale (2,133) -0- -0-
Net change in loans to
affiliated parties (281) -0- -0-
Purchases of premises and
equipment (931) (1,372) (499)
Acquisition and additional
investment in subsidiary,
net of cash received -0- 186 (1,000)
Net cash used by
investing activities (3,345) (1,186) (1,499)
Financing Activities
Repayment of long-term
debt (1,500) (500) (500)
Tax benefit of ESOP dividend -0- 81 84
Discount on dividend reinvestment
plan purchases (342) (212) (159)
Treasury stock acquired (1,583) (82) -0-
Treasury stock reissued 316 -0- -0-
Cash dividends paid (14,326) (10,878) (8,571)
Net cash used by
financing activities (17,435) (11,591) (9,146)
Net increase (decrease) in cash 5,610 (451) (54)
Cash at beginning of year 2,120 2,571 2,625
Cash at end of year $ 7,730 $ 2,120 $ 2,571
47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only) (Continued)
Supplemental schedule of noncash investing and financing activities
The Corporation borrowed $500 in 1995, $1,730 in 1994 and $250 in 1993 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 $1,151
in 1995, $983 in 1994 and $714 in 1993 were made by the ESOP thereby
reducing the outstanding amount related to unearned ESOP shares to $4,545 at
December 31, 1995.
Dividends from subsidiaries for 1995 include a special dividend in the
amount of $13,674 received from Reliable Financial Corporation, a wholly-
owned subsidiary. After distribution of the special dividend, which was
within guidelines established by the banking regulators, Reliable remained
classified as a well capitalized institution. Included in this special
dividend was a dividend-in-kind in the amount of $1,259 which was received
in the form of securities available for sale. This amount was recorded as a
reduction of investment in subsidiary and is included in securities
available for sale at December 31, 1995.
NOTE 22--Fair Values of Financial Instruments
Below are various estimated fair values at December 31, 1995 and 1994, as
required by Statement of Financial Accounting Standards No. 107 ("FAS No.
107"). Such information, which pertains to the Corporation's financial
instruments, is based on the requirements set forth in FAS No. 107 and does
not purport to represent the aggregate net fair value of the Corporation.
It is the Corporation's general practice and intent to hold its financial
instruments to maturity, except for certain securities designated as
securities available for sale, and not to engage in trading activities. Many
of the financial instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Therefore, the Corporation had to use significant estimations
and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and the methodologies in absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
The following methods and assumptions were used by the Corporation in
estimating financial instrument fair values:
Cash and short-term instruments: The balance sheet carrying amounts for
cash and short-term instruments approximate the estimated fair values of
such assets.
Securities: Fair values for securities held to maturity and securities
available for sale are based on quoted market prices, if available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments. The carrying value of
nonmarketable equity securities, such as Federal Reserve Bank stock and
Federal Home Loan Bank stock, is considered a reasonable estimate of fair
value.
48
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
(Dollar Amounts in Thousands)
NOTE 22--Fair Values of Financial Instruments (Continued)
Loans receivable: Fair values of variable rate loans subject to frequent
repricing and which entail no significant credit risk are based on the
carrying values. The estimated fair values of other loans are estimated by
discounting the future cash flows using interest rates currently offered for
loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest is considered a reasonable estimate of
fair value.
Off-balance-sheet instruments: Many of the Corporation's off-balance-sheet
instruments, primarily loan commitments and standby letters of credit, are
expected to expire without being drawn upon, therefore the commitment
amounts do not necessarily represent future cash requirements. Management
has determined that due to the uncertainties of cash flows and difficulty in
predicting the timing of such cash flows, fair values were not estimated for
these instruments.
Deposit liabilities: For deposits which are payable on demand at the
reporting date, representing all deposits other than time deposits,
management estimates that the carrying value of such deposits is a
reasonable estimate of fair value. The carrying amounts of variable rate
time deposit accounts and certificates of deposit approximate their fair
values at the report date. Fair values of fixed rate time deposits are
estimated by discounting the future cash flows using interest rates
currently being offered and a schedule of aggregated expected maturities.
The carrying amount of accrued interest approximates its fair value.
Short-term borrowings: The carrying amounts of short-term borrowings such
as Federal funds purchased, securities sold under agreements to repurchase,
borrowings from the Federal Home Loan Bank and treasury, tax and loan notes
approximate their fair values.
Long-term debt: The carrying amounts of variable rate debt approximate
their fair values at the report date. Fair values of fixed rate debt are
estimated by discounting the future cash flows using the Corporation's
estimated incremental borrowing rate for similar types of borrowing
arrangements.
