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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, 1996 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 24, 1997
Common Stock, $1 Par Value 22,173,921 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 24, 1997), was approximately $368,111,268.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement related to the annual meeting of
security holders to be held April 28, 1997 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..................................... 56
PART III
ITEM 10. Directors and Executive Officers of the
Registrant..................................... 56
ITEM 11. Management Renumeration and Transactions........ 57
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management................................. 57
ITEM 13. Certain Relationships and Related Transactions.. 57
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................ 58
Signatures..................................... 60
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. On April 1, 1996 the Corporation affiliated with BSI
Financial Services Inc. ("BSI") a Pennsylvania business corporation
headquartered in Titusville, Crawford County. BSI provides mortgage banking
loan servicing and collection services to the Corporation's subsidiary banks
as well as unaffiliated organizations. The Corporation and its subsidiaries
employed approximately 1,154 persons (full-time equivalents) at December 31,
1996.
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 83 community banking offices in 52
communities in the counties of Adams (1 office), Allegheny (2), Armstrong
(3), Beaver (1), Bedford (4), Blair (8), Cambria (11), Centre (4),
Clearfield (6), Elk (3), Franklin (2), Huntingdon (7), Indiana (9),
Jefferson (4), Lawrence (6), Somerset (5), Washington (1) and Westmoreland
(6).
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 65 automated teller machines
("ATMs") which permit their customers to conduct routine banking
transactions 24 hours a day. Of the ATMS, 51 are located on the premises of
their main or branch offices and 14 are in remote locations. All the ATMs
are part of the MAC network which consist of over 23,000 ATMs owned by
numerous banks, savings and loan associations and credit unions located
throughout 45 states. The ATM's operated by the Banks are also part of the
global MasterCard/Cirrus network which is comprised of more than 300,000
ATMs located in the United States, Canada and 58 other countries and
territories, which services over 365 million card holders. Such networks
allow the 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 300,000 point of sale
terminals on the MAC system as well as being used on the global MasterCard
system for the purchase of goods and services. The MAC debit card provides
customers with the almost universal acceptability of a credit card combined
with the convenience of direct debit to the customers checking account.
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
nonbank subsidiaries. CSC also acts as a centralized purchasing agent for
the purchase of computer hardware and software products by the Corporation
and subsidiaries as well as providing technical support for the installation
and use of these products. It competes, principally with data processing
subsidiaries of other, mostly larger, banks, on the basis of the price and
quality of its services and the speed with which such services are
delivered.
FCTC has five 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 BSI 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 expected 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, 1996 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 83 banking facilities of
which 26 are leased and 57 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 18 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 9,500. 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
1996
First Quarter $19.500 $17.750 $0.180
Second Quarter $19.625 $17.750 $0.180
Third Quarter $19.125 $17.000 $0.180
Fourth Quarter $19.000 $17.500 $0.200
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
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,
1996 1995 1994 1993 1992
Interest income....................... $182,329 $175,701 $159,644 $154,990 $155,606
Interest expense...................... 88,325 82,418 69,102 67,164 73,295
Net interest income................. 94,004 93,283 90,542 87,826 82,311
Provision for possible credit losses.. 4,501 4,125 2,896 2,920 3,744
Net interest income after provision
for possible credit losses........ 89,503 89,158 87,646 84,906 78,567
Securities gains (losses)............. 1,403 (603) 5,536 3,528 955
Other operating income................ 12,338 11,007 10,635 10,960 9,362
Other operating expenses.............. 63,589 62,062 60,855 59,405 54,957
Income before taxes and cumulative
effect of change in accounting
method......................... 39,655 37,500 42,962 39,989 33,927
Applicable income taxes............... 12,072 11,974 14,226 12,444 9,393
Income before cumulative effect
of change in accounting method. 27,583 25,526 28,736 27,545 24,534
Cumulative effect of change in
accounting method................... -0- -0- -0- 865 -0-
Net income............................ $ 27,583 $ 25,526 $ 28,736 $ 28,410 $ 24,534
Per Share Data
Net income before cumulative effect
of change in accounting method..... $1.26 $1.16 $1.28 $1.23 $1.12
Cumulative effect of change in
accounting method.................. 0.00 0.00 0.00 0.04 0.00
Net income.......................... $1.26 $1.16 $1.28 $1.27 $1.12
Dividends declared.................. $0.74 $0.66 $0.58 $0.51 $0.55
Average shares outstanding.......... 21,954,111 22,005,427 22,432,062 22,416,360 21,983,845
At End of Period
Total assets........................ $2,584,638 $2,364,307 $2,334,921 $2,252,836 $2,077,824
Investment securities............... 704,161 748,702 813,687 909,166 703,227
Loans and leases, net of unearned
income............................ 1,747,335 1,487,542 1,377,794 1,211,109 1,165,494
Allowance for possible credit losses 19,324 18,152 17,337 16,483 15,828
Deposits............................ 2,104,783 1,962,760 1,881,060 1,822,085 1,788,226
Long-term debt...................... 40,880 5,261 7,596 7,363 8,130
Shareholders' equity................ 261,358 252,276 225,135 228,910 210,687
Key Ratios
Return on average assets............ 1.12% 1.10% 1.26% 1.32% 1.26%
Return on average equity............ 10.69% 10.55% 12.55% 12.86% 12.30%
Net loans to deposit ratio.......... 82.10% 74.86% 72.32% 65.56% 64.29%
Dividends per share as a percent of
net income per share.............. 58.73% 56.90% 45.31% 40.16% 49.11%
Average equity to average assets
ratio............................. 10.47% 10.39% 10.01% 10.23% 10.26%
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,
1996, 1995 and 1994 and are intended to supplement, and should be read in
conjunction with, the consolidated financial statements and related
footnotes.
In addition to historical information, this discussion and analysis contains
forward-looking statements. The forward-looking statements contained herein
are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include,
but are not limited to, those discussed in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect managements' analysis only as of the date hereof. The
Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise
after the date hereof.
The Corporation acquired BSI Financial Services Inc. ("BSI") effective
April 1, 1996. The BSI merger was accounted for as a purchase transaction,
whereby the results of operations of BSI from the date of acquisition are
included in the Corporation's financial statements. 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. The United and
Reliable 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 1996 was $27.6 million, an increase of $2.1 million from the
1995 level of $25.5 million and compared to $28.7 million reported in 1994.
Earnings per share increased $0.10 per share in 1996 to $1.26. The impact
of net securities transactions increased earnings per share $0.09 in 1996
while the impact of net securities transactions decreased earnings per share
by $0.27 in 1995. Changes in net interest income increased earnings by
$0.04 per share during 1996 and $0.20 per share during 1995. The inclusion
of BSI income for 1996 increased earnings per share and other income by
$0.02 per share. Also included in other income for 1996 were increases in
charge card user fees representing $0.02 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. Included in FDIC
expenses for 1996 was a $0.03 per share adjustment representing the
Corporation's share of the industry-wide assessment to recapitalize the
Savings Association Insurance Fund, while FDIC expenses for 1995 included a
rebate of deposit insurance costs to the Corporation's commercial banking
subsidiaries representing $0.05 per share. Excluding the impact of the SAIF
assessment, FDIC rebate and securities transactions, earnings per share
would have been $1.24 for 1996 and $1.15 for 1995 representing an increase
of $0.09 per share. Return on average assets was 1.12% and return on
average equity was 10.69% during 1996 compared to 1.10% and 10.55%,
respectively for 1995. Return on average assets was 1.26% during 1994 while
return on average equity was 12.55%.
10
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is an analysis of the impact of changes in net income on
earnings per share:
1996 1995
vs. vs.
1995 1994
Net income per share, prior year $1.16 $1.28
Increase (decrease) from changes in:
Net interest income 0.04 0.20
Provision for possible credit losses (0.02) (0.06)
Security transactions 0.09 (0.27)
Other income 0.06 0.02
Salaries and employee benefits (0.01) (0.16)
Occupancy and equipment costs (0.04) (0.02)
Merger expenses 0.00 0.07
FDIC expense 0.06 0.08
Other expenses (0.07) (0.07)
Provision for income taxes (0.01) 0.09
Net income per share $1.26 $1.16
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 $94.0 million in 1996
compared to $93.3 million in 1995 and $90.5 million in 1994. 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,
1996.
11
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
1996 1995 1994
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 $ 7,378 $ 413 5.59% $ 8,552 $ 486 5.69% $ 14,677 $ 600 4.09%
Investment securities 738,916 43,177 6.10 769,006 45,600 6.12 870,656 48,645 5.80
Federal funds sold 1,712 85 4.97 17,712 1,033 5.83 4,138 186 4.49
Loans (b) (c), net of
unearned income 1,601,747 138,654 8.74 1,421,004 128,582 9.11 1,283,866 110,213 8.66
Total interest-
earning assets 2,349,753 182,329 7.89 2,216,274 175,701 8.04 2,173,337 159,644 7.48
Noninterest-earning assets:
Cash 57,717 53,752 54,542
Allowance for credit losses (18,951) (17,584) (17,120)
Other assets 75,156 77,843 77,498
Total noninterest-
earning assets 113,922 114,011 114,920
Total Assets $2,463,675 $2,330,285 $2,288,257
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing
demand deposits $ 212,269 3,434 1.62% $ 208,330 3,108 1.49% $ 226,824 3,764 1.66%
Savings deposits 481,608 13,392 2.78 464,021 11,858 2.56 503,327 11,520 2.29
Time deposits 1,145,592 63,886 5.58 1,060,070 58,855 5.55 948,804 45,901 4.84
Short-term borrowings 127,150 6,550 5.15 141,474 8,013 5.66 168,929 7,394 4.38
Long-term debt 18,170 1,063 5.85 7,010 584 8.33 7,744 523 6.75
Total interest-
bearing liabilities 1,984,789 88,325 4.45 1,880,905 82,418 4.38 1,855,628 69,102 3.72
Noninterest-bearing
liabilities and capital:
Noninterest-bearing
demand deposits 197,899 185,889 185,058
Other liabilities 23,033 21,429 18,576
Shareholders' equity 257,954 242,062 228,995
Total noninterest-
bearing funding sources 478,886 449,380 432,629
Total Liabilities and
Shareholders' Equity $2,463,675 $2,330,285 $2,288,257
Net Interest Income and
Net Yield On Interest-
earning Assets $ 94,004 4.14% $ 93,283 4.32% $ 90,542 4.30%
(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 over 1995 levels as
volumes increased. Average interest-earning assets increased $133.5 million
in 1996. Average loans increased $180.7 million in 1996 and were supported
by deposit growth and maturities of investment securities. Average
investment securities decreased $30.1 million during 1996.
Asset yields, on a tax-equivalent basis, decreased 15 basis points (0.15%)
during 1996 while the cost of funds increased 7 basis points (0.07%). 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%). The decline in loan
yields which began in the fourth quarter of 1995 has continued throughout
1996. Loan yields declined 37 basis points (0.37%) during 1996 as yields on
mortgage loans and time and demand loans decreased by 39 basis points
(0.39%) and 34 basis points (0.34%), respectively. The mortgage portfolio
was 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 new products are expected to produce long-term profitable
relationships and loan yields. Loan yields on new products are expected to
begin improving in the fourth quarter of 1997. The decline in time and
demand loan yields can mainly be attributed to the repricing of prime and
other variable rate loans at lower rates during 1996 than the rates for the
corresponding 1995 period.
Prepayments of mortgage backed securities ("MBS") remained steady during
1996 and have not yet been 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.
Interest expense increased $5.9 million during 1996 and included increases
due to volume of $5.4 million and increases due to rate of $533 thousand.
The total cost of funds increased 7 basis points (0.07%) during 1996 and
reflected deposit cost increases of 11 basis points (0.11%) combined with
declines in short-term and long-term borrowing rates of 51 basis points
(0.51%) and 248 basis points (2.48%) respectively. Average interest-bearing
deposits increased $107.0 million during 1996 and included increases of
$21.5 million in interest-bearing demand deposits and savings accounts
combined with increases of $85.5 million in time deposits. Time deposits
increased primarily in the 12 to 23 month maturity range as deposits in this
maturity range increased by $72.9 million compared to 1995 averages.
Deposit cost increases of 11 basis points (0.11%) during 1996 can be
compared to increases of 57 basis points (0.57%) during 1995. Cost
increases of 22 basis points (0.22%) during 1996 for savings deposits can
primarily be attributed to new savings products which in addition to an
attractive base interest rate include interest adjustments based on the
number and amounts of various accounts a customer has in addition to a
savings account.
Net interest margin (net interest income, on a tax-equivalent basis as a
percentage of average earning assets), was 4.14% during 1996 compared to
4.32% in 1995 and 4.30% in 1994. 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)
1996 Change from 1995 1995 Change from 1994
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 $ (73) $ (67) $ (6) $ (114) $ (251) $ 137
Securities (2,423) (1,843) (580) (3,045) (5,896) 2,851
Federal funds sold (948) (933) (15) 847 609 238
Loans 10,072 16,473 (6,401) 18,369 11,876 6,493
Total interest income 6,628 13,630 (7,002) 16,057 6,338 9,719
Interest-bearing liabilities:
Deposits 6,891 5,256 1,635 12,636 4,176 8,460
Short-term borrowings (1,463) (811) (652) 619 (1,202) 1,821
Long-term debt 479 929 (450) 61 (50) 111
Total interest expense 5,907 5,374 533 13,316 2,924 10,392
Net interest income $ 721 $ 8,256 $(7,535) $ 2,741 $ 3,414 $ (673)
The provision for possible credit losses is an amount added to the allowance
against which credit losses are charged. The amount of the provision is
determined by management based upon its assessment of the size and quality
of the loan portfolio and the adequacy of the allowance in relation to the
risks inherent within the loan portfolio. The provision for possible credit
losses was $4.5 million in 1996 compared to $4.1 million in 1995 and $2.9
million in 1994. The provision for possible credit losses increased in 1996
as a result of growth in the portfolio as a whole, combined with an increase
in charge-offs and delinquencies of consumer installment and revolving
credit loans. Net charge-offs against the allowance for possible credit
losses were $3.3 million, or 0.21% of average total loans in 1996. This
compared to $3.3 million in 1995 and $2.0 million in 1994. Net charge-offs
were 0.23% and 0.16% of average total loans in 1995 and 1994, respectively.
Although the allowance for possible credit losses as a percentage of average
loans outstanding is below peer averages, net charge-offs as a percentage of
average loans outstanding is also below peer averages. 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 allowance for
possible credit losses for the five years ended December 31, 1996 (dollars
in thousands):
Summary of Loan Loss Experience
1996 1995 1994 1993 1992
Loans outstanding at end of year $1,747,335 $1,487,542 $1,377,794 $1,211,109 $1,165,494
Average loans outstanding $1,601,747 $1,421,004 $1,283,866 $1,187,236 $1,094,197
Allowance for possible credit losses:
Balance, beginning of year $ 18,152 $ 17,337 $ 16,483 $ 15,828 $ 10,681
Addition as result of acquisition -0- -0- -0- -0- 4,501
Loans charged off:
Commercial, financial and agricultural 571 1,161 1,246 774 860
Loans to individuals 3,023 2,316 1,676 1,825 1,906
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial 440 218 23 791 706
Real estate-residential 174 423 179 357 650
Lease financing receivables 26 52 52 106 127
Total loans charged off 4,234 4,170 3,176 3,853 4,249
Recoveries of loans previously charged off:
Commercial, financial and agricultural 254 132 254 563 371
Loans to individuals 482 518 563 565 397
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial 83 56 249 276 317
Real estate-residential 81 55 61 177 47
Lease financing receivables 5 99 7 7 19
Total recoveries 905 860 1,134 1,588 1,151
Net loans charged off 3,329 3,310 2,042 2,265 3,098
Provision charged to expense 4,501 4,125 2,896 2,920 3,744
Balance, end of year $ 19,324 $ 18,152 $ 17,337 $ 16,483 $ 15,828
Ratios:
Net charge-offs as a percentage
of average loans outstanding 0.21% 0.23% 0.16% 0.19% 0.28%
Allowance for possible credit losses
as a percentage of average loans
outstanding 1.21% 1.28% 1.35% 1.39% 1.45%
Total other operating income increased $3.3 million in 1996 to $13.7 million
from $10.4 million reported in 1995 and can be compared to $16.2 million in
1994. Net securities gains of $1.4 million in 1996 compared to securities
losses of $603 thousand in 1995 resulted in an increase of $2.0 million.
The securities gains during 1996 resulted from the sale of investments in
Pennsylvania bank stocks classified as equity securities "available for
sale". These equity securities had a book value of $6.8 million and were
sold for a gain of $1.5 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" having an average yield of
4.91% and an average remaining life of about 17 months. The proceeds from
the sale of these U.S. Treasury securities were used to pay off short-term
borrowings costing 6.00%. This transaction resulted in a net improvement in
net interest income over the remaining life of the securities in excess of
the net loss on the sale.