The following table presents carrying amounts and estimated fair values of
the Corporation's financial instruments at December 31, 1995 and 1994.
1995 1994
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and due from banks $ 62,381 $ 62,381 $ 66,055 $ 66,055
Interest-bearing deposits with
banks 8,288 8,288 13,686 13,686
Federal funds sold 4,800 4,800 -0- -0-
Securities available for sale 244,193 244,193 443,189 443,189
Investments held to maturity 504,509 503,568 370,498 348,074
Loans, net of reserve 1,469,390 1,509,057 1,360,457 1,377,391
Financial liabilities
Deposits 1,962,760 1,972,313 1,881,060 1,868,375
Short-term borrowings 120,774 120,774 201,706 201,706
Long-term debt 5,261 5,296 7,596 7,619
49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
First Commonwealth Financial Corporation
We have audited the consolidated balance sheets of First Commonwealth
Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the two years in the period then ended.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of First
Commonwealth Financial Corporation and subsidiaries for the year ended
December 31, 1993, were audited by other auditors whose report dated March
2, 1994, expressed an unqualified opinion on those statements prior to
restatement for the transactions accounted for as poolings of interests as
described in Note 2 to the financial statements.
The consolidated financial statements for the year ended December 31, 1993
have been restated to reflect the poolings of interests with Reliable
Financial Corporation and United National Bancorporation as described in
Note 2 to the consolidated financial statements. We have audited the
combination of the accompanying consolidated financial statements for 1993
after restatement for the 1994 poolings of interests. In our opinion, such
consolidated statements have been properly combined on the basis described
in Note 2.
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
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 1995 and 1994 financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of First Commonwealth Financial Corporation and subsidiaries as of
December 31, 1995 and 1994, and the consolidated results of their operations
and their cash flows for each of the two years in the period then ended in
conformity with generally accepted accounting principles.
As discussed in Notes 1 and 14, to the consolidated financial statements,
the Corporation changed its method of accounting for investments and income
taxes during 1993.
/S/GRANT THORNTON LLP
Pittsburgh, Pennsylvania
January 25, 1996
50
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders of
First Commonwealth Financial Corporation
Indiana, Pennsylvania
We have audited the consolidated balance sheet of First Commonwealth
Financial Corporation and subsidiaries as of December 31, 1993, and the
related consolidated statements of income, changes in shareholders' equity
and cash flows for the year then ended prior to restatement for the
transactions accounted for as poolings of interests. 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 audit.
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 audit provides 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 the results of their operations and cash flows for the year then ended
prior to restatement for the transactions accounted for as poolings of
interests, 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.
/S/JARRETT STOKES & KELLY
Indiana, Pennsylvania
March 2, 1994
51
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, 1995 and 1994 are as follows. All amounts have been restated
to reflect poolings of interests.
1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income.............................. $42,918 $43,819 $44,244 $44,720
Interest expense............................. 19,948 20,665 20,594 21,211
Net interest income..................... 22,970 23,154 23,650 23,509
Provision for possible loan losses........... 793 837 815 1,680
Net interest income after provision for
possible loan losses....................... 22,177 22,317 22,835 21,829
Securities gains (losses).................... 24 (628) -0- 1
Other operating income....................... 2,517 2,909 2,730 2,851
Other operating expenses..................... 15,417 15,705 14,381 16,559
Income before taxes..................... 9,301 8,893 11,184 8,122
Applicable income taxes...................... 3,011 2,898 3,729 2,336
Net income.............................. $ 6,290 $ 5,995 $ 7,455 $ 5,786
Earnings per share........................... $ 0.29 $ 0.27 $ 0.34 $ 0.26
1994
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income.............................. $37,825 $39,091 $40,675 $42,053
Interest expense............................. 16,417 16,657 17,444 18,584
Net interest income..................... 21,408 22,434 23,231 23,469
Provision for possible loan losses........... 688 722 766 720
Net interest income after provision for
possible loan losses....................... 20,720 21,712 22,465 22,749
Securities gains (losses).................... 466 1,333 (71) 3,808
Other operating income....................... 2,867 2,617 2,683 2,468