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
Service charges on deposits increased over all periods reported, primarily
as a result of increased average total deposits. Other income increased
$1.1 million in 1996 to $4.4 million from $3.2 million reported in 1995 and
can be compared to $3.0 million in 1994. The inclusion of BSI income on
loan origination and servicing for 1996 increased other income by $527
thousand. Other revenue for 1996 also reflected increases in charge card
user fees of $607 thousand as the introduction of redesigned charge card
products generated over a fifty percent increase in the number of accounts
and balances outstanding compared to year end 1995.
Total other operating expenses increased $1.5 million to $63.6 million in
1996 and compared to $62.1 million and $60.9 million in 1995 and 1994,
respectively. Results for the 1994 period included merger costs of $1.7
million.
Employee costs during 1996 were $33.3 million, an increase of $253 thousand
over the 1995 level of $33.0 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 $1.5 million or 4.76% during 1996.
Inclusion of BSI in the 1996 period increased employee costs by $602
thousand. Also reflected in the 1996 period is a $228 thousand increase in
the employer's matching contribution for the Corporation's 401(k) plan at
80% of the amount contributed by the employee, up from 60% in 1995.
Excluding BSI from the 1996 period, hospitalization expense for 1996
reflected a decrease of $375 thousand primarily a result of converting to a
managed health care plan effective January 1, 1996. Employee costs as a
percentage of average assets was 1.35% in 1996 and compares to 1.42% in 1995
and 1.31% in 1994. Salary levels are generally maintained through attrition
management programs.
Net occupancy expense and furniture and equipment increased $786 thousand
during 1996. The inclusion of BSI represented $98 thousand of the 1996
increase while the cost of equipment maintenance contracts and equipment
repairs increased $485 thousand during 1996. Net occupancy expense and
furniture and equipment increased $360 thousand in 1995 as a result of
increased utilization of leased equipment during the redesign of various
operational areas of the organization such as loan processing. 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.
Both the 1996 and 1995 periods include adjustments to the Corporation's
Federal Deposit Insurance costs. The 1996 period includes an additional
one-time assessment against the Corporation's thrift deposits of $768
thousand to replenish the Savings and Loan Insurance Fund (SAIF). The 1995
related period includes a rebate of $1.1 million of deposit insurance costs
to the Corporation's commercial banking subsidiaries as a result of the
Federal Deposit Insurance Corporation's Bank Insurance Fund (BIF) reaching
its regulatory cap. These adjustments have been made to enable banks and
thrifts to pay equal deposit insurance rates in the future. BIF insured
institutions will pay an annual rate of approximately 1.29 cents per $100 of
deposits while SAIF insured institutions will pay approximately 6.44 cents
per $100 annually for the years 1997 through 1999. It is anticipated that
beginning in the year 2000 banks and thrifts will pay an equal rate of 2.43
cents per $100 of deposits.
16
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Other operating expenses increased $1.8 million in 1996 to $20.0 million and
can be compared to $18.2 million in 1995 and $18.6 million in 1994. The
inclusion of BSI for the 1996 period represented $296 thousand of the 1996
increase. Telephone cost increases of $392 thousand during 1996 reflected
usage increases for both voice and data lines partially offset by rate
decreases. Aggressive marketing of innovative new products and services
resulted in increases of $274 thousand in advertising expenses during 1996.
Additional cost increases during 1996 occurred in stationery and supplies,
filing and recording fees and Pennsylvania shares tax expenses which
incurred increases of $187 thousand, $226 thousand, and $337 thousand
respectively. Other professional fees increased $277 for 1996 compared to
1995 primarily as a result of the use of outside consultants to help analyze
and implement standardized fee schedules.
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 to
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 $12.1 million during 1996 representing an increase of
$98 thousand over the 1995 total of $12.0 million and compared to $14.2
million in 1994. Taxable income increased $772 thousand during 1996 while
taxable income decreased $6.4 million during 1995 and increased $5.3 million
in 1994. The Corporation's effective tax rate decreased to 30.4% in 1996
from 31.9% in 1995 and compares to 33.1% in 1994. The most significant
factor for the decrease in the 1996 effective rate compared to 1995 is an
increase in tax-free income, while 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. Increased competition from nonbanking sources such as mutual
funds may require banks to shift to alternative funding from other
borrowings. Although this is not significant at the end of 1996, it could
become more consequential in the future. Deposits increased $142.0 million
in 1996 and included $48.6 million in core deposits. Non-core deposits,
which are time deposits in denominations of $100 thousand or more
represented 12.39% of total deposits, up from 8.52% of total deposits at
December 31, 1995. Non-core deposits increased by $93.4 million in 1996 and
$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, 1996, 1995 and 1994
had remaining maturities as follows:
Maturity Distribution of
Large Certificates of Deposit
(Dollar Amounts in Thousands)
1996 1995 1994
Amount Percent Amount Percent Amount Percent
Remaining Maturity:
3 months or less $ 87,467 33% $ 40,377 24% $ 37,968 30%
Over 3 months through 6 months 38,714 15 26,331 16 10,191 8
Over 6 months through 12 months 43,115 17 32,357 19 17,885 14
Over 12 months 91,447 35 68,241 41 61,841 48
Total $260,743 100% $167,306 100% $127,885 100%
Net loans increased $258.6 million during 1996 primarily in the categories
of consumer loans and leases and real estate loans secured by residential
properties. In combination these categories represented over 73% of the
loan growth during 1996, reflecting a strengthening of consumer loan demand.
The growth in consumer loans and leases during 1996 can partially be
attributed to strong growth in the Corporation's Dealer Service Program
which began in May and offers in addition to indirect loans, a new FlexLease
product. The majority of the growth in residential real estate loans
resulted from the success of an innovative mortgage product. Below is a
schedule of loans by classification for the five years ended December 31,
1996.
Loans by Classification
(Dollar Amounts in Thousands)
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial,
agricultural and
other $ 252,798 14% $ 192,530 13% $ 180,373 13% $ 179,227 14% 216,183 18%
Real estate-construction 24,111 2 22,969 1 23,131 2 12,980 1 17,007 1
Real estate-commercial 287,318 16 293,095 19 268,417 19 238,864 19 204,853 17
Real estate-residential 752,562 42 616,661 40 587,734 41 511,889 41 484,218 40
Loans to individuals 425,012 24 381,729 25 332,167 23 279,357 23 259,419 22
Net leases 36,329 2 24,190 2 30,498 2 26,617 2 23,521 2
Gross loans and
leases 1,778,130 100% 1,531,174 100% 1,422,320 100% 1,248,934 100% 1,205,201 100%
Unearned income (30,795) (43,632) (44,526) (37,825) (39,707)
Total loans, and leases
net of unearned income $1,747,335 $1,487,542 $1,377,794 $1,211,109 $1,165,494
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,
1996, securities available for sale had an amortized cost of $242.1 million
18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
and a market value of $244.4 million. Gross unrealized gains were $3.3
million and gross unrealized losses were $915 thousand. 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.
Below is a schedule of the maturity distribution of securities held to
maturity and securities available for sale at December 31, 1996.
Maturity Distribution of Securities Held to Maturity
(Dollar Amounts in Thousands)
States and Total Weighted
U.S. Government Agencies Political Other Amortized Average
and Corporations Subdivisions Securities Cost Yield*
Within 1 year $ 82,589 $ 4,683 $ 5,110 $ 92,382 5.60%
After 1 but within 5 years 285,653 35,977 1,618 323,248 5.96
After 5 but within 10 years 5,240 25,507 107 30,854 7.44
After 10 years -0- 13,262 -0- 13,262 7.30
Total $373,482 $79,429 $ 6,835 $459,746 6.03%
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 $ 50,273 $ 2 $ 730 $ 51,005 5.71%
After 1 but within 5 years 77,698 -0- 1,390 79,088 6.37
After 5 but within 10 years 2,723 -0- 574 3,297 4.38
After 10 years 78,295 -0- 30,394 108,689 6.38
Total $208,989 $ 2 $33,088 $242,079 6.21%
*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, 1996 and 1995 (Dollar Amounts in Thousands):
1996
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
Loans $ 669,043 $102,628 $190,064 $ 961,735
Investments 17,574 37,133 84,794 139,501
Other interest-earning assets 97,201 7,346 11,361 115,908
Total interest-sensitive
assets 783,818 147,107 286,219 1,217,144
Certificates of deposit 269,090 154,045 227,381 650,516
Other deposits 700,445 -0- -0- 700,445
Borrowings 179,308 5,621 4,946 189,875
Total interest-sensitive
liabilities 1,148,843 159,666 232,327 1,540,836
Gap $ (365,025) $(12,559) $ 53,892 $ (323,692)
ISA/ISL 0.68 0.92 1.23 0.79
Gap/Total assets 14.12% 0.49% 2.09% 12.52%
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
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%
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, 1996 were as follows (Dollar Amounts in Thousands):
Within One One to After
Year 5 Years 5 Years Total
Commercial and industrial $ 87,008 $ 53,668 $ 51,728 $192,404
Financial institutions 4 110 -0- 114
Real estate-construction 20,930 307 2,874 24,111
Real estate-commercial 39,360 44,345 203,613 287,318
Other 19,551 12,845 27,884 60,280
Totals $166,853 $111,275 $286,099 $564,227
Loans at fixed interest rates 79,179 173,972
Loans at variable interest rates 32,096 112,127
Totals $111,275 $286,099
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. Assumptions
regarding the replacement of maturing assets and liabilities are made to
simulate the impact of future changes in rates and/or changes in balance
sheet composition. 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 effect of changes in future interest rates
on the mix of assets and liabilities may cause actual results to differ from
simulated results. In addition, certain financial instruments provide
customers with a certain degree of flexibility to respond to economic
changes. This flexibility would enable customers to shift from lower cost
deposit products to higher cost products or to refinance loans as interest
rates decrease. While the Corporation's simulation analysis considers these
factors, the extent to which customers utilize their investment and
borrowing options may cause actual results to differ from the simulation.
The analysis at December 31, 1996 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 an allowance for
possible credit losses that may exist in the portfolio at a point in time,
but have not been specifically identified.
21
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The Corporation's written lending policy requires certain underwriting
standards to be met prior to funding any loan, including requirements for
credit analysis, collateral value coverage, documentation, and terms. The
principal factor used to determine potential borrowers' creditworthiness is
business cash flows or consumer income available to service debt payments.
Secondary sources of repayment, including collateral or guarantees, are
frequently obtained.
The lending policy provides limits for individual and bank committees
lending authorities. In addition to the bank loan approval process,
requests for borrowing relationships which will exceed one million dollars
must also be approved by the Corporation's Credit Committee. This Committee
consists of a minimum of three members of the Corporation's board of
directors.
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.
22
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Since all identified losses are immediately charged off, no portion of the
allowance for possible credit losses is restricted to any individual credit
or groups of credits, and the entire allowance is available to absorb any
and all credit losses. However, for analytical purposes, the following
table sets forth an allocation of the allowance for possible credit losses
at December 31 according to the categories indicated:
Allocation of the Allowance for Possible Credit Losses
(Dollar Amounts in Thousands)
1996 1995 1994 1993 1992
Commercial, industrial, financial,
agricultural and other $ 2,901 $ 1,800 $ 2,443 $ 2,541 $ 5,488
Real estate-construction 290 220 215 146 98
Real estate-commercial 3,747 3,253 3,328 3,389 1,750
Real estate-residential 5,972 4,334 4,532 4,151 3,186
Loans to individuals 3,188 2,377 2,417 1,978 1,991
Lease financing receivables 285 162 243 552 182
Unallocated 2,941 6,006 4,159 3,726 3,133
Total $19,324 $18,152 $17,337 $16,483 $15,828
Allowance as percentage
of average total loans 1.21% 1.28% 1.35% 1.39% 1.45%
The unallocated portion of the allowance for possible credit losses
decreased during 1996 in both total dollars and as a percentage of the total
allowance. Various factors impacted this decrease but most notably were an
amount set aside to provide for loan growth and to adjust the allowance for
possible credit losses based on comparative peer analysis. The Corporation
has defined an adequate base allowance for possible credit losses by
comparing the Corporation's allowance for possible credit losses as a
percentage of average loans outstanding to the peer average and has
allocated a portion of the allowance to reduce the variance to peer.
Although the Corporation's historic net charge-offs as a percentage of
average loans remain lower than peer averages, management has deemed it
appropriate to allocate a portion of the allowance for possible credit
losses to provide for a potential change in the Corporation's trend in
credit loss experience equal to peers, rather than continuation of the
historic trend which has been favorable in comparison to peers.
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
loans which terms have been renegotiated to provide a reduction or deferral
of principal or interest as a result of the deteriorating financial position
of the borrower.
23
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Nonperforming and Impaired Assets and Effect on Interest
Income Due to Nonaccrual
(Dollar Amounts in Thousands)
1996 1995 1994 1993 1992
Loans on nonaccrual basis $ 7,906 $ 7,419 $ 9,575 $ 9,672 $ 9,328
Past due loans 12,044 7,881 6,936 9,106 7,578
Renegotiated loans 280 803 733 1,413 1,229
Total nonperforming loans $20,230 $16,103 $17,244 $20,191 $18,135
Nonperforming loans as a percentage of
total loans 1.16% 1.08% 1.25% 1.67% 1.56%
Allowance as percentage of nonperforming
loans 95.52% 112.72% 100.54% 81.64% 87.28%
Other real estate owned $ 1,647 $ 1,408 $ 2,269 $ 5,590 $ 4,894
Gross income that would have been
recorded at original rates $ 726 $ 857 $ 1,085 $ 929 $ 1,080
Interest that was reflected in income 112 161 164 204 139
Net reduction to interest income due to
nonaccrual $ 614 $ 696 $ 921 $ 725 $ 941
The reduction of income due to renegotiated loans was less than $50 thousand
in any year presented.
At December 31, 1996 the ratio of the allowance for possible credit 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
allowance for possible credit losses it does not in itself measure loan loss
allowance 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. Although the
dollar amount of nonperforming loans has increased, nonperforming loans as a
percentage of total loans has not increased above historic levels.
Management believes that the allowance for possible credit losses and
nonperforming loans remained safely within acceptable levels.
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.
24
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Capital Resources
Equity capital increased $9.1 million in 1996 to $261.4 million. Dividends
declared decreased equity by $16.4 million, an increase over the 1995 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 $1.2
million. The market value adjustment to securities available for sale
increased capital by $798 thousand. Amounts paid to fund the discount on
reinvested dividends and optional cash payments reduced equity by $529
thousand. The cost of purchasing treasury shares decreased equity by $4.1
million while proceeds from the reissuance of treasury shares to provide for
stock options exercised increased equity capital by $552 thousand during
1996.
A capital base can be considered adequate when it enables the Corporation to
intermediate funds responsibly and provide related services while protecting
against future uncertainties. The evaluation of capital adequacy depends on
a variety of factors, including asset quality, liquidity, earnings history
and prospects, internal controls and management caliber. In consideration
of these factors, management's primary emphasis with respect to the
Corporation's capital position is to maintain an adequate and stable ratio
of equity to assets. See NOTE 20 for an analysis of regulatory capital
guidelines and the Corporation's capital ratios relative to these
measurement standards.
Inflation and Changing Prices
Management is aware of the impact inflation has on interest rates and
therefore the impact it can have on a bank's performance. The ability of a
financial institution to cope with inflation can only be determined by
analysis and monitoring of its asset and liability structure. The
Corporation monitors its asset and liability position with particular
emphasis on the mix of interest-sensitive assets and liabilities in order to
reduce the effect of inflation upon its performance. However, it must be
remembered that the asset and liability structure of a financial institution
is substantially different from an industrial corporation in that virtually
all assets and liabilities are monetary in nature, meaning that they have
been or will be converted into a fixed number of dollars regardless of
changes in general price levels. Examples of monetary items include cash,
loans and deposits. Nonmonetary items are those assets and liabilities
which do not gain or lose purchasing power solely as a result of general
price level changes. Examples of nonmonetary items are premises and
equipment.
Inflation can have a more direct impact on categories of noninterest
expenses such as salaries and wages, supplies and employee benefit costs.
These expenses are very closely monitored by management for both the effects
of inflation and increases relating to such items as staffing levels, usage
of supplies and occupancy costs.