Other operating expenses..................... 14,991 15,309 15,737 14,818
Income before taxes..................... 9,062 10,353 9,340 14,207
Applicable income taxes...................... 2,863 3,553 2,999 4,811
Net income.............................. $ 6,199 $ 6,800 $ 6,341 $ 9,396
Earnings per share........................... $ 0.28 $ 0.30 $ 0.28 $ 0.42
52
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 20, 1996
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 73 Chairman of the Board of the Corporation,
Chairman of the Board of FCTC, CSC, and
FCB; Director of NBOC, CTCLIC, and New
Mexico Banquest Investors Corp.; Former
President and Chief Executive Officer of
the Corporation
Joseph E. O'Dell 50 President and Chief Executive Officer of
the Corporation, President and Chief
Executive Officer of FCB, Director of
FCB and FCTC, Vice Chairman of the Board
of CSC; Former Senior Executive Vice
President and Chief Operating Officer of
the Corporation
Gerard M. Thomchick 40 Senior Executive Vice President and Chief
Operating Officer of the Corporation;
President, Chief Executive Officer and
Director of CTCLIC; Director of FCB,
Unitas and FCTC
David R. Tomb, Jr. 64 Senior Vice President, Secretary and
Treasurer of the Corporation; Secretary
and Cashier of FCB; Director of NBOC,
PBWPA, FCB, CSC, FCTC and CTCLIC
John J. Dolan 39 Senior Vice President, Comptroller and
Chief Financial Officer of the
Corporation; Comptroller and Chief
Financial Officer of FCB; Chief Financial
Officer, Comptroller of CTCLIC;,
Treasurer and Assistant Secretary of
FCTC; Director of Peoples
George E. Dash 45 Senior Vice President, Sales and
Marketing of the Corporation; Director of
Central
Johnston A. Glass 46 President of NBOC, Director of the
Corporation
William R. Jarrett 61 Senior Vice President of the Corporation,
Director of PBWPA and RSB, Former
managing partner of Jarrett Stokes & Co.
Certified Public Accountants, until his
employment by the Corporation on
April 15, 1994.
R. John Previte 46 Senior Vice President, Investments of the
Corporation; Director of Cenwest
53
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT (Continued)
Each of the officers identified above has held the position indicated above
or other executive positions with the same entity (or a subsidiary thereof)
for at least the past five years except where noted.
Executive officers of the Corporation serve at the pleasure of the Board of
Directors of the Corporation and for a term of office extending through the
election and qualification of their successors.
ITEM 11 - MANAGEMENT RENUMERATION
Information appearing in the definitive Proxy Statement related to
the annual meeting of security holders to be held April 20, 1996
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 20, 1996
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 20, 1996
is incorporated herein by reference in response to this item.
54
FIRST COMMONWEALTH FINANCIAL CORPORATION
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K
(A) Documents Filed as Part of this Report
1) Financial Statements
All financial statements of the registrant as set forth under
Item 8 of this Report on Form 10-K.
2) Financial Statement Schedules
Schedule
Number Description Page
I Indebtedness to Related Parties N/A
II Guarantees of Securities of Other Issuers N/A
Page Number or
Exhibit Incorporated by
3) Number Description Reference to
3.1 Articles of Incorporation Exhibit 3(i) to the
Corporation's quarterly
report on Form 10Q for the
quarter ended March 31,
1994
3.2 By-Laws of Registrant Exhibit 3.2 to Form S-4
filed October 15, 1993
10.1 Employment Contract Exhibit 10.2 to Form S-4
Sumner E. Brumbaugh Filed October 15, 1993
10.2 Employment Contract Exhibit 10.3 to Form S-4
Robert F. Koslow filed October 15, 1993
10.3 Employment Contract Exhibit 10.4 to Form S-4
Robert C. Williams filed June 17, 1994
10.4 Change in Control Agreement
dated October 27, 1995
Joseph E. O'Dell
10.5 Change in Control Agreement
dated October 27, 1995
Gerard M. Thomchick
10.6 Change in Control Agreement
dated October 30, 1995, entered
into between First Commonwealth
Financial Corporation and
John J. Dolan, together with a
schedule listing substantially
identical Change in Control
Agreements with the following
individuals: George E. Dash,
William R. Jarrett, R. John Previte,
Kenneth D. Brougher, David L. Dawson,
Johnston A. Glass, Rosemary Krolick,
William Miksich, Domenic P. Rocco,
Timothy P. Sissler, Ronald R. Stacy,
Robert C. Wagner and C. Dean Wingard.
21.1 Subsidiaries of the
Registrant
55
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K
PART IV (Continued)
23.1 Consent of Grant Thornton LLP
Certified Public Accountants
23.2 Consent of Jarrett Stokes & Kelly
Certified Public Accountants
24.1 Power of Attorney
(B) Report on Form 8-K
(1) Form 8-K dated December 27, 1995 reporting the Corporation's
intent to buy back shares of its common stock to be used to
cover outstanding stock options.
56
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 21st day of March 1996.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
/S/JOSEPH E. O'DELL
Joseph E. O'Dell, President and Chief Executive Officer
57