25
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
(Dollar Amounts in Thousands)
December 31,
1996 1995
Assets
Cash and due from banks.....................$ 69,406 $ 62,381
Interest-bearing bank deposits.............. 4,199 8,288
Federal funds sold.......................... -0- 4,800
Securities available for sale, at market.... 244,415 244,193
Securities held to maturity, at cost, (market
value $457,189 in 1996 and $503,568 in 1995) 459,746 504,509
Loans....................................... 1,778,130 1,531,174
Unearned income........................... (30,795) (43,632)
Allowance for possible credit losses...... (19,324) (18,152)
Net loans............................ 1,728,011 1,469,390
Property and equipment...................... 32,590 29,435
Other real estate owned..................... 1,647 1,408
Other assets................................ 44,624 39,903
Total assets.........................$2,584,638 $2,364,307
Liabilities
Deposits (All Domestic):
Noninterest-bearing.......................$ 200,473 $ 200,939
Interest-bearing.......................... 1,904,310 1,761,821
Total deposits....................... 2,104,783 1,962,760
Short-term borrowings....................... 150,330 120,774
Other liabilities........................... 27,287 23,236
Long-term debt.............................. 40,880 5,261
Total liabilities.................... 2,323,280 2,112,031
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 22,194,426 shares
outstanding in 1996; 22,436,628 shares
issued and 22,371,626 shares outstanding
in 1995................................... 22,437 22,437
Additional paid-in capital.................. 76,664 77,226
Retained earnings........................... 168,711 157,576
Unrealized gain on securities available for
for sale, net of taxes.................... 1,309 511
Treasury stock (242,202 and 65,002 shares at
December 31, 1996 and 1995, respectively
at cost).................................. (4,289) (929)
Unearned ESOP shares........................ (3,474) (4,545)
Total shareholders' equity........... 261,358 252,276
Total liabilities and
shareholders' equity..........$2,584,638 $2,364,307
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,
1996 1995 1994
Interest Income
Interest and fees on loans................ $138,654 $128,582 $110,213
Interest and dividends on investments:
Taxable interest........................ 38,240 41,775 44,187
Interest exempt from Federal
income taxes.......................... 3,530 2,785 3,430
Dividends............................... 1,407 1,040 1,028
Interest on Federal funds sold............ 85 1,033 186
Interest on bank deposits................. 413 486 600
Total interest income................. 182,329 175,701 159,644
Interest Expense
Interest on deposits..................... 80,712 73,821 61,185
Interest on short-term borrowings........ 6,549 8,013 7,394
Interest on long-term debt............... 1,064 584 523
Total interest expense............... 88,325 82,418 69,102
Net interest income........................ 94,004 93,283 90,542
Provision for possible credit losses....... 4,501 4,125 2,896
Net interest income after provision for
possible credit losses................... 89,503 89,158 87,646
Other Income
Securities gains (losses)................ 1,403 (603) 5,536
Trust income............................. 2,192 2,173 2,226
Service charges on deposits.............. 5,772 5,601 5,382
Other income............................. 4,374 3,233 3,027
Total other income................... 13,741 10,404 16,171
Other Expenses
Salaries and employee benefits........... 33,287 33,034 30,035
Net occupancy expense.................... 4,528 4,347 4,238
Furniture and equipment expense.......... 4,715 4,110 3,859
FDIC expense............................. 1,062 2,373 4,151
Other operating expenses................. 19,997 18,198 18,572
Total other expenses................. 63,589 62,062 60,855
Income before taxes........................ 39,655 37,500 42,962
Applicable income taxes.................... 12,072 11,974 14,226
Net Income................................. $27,583 $25,526 $28,736
Average Shares Outstanding................. 21,954,111 22,005,427 22,432,062
Per share data:
Net income............................... $1.26 $1.16 $1.28
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, 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
Net income............................ -0- -0- 27,583 -0- -0- -0- 27,583
Cash dividends declared............... -0- -0- (16,448) -0- -0- -0- (16,448)
Change in market value of securities
available for sale, net of tax
effect.............................. -0- -0- -0- 798 -0- -0- 798
Decrease in unearned ESOP shares...... -0- 105 -0- -0- 1,071 -0- 1,176
Discount on dividend reinvestment
plan purchases....................... -0- (529) -0- -0- -0- -0- (529)
Treasury stock acquired............... -0- -0- -0- -0- -0- (4,050) (4,050)
Treasury stock reissued............... -0- (138) -0- -0- -0- 690 552
Balance at December 31, 1996........... $22,437 $76,664 $168,711 $ 1,309 $(3,474) $(4,289) $261,358
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,
1996 1995 1994
Operating Activities
Net income............................................ $27,583 $25,526 $28,736
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............... 4,501 4,125 2,896
Depreciation and amortization...................... 5,155 5,126 5,126
Net (gains) losses on sales of assets.............. (2,030) 427 (5,555)
Increase in interest receivable.................... (1,448) (765) (1,123)
Increase in interest payable....................... 2,523 3,349 631
Increase (decrease) in income taxes payable........ 2,021 (2,168) 135
Change in deferred taxes........................... (683) 863 849
Other - net........................................ (4,082) 544 (3,917)
Net cash provided by operating activities....... 33,540 37,027 27,778
Investing Activities
Transactions with securities held to maturity:
Sales.............................................. -0- -0- 7,476
Maturities and redemptions......................... 87,684 49,859 104,915
Purchases of investment securities................. (42,576) (38,462) (70,246)
Transactions with securities available for sale:
Sales.............................................. 20,240 76,999 51,427
Maturities and redemptions......................... 46,448 46,965 73,296
Purchases of investment securities................. (64,562) (44,342) (94,197)
Proceeds from sales of loans and other assets......... 21,974 21,180 13,488
Acquisition of affiliate and branch, net of cash
received............................................. 7,836 -0- -0-
Changes net of acquisitions:
Net decrease in time deposits with banks.............. 4,090 5,398 6,848
Net increase in loans................................. (285,160) (132,610) (178,299)
Purchases of premises and equipment................... (6,757) (4,095) (5,578)
Net cash used by investing activities............... (210,783) (19,108) (90,870)
Financing Activities
Proceeds from issuance of long-term debt.............. 33,000 -0- -0-
Repayments of long-term debt.......................... (8,509) (1,684) (515)
Tax benefit of ESOP dividend.......................... -0- -0- 81
Discount on dividend reinvestment plan purchases...... (529) (342) (212)
Dividends paid........................................ (16,037) (14,326) (12,206)
Net increase (decrease) in Federal funds purchased.... 23,740 (34,940) 20,220
Net increase (decrease) in other short-term borrowings 18,015 (45,993) 5,302
Changes net of acquisitions:
Acquisition of treasury stock....................... (4,050) (1,583) (82)
Reissuance of treasury stock........................ 108 316 113
Net increase in deposits............................ 133,730 81,759 59,079
Net cash provided (used) by financing activities 179,468 (16,793) 71,780
Net increase in cash and cash equivalents....... 2,225 1,126 8,688
Cash and cash equivalents at January 1.................. 67,181 66,055 57,367
Cash and cash equivalents at December 31................ $69,406 $67,181 $66,055
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, 1996, 1995 and 1994
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.
The Corporation and subsidiaries are subject to regulations of certain state
and federal agencies. These regulatory agencies periodically examine the
Corporation and its subsidiaries for adherence to laws and regulations. As
a consequence the cost of doing business may be affected.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Corporation and its wholly-owned subsidiaries. All material
intercompany transactions have been eliminated in consolidation.
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.
30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(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.
Mortgage Servicing Rights
Effective January 1, 1996 the Corporation adopted the Financial Accounting
Standards Board Statement No. 122 "Accounting for Mortgage Servicing Rights
an amendment of FASB Statement No. 65" (FAS No. 122). When a mortgage
banking enterprise purchases or originates mortgage loans with a definitive
plan to sell or securitize those loans and retain the mortgage servicing
rights, the Corporation must measure the mortgage servicing rights at cost
by allocating the cost of the mortgage loans between the mortgage servicing
rights and the mortgage loans (without the mortgage servicing rights) based
on their relative fair values at the date of purchase or origination. When
the mortgage banking enterprise does not have a definitive plan at the
purchase or origination date and later sells or securitizes the mortgage
loans and retains the mortgage servicing rights, the Corporation must
allocate the amortized cost of the mortgage loans between the mortgage
servicing rights and the mortgage loans (without mortgage servicing rights)
based on their relative fair values at the date of sale. The amount
capitalized as the right to service mortgage loans is recognized as a
separate asset and amortized in proportion to, and over the period of,
estimated net servicing income (servicing revenue in excess of servicing
cost). FAS No. 122 also requires mortgage servicing rights to be
periodically evaluated for impairment based on fair values. The adoption of
FAS No. 122 did not have a material impact on the Corporation's financial
condition or results of operations.
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Loan Fees
Loan origination and commitment fees, net of associated direct costs, are
deferred and the net amount is amortized as an adjustment to the related
loan yield on the interest method, generally over the contractual life of
the related loans or commitments.
Other Real Estate Owned
Real estate, other than bank premises, is recorded at the lower of cost or
fair value less selling costs at the time of acquisition. Expenses related
to holding the property, net of rental income, are generally charged against
earnings in the current period.
Allowance for Possible Credit Losses
The allowance for possible credit losses represents management's estimate of
an amount adequate to provide for losses which may be incurred on loans
currently held. Management determines the adequacy of the allowance based
on historical patterns of loan charge-offs and recoveries, the relationship
of the allowance to outstanding loans, industry experience, current economic
trends and other factors relevant to the collectibility of loans currently
in the portfolio.
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.
Accounting for the Impairment of Long-Lived Assets
The Corporation adopted the Financial Accounting Standards Board Statement
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of" (FAS No. 121) effective January 1, 1996.
This statement requires long-lived assets, such as premises and equipment
and intangibles to be reviewed for impairment whenever events or changes in
circumstances, such as a significant decrease in the market value of an
asset or the extent or manner in which an asset is used indicate that the
carrying amount of an asset may not be recoverable. If there is an
indication that the carrying amount of an asset may not be recoverable,
future discounted cash flows expected to result from the use of the asset
are estimated. If the sum of the expected cash flows is less than the
carrying value of the asset a loss is recognized for the difference between
the carrying value and fair market value of the asset. Adoption of this
statement did not have a material impact on the Corporation's financial
condition or results of operations.
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.
32
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
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
1996 1995 1994
Cash paid during the year for:
Interest $85,802 $79,069 $68,576
Income taxes $10,604 $13,266 $13,234
Noncash investing and financing activities:
ESOP borrowings $ -0- $ 500 $ 1,730
ESOP loan reductions $ 1,071 $ 1,151 $ 983
Gross increase (decrease)
in Market Value adjustment
to securities available
for sale pursuant to FAS
No. 115 $ 1,228 $ 26,635 $(28,285)
Net securities available
for sale transferred to
securities held to
maturity $ -0- $145,723 $ -0-
Net securities held to
maturity transferred to
securities available for
sale upon implementation
of FAS No. 115 $ -0- $ -0- $ 31,011
Loans transferred to
other real estate owned
and repossessed assets $ 2,964 $ 2,733 $ 1,775
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.
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
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.
Dividends on both old and new unallocated ESOP shares are used for debt
service and are reported as a reduction of debt and accrued interest
payable. Dividends on allocated ESOP shares are charged to retained
earnings and allocated to the plan participants accounts. The average
number of common shares outstanding used in calculating earnings per share
excludes all unallocated ESOP shares.
Employee Stock Option Plan
The Corporation adopted the Financial Accounting Standards Board Statement
No. 123 "Accounting for Stock Based Compensation" (FAS No. 123) effective
January 1, 1996. This statement defines a method of measuring stock based
compensation, such as stock options granted, at an estimated fair value.
FAS No. 123 also permits the continued measurement of stock based
compensation under provisions of the Accounting Practice Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25").
As permitted under FAS No. 123 the Corporation has elected to use the
intrinsic value method to measure stock based compensation under APB 25 and
to disclose in a footnote to the financial statements, net income and
earnings per share determined as if the fair value methodology of FAS No.
123 was implemented (see NOTE 17). The adoption of FAS No. 123 did not have
a material impact on the Corporation's financial condition or results of
operations.
NOTE 2--Business Combinations
Effective April 1, 1996 the Corporation acquired all of the outstanding
common stock of BSI Financial Services Inc. ("BSI"), headquartered in
Titusville, PA for cash and stock consideration aggregating $1.2 million.
BSI provides mortgage banking, loan servicing and collection services to the
Corporation's subsidiary banks as well as unaffiliated organizations. The
acquisition was accounted for as a purchase transaction, whereby the
identifiable tangible and intangible assets and liabilities of BSI were
recorded at their fair values at the acquisition date. Under the purchase
method of accounting, the results of operations of BSI from the date of
acquisition are included in the Corporation's financial statements.
34
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 2--Business Combinations (Continued)
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. The Reliable
and United 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 $12,119 during 1996 and $6,827 during 1995.
35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(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, 1996 and 1995:
1996 1995
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 $ 57,706 $ 97 $ -0- $ 57,803 $ 66,052 $ 472 $ (226) $ 66,298
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities 105,656 231 (81) 105,806 79,540 747 (109) 80,178
Other 45,627 17 (358) 45,286 67,441 264 (399) 67,306
Obligations of States and
Political Subdivisions 2 -0- -0- 2 272 -0- -0- 272
Debt Securities Issued
by Foreign Governments 710 -0- -0- 710 710 -0- -0- 710
Corporate Securities 1,984 -0- (32) 1,952 2,763 3 (1) 2,765
Other Mortgage Backed
Securities -0- -0- -0- -0- 2,429 2 (3) 2,428
Total Debt Securities 211,685 345 (471) 211,559 219,207 1,488 (738) 219,957
Equities 30,394 2,906 (444) 32,856 23,719 829 (312) 24,236
Total Securities
Available for Sale $242,079 $3,251 $(915) $244,415 $242,926 $2,317 $(1,050) $244,193
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 29 years and
have an anticipated average life to maturity ranging from less than one year
to 24 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, 1996 and 1995 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.
36
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 4--Securities Available For Sale (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 1996, 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 $ 50,961 $ 50,950
Due after 1 but within 5 years 54,394 54,138
Due after 5 but within 10 years 674 665
Due after 10 years -0- -0-
106,029 105,753
Mortgage backed securities 105,656 105,806
Total debt securities $211,685 $211,559
Proceeds from the sales of securities available for sale were $20,240,
$76,999 and $51,427 during 1996, 1995 and 1994 respectively. Gross gains of
$1,624, $136 and $5,610 and gross losses of $239, $739 and $90 were realized
on those sales during 1996, 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.
Securities available for sale with a book value of $88,649 and $69,097 were
pledged at December 31, 1996 and 1995, respectively to secure public
deposits and for other purposes required or permitted by law.
37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(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:
1996 1995
Gross Gross Approximate Gross Gross Approximate
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities $285,576 $-0- $(1,720) $283,856 $324,355 $ 188 $(1,297) $323,246
Other 87,906 -0- (478) 87,428 101,465 288 (689) 101,064
Obligations of States and
Political Subdivisions 79,429 9 (390) 79,048 61,681 754 (241) 62,194
Debt Securities Issued By
Foreign Governments 113 -0- -0- 113 15 -0- (1) 14
Corporate Securities 1,490 4 -0- 1,494 6,196 19 (4) 6,211
Other Mortgage Backed
Securities 5,232 18 -0- 5,250 10,797 47 (5) 10,839
Total Debt Securities $459,746 $ 31 $(2,588) $457,189 $504,509 $1,296 $(2,237) $503,568
The amortized cost and estimated market value of debt securities at
December 31, 1996, 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 $ 28,402 $ 28,413
Due after 1 but within 5 years 98,278 97,556
Due after 5 but within 10 years 28,996 28,933
Due after 10 years 13,262 13,181
168,938 168,083
Mortgage backed securities 290,808 289,106
Total debt securities $459,746 $457,189
38
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 5--Securities Held to Maturity (Continued)
There were no sales of securities held to maturity in 1996 and 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.
Securities held to maturity with a book value of $232,648 and $228,443 were
pledged at December 31, 1996 and 1995, 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,
1996 1995
Commercial, financial,
agricultural and other $ 252,798 $ 192,530
Real estate loans:
Construction and land
development 24,111 22,969
1-4 Family dwellings 752,562 616,661
Other real estate loans 287,318 293,095
Loans to individuals for household,
family and other personal
expenditures 425,012 381,729
Leases, net of unearned income 36,329 24,190
Subtotal 1,778,130 1,531,174
Unearned income (30,795) (43,632)
Total loans and leases $1,747,335 $1,487,542
Most of the Corporation's business activity was with customers located
within Pennsylvania. The portfolio is well diversified, and as of
December 31, 1996 and 1995, 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
$45,862 at December 31, 1996 as collateral for long-term debt and
$15,155 at December 31, 1995 as collateral for short-term borrowings by
the Corporation's banking subsidiaries.
NOTE 7--Allowance for Possible Credit Losses
Description of changes:
1996 1995 1994
Allowance at January 1 $18,152 $17,337 $16,483
Additions:
Recoveries of previously
charged off loans 905 860 1,134
Provision charged to operating
expense 4,501 4,125 2,896
Deductions:
Loans charged off 4,234 4,170 3,176
Allowance at December 31 $19,324 $18,152 $17,337
39
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 7--Allowance for Possible Credit Losses (Continued)
1996 1995
Recorded investment in impaired loans
at end of period $8,186 $8,222
Average balance of impaired loans for
the year $6,123 $8,192
Allowance for possible credit losses
related to impaired loans $1,639 $ 591
Impaired loans with an allocation
of the allowance for possible
credit losses $4,485 $3,858
Impaired loans with no allocation
of the allowance for possible
credit losses $3,701 $4,364
Income recorded on impaired loans
on a cash basis $ 112 $ 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, 1996 and 1995 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, 1996 and 1995.
1996 1995
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $305,744 $236,929
Standby letters of credit $ 20,747 $ 8,027
Commercial letters of credit $ 483 $ 55
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
counter-party. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, residential and income-producing
commercial properties.
40
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 8--Financial Instruments with Off-Balance-Sheet Risk (Continued)
Standby letters of credit and commercial letters of credit written are
conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
NOTE 9--Premises and Equipment
Premises and equipment are described as follows:
Estimated
Useful Life 1996 1995
Land Indefinite $ 4,378 $ 4,373
Buildings and improvements 5 - 50 Years 31,555 28,781
Leasehold improvements 4 - 39 Years 5,371 4,567
Furniture and equipment 3 - 25 Years 30,072 27,232
Subtotal 71,376 64,953
Less accumulated depreciation
and amortization 38,786 35,518
Total premises and
equipment $32,590 $29,435
Depreciation and amortization related to premises and equipment was $3,657
in 1996, $3,536 and $3,499 in 1995 and 1994, respectively.
NOTE 10--Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
1996 1995
NOW and Super NOW accounts $ 205,090 $ 216,811
Savings and MMDA accounts 495,355 463,492
Time deposits 1,203,865 1,081,518
Total interest-bearing deposits $1,904,310 $1,761,821
Included in time deposits at December 31, 1996 and 1995 were certificates of
deposit in denominations of $100 or more of $260,743 and $167,306
respetively.
Interest expense related to $100 or greater certificates of deposit amounted
to $11,040 in 1996, $9,643 in 1995, and $6,148 in 1994.
Included in time deposits at December 31, 1996 were certificates of deposit
with the following scheduled maturities:
1997 $ 646,837
1998 257,764
1999 188,356
2000 43,375
2001 and thereafter 66,502
$1,202,834
41
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 11--Short-term Borrowings
Short-term borrowings at December 31 were as follows:
1996 1995
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
Federal funds
purchased $ 54,975 $ 34,536 5.54% $ 31,235 $ 37,261 6.06%
Borrowings from
FHLB -0- 6,832 5.48% 12,198 26,369 6.00%
Securities sold
under agreements
to repurchase 79,023 73,766 4.91% 75,109 69,054 5.29%
Treasury, tax and
loan note option 16,332 12,015 5.31% 2,232 8,790 5.89%
Total $150,330 $127,149 5.15% $120,774 $141,474 5.66%
Maximum total at
any month-end $188,232 $212,342
At December 31, 1996 the Corporation had approved but unused borrowing
capacity with the FHLB of $173,217.
Interest expense on short-term borrowings for the years ended December 31 is
detailed below:
1996 1995 1994
Federal funds purchased $1,915 $2,259 $2,381
Borrowings from FHLB 374 1,583 2,646
Securities sold under agreements to
repurchase 3,622 3,653 2,062
Treasury, tax and loan note option 638 518 305
Total interest on
short-term borrowings $6,549 $8,013 $7,394
NOTE 12--Long-Term Debt
Long-term debt at December 31, follows:
1996 1995
Amount Rate Amount Rate
Bank subordinated notes due September, 1997 $ 716 8.38% $ 716 8.38%
Borrowings from FHLB due March, 1998 165 7.22% -0-
Borrowings from FHLB due March, 1998 8,000 7.22% -0-
Borrowings from FHLB due August, 1998 425 6.43% -0-
ESOP loan due September, 1997 -0- 1,250 80% of Prime
ESOP loan due March, 2001 -0- 1,875 Prime
ESOP loan due March, 2004 -0- 1,420 Prime
ESOP loan due March, 2004 3,474 Libor+1% -0-
Borrowings from FHLB due December, 2001 25,000 4.92% -0-
Borrowings from FHLB due January, 2009 3,100 6.18% -0-
Total long-term debt $40,880 $5,261
At June 30, 1996 ESOP loans due September 1997, March 2001 and March 2004
were refinanced by one ESOP loan due March 2004.
42
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands except per share data)
NOTE 12--Long-Term Debt (Continued)
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:
1997 1998 1999 2000 2001 Thereafter
Loan payments $1,658 $9,137 $906 $921 $25,654 $1,888
Note maturities 716 -0- -0- -0- -0- -0-
Total $2,374 $9,137 $906 $921 $25,654 $1,888
NOTE 13--Common Share Commitments
At December 31, 1996 the Corporation had 100,000,000 common shares
authorized and 22,194,426 shares outstanding. Outstanding shares were
reduced by 242,202 shares of treasury stock at December 31, 1996 and 65,002
shares 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 1996 and 1995, 217,294 and 111,522 shares of treasury stock were
acquired at an average price per share of $18.64 and $14.19 respectively,
for the purpose of funding stock options upon exercise. Treasury shares
consisting of 16,694 and 52,420 were reissued during 1996 and 1995 upon
exercise of various stock option plans assumed by the Corporation in the
merger transactions with Reliable and United. In addition 23,400 treasury
shares were reissued during 1996 to fund the BSI acquisition.
NOTE 14--Income Taxes
The income tax provision consists of:
1996 1995 1994
Current tax provision for income
exclusive of securities
transactions:
Federal $12,129 $11,309 $10,599
State 135 15 455
Securities transactions 491 (213) 2,323
Total current tax
provision 12,755 11,111 13,377
Deferred tax provision (benefit) (683) 863 849
Total tax provision $12,072 $11,974 $14,226
43
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(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, 1996 and 1995 were as
follows:
1996 1995
Deferred tax assets:
Allowance for possible credit
losses $ 6,136 $ 5,491
Alternative minimum tax
carryforward 116 -0-
Other 290 332
Deferred tax liabilities:
Accumulated accretion
of bond discount (440) (365)
Unrealized gain on securities
available for sale (705) (275)
Lease financing deduction (3,837) (2,784)
Loan origination fees and costs (756) (360)
Accumulated depreciation (238) (333)
Basis difference in assets acquired (1,561) (1,635)
Other (167) (120)
Net deferred tax liability $(1,162) $ (49)
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:
1996 1995 1994
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Tax at statutory rate $13,879 35.0 $13,125 35.0 $15,037 35.0
Increase (decrease)
resulting from:
Effect of
nontaxable
interest (1,924) (4.9) (1,408) (3.8) (1,643) (3.8)
Merger expenses -0- 0.0 -0- 0.0 590 1.4
State income taxes 135 0.3 13 0.0 566 1.3
Other (18) 0.0 244 0.7 (324) (0.8)
Total tax
provision $12,072 30.4 $11,974 31.9 $14,226 33.1
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 of Reliable, its savings bank subsidiary. These bad debt reserves for
tax purposes would have created a potential tax liability if the thrift
changed its charter. Congress passed legislation during the third quarter
of 1996 which removes the potential liability related to thrift charter
conversions.
44
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(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 of the Corporation's common stock in 1995, at a
corresponding cost of $500, 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 $1,224 in 1996, $1,908 in 1995 and $1,070 in
1994. (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 80% of the employee's contribution. Prior
to January 1, 1996 the employer's matching contribution was 60% of the
employee's contribution. The 401(k) plan expense was $1,638 in 1996, $1,294
in 1995 and $1,137 in 1994.
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 $3,474 at December 31, 1996 and $4,545 at December 31, 1995.
The loans have been recorded as long-term debt on the Corporation's
consolidated balance sheets. A like amount of unearned ESOP shares was
recorded as a reduction of common shareholders' equity. Unearned ESOP
shares, included as a component of shareholders' equity, represents the
Corporation's prepayment of future compensation expense. The shares
acquired by the ESOP are held in a suspense account and will be released to
the ESOP for allocation to the plan participants as the loan is reduced.
Repayment of the loans are scheduled to occur over a nine year period from
contributions to the ESOP by the Corporation and dividends on unallocated
ESOP shares.
The following is an analysis of ESOP shares held in suspense:
(See NOTE 1 for the definition of "old" and "new shares").
Old New
Total Shares Shares
Shares in suspense December 31, 1994 395,902 278,996 116,906
Shares acquired during 1995 36,880 -0- 36,880
Shares allocated during 1995 (103,714) (84,537) (19,177)
Shares in suspense December 31, 1995 329,068 194,459 134,609
Shares acquired during 1996 -0- -0- -0-
Shares allocated during 1996 (82,980) (49,036) (33,944)
Shares in suspense December 31, 1996 246,088 145,423 100,665
The fair market value of the new shares remaining in suspense was
approximately $1,875 and $2,356 at December 31, 1996 and 1995 respectively.
Interest on ESOP loans was $313 in 1996, $434 in 1995 and $312 in 1994.
During 1996 and 1995 dividends on unallocated shares in the amount of $256
and $285 respectively 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.
45
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 17--Stock Option Plans
At December 31, 1996, the Corporation had a stock-based compensation plan,
which is described below. The plan permits the executive compensation
committee to grant options for up to one million shares of the Corporation's
common stock through October 15, 2005. Although the vesting requirements
and term of future options granted are at the discretion of the executive
compensation committee, all options granted during 1996 require a three year
vesting period and expire ten years from the grant date. The Corporation
has elected, as permitted by FASB Statement 123, to apply APB Opinion 25 and
related Interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized for it stock options outstanding. Had
compensation cost for the Corporation's stock option plan been determined
based upon the fair value at the grant dates for awards under the plan
consistent with the method of FASB Statement 123, the Corporation's net
income and earnings per share would have been reduced to the pro forma
amounts shown below:
Net Income
As reported $27,583
Pro forma $27,548
Earnings per share
As reported $1.26
Pro forma $1.25
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes options pricing model with the following weighted
average assumptions used: dividend yield of 3% per annum, expected
volatility of 10%, risk free interest rate of 6.7% and expected option life
of 9.3 years.
Under the Corporation's 1995 Stock Option Plan, the Corporation may grant
options to its executives for up to one million shares of common stock. The
Corporation also assumed the Stock Options of United National Bank
Corporation ("Unitas") upon the merger of Unitas into the Corporation in
1994. There were no options granted under the plan during 1995. Options
for 48,308 shares of the Corporation's common stock assumed from mergers
were unexercised at December 31, 1996.
A summary of the status of the Corporation's outstanding stock options as of
December 31, 1996 and changes for the year ending on that date is presented
below:
Weighted-Average Exercise
Shares Price Per Share
Outstanding 1/1/96 58,134 $ 6.47
Granted 195,048 $18.375
Exercised (9,140) $ 6.44
Forfeited (10,734) $13.38
Outstanding 12/31/96 233,308 $16.10
46
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 17--Stock Option Plans (Continued)
The following table summarizes information about the stock options
outstanding at December 31, 1996.
Options Outstanding Options Exercisable
Weighted-Average
Range of Number Outstanding Remaining Contract Weighted-Average Number Exercisable Weighted-Average
Exercise Prices at 12/31/96 Life Exercise Price at 12/31/96 Exercise Price
$5.00-5.99 27,874 4.8 $5.53 27,874 $5.53
$8.00-8.99 16,500 6.2 $8.07 16,500 $8.07
$18.375 188,934 9.3 $18.375 -0- -0-
233,308 44,374
NOTE 18--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 19--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 1996.
Balances December 31, 1995 $ 9,285
Advances 10,458
Repayments (9,680)
Other 1,050
Balances December 31, 1996 $11,113
"Other" primarily reflects the change in those classified as a "related
party" as a result of mergers, resignations and retirements.
NOTE 20--Regulatory Restrictions and Capital Adequacy
The amount of funds available to the parent from its subsidiary banks is
limited by restrictions imposed on all financial institutions by banking
regulators. During 1996, dividends from subsidiary banks were restricted
not to exceed $63,829. These restrictions have not had, and are not
expected to have, a significant impact on the Corporation's ability to meet
its cash obligations.
47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 20--Regulatory Restrictions and Capital Adequacy (Continued)
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corproration's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific
capital guidelines that involve quantitative measures of the Corporation's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of total and
Tier I capital (common and certain other "core" equity capital) to risk
weighted assets, and of Tier I capital to average assets. As of
December 31, 1996, the Corporation and its banking subsidiaries meet all
capital adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notifications from the Federal
Reserve Board and Federal Deposit Insurance Corporation categorized the
Corporation and First Commonwealth Bank as well capitalized under the
regulatory framework for prompt corrective action. To be considered as well
capitalized the Corporation and its banking subsidiaries must maintain
minimum total risk-based capital, Tier I risk-based capital and Tier I
leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the
institution's category.
To Be Well Capitalized
Under Prompt Corrective
Actual Regulatory Minimum Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $266,999 15.3% $139,303 8.0%
First Commonwealth Bank $225,903 13.7% $131,642 8.0% $164,553 10.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $247,531 14.2% $ 69,651 4.0%
First Commonwealth Bank $207,437 12.6% $ 65,821 4.0% $ 98,732 6.0%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $247,531 9.7% $102,061 4.0%
First Commonwealth Bank $207,437 8.7% $ 95,067 4.0% $118,833 5.0%
As of December 31, 1995
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $256,331 17.8% $115,214 8.0%
First Commonwealth Bank $217,689 16.0% $108,832 8.0% $136,040 10.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $238,186 16.5% $ 57,607 4.0%
First Commonwealth Bank $200,541 14.7% $ 54,416 4.0% $ 81,624 6.0%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $238,186 10.2% $ 93,369 4.0%
First Commonwealth Bank $200,541 9.2% $ 86,926 4.0% $108,657 5.0%
48
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only)
Balance Sheets
December 31,
1996 1995
Assets
Cash $ 5,546 $ 7,730
Securities available for sale 2,148 3,918
Loans to affiliated parties 517 281
Investment in subsidiaries 250,242 239,834
Investment in jointly-owned company 2,214 1,768
Premises and equipment 4,050 2,835
Dividends receivable from subsidiaries 3,571 4,443
Receivable from related parties 922 237
Other assets 1,552 1,164
Total assets $270,762 $262,210
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 1,491 $ 1,362
Dividends payable 4,439 4,027
Loans payable 3,474 4,545
Shareholders' equity 261,358 252,276
Total liabilities and
shareholders' equity $270,762 $262,210
Statements of Income
Years Ended December 31,
1996 1995 1994
Interest and dividends $ 104 $ 53 $ -0-
Dividends from subsidiaries 24,433 31,194 17,260
Net securities (losses) (169) -0- -0-
Other revenue 92 -0- -0-
Operating expenses (8,510) (8,929) (7,561)
Income before taxes and equity
in undistributed earnings of
subsidiaries 15,950 22,318 9,699
Applicable income tax benefits 2,845 2,781 2,673
Income before equity in
undistributed earnings of
subsidiaries 18,795 25,099 12,372
Equity in undistributed
earnings of subsidiaries 8,788 427 16,364
Net income $27,583 $25,526 $28,736
49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(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,
1996 1995 1994
Operating Activities
Net income $ 27,583 $ 25,526 $ 28,736
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 1,198 1,223 1,001
Net losses on sale of assets 167 -0- -0-
Decrease (Increase) in prepaid
income taxes 69 (156) (112)
Undistributed equity in
subsidiaries (8,788) (427) (16,364)
Other - net (1,055) 224 (935)
Net cash provided by
operating activities 19,174 26,390 12,326
Investing Activities
Transactions with securities
available for sale:
Purchases of investment
securities (317) (2,133) -0-
Sales of investment
securities 3,331 -0- -0-
Net change in loans to
affiliated parties (236) (281) -0-
Purchases of premises and
equipment (1,714) (931) (1,372)
Acquisition of and additional
investment in subsidiary,
net of cash received (1,913) -0- 186
Net cash used by
investing activities (849) (3,345) (1,186)
Financing Activities
Repayment of long-term debt -0- (1,500) (500)
Tax benefit of ESOP dividend -0- -0- 81
Discount on dividend reinvestment
plan purchases (530) (342) (212)
Treasury stock acquired (4,050) (1,583) (82)
Treasury stock reissued 108 316 -0-
Cash dividends paid (16,037) (14,326) (10,878)
Net cash used by
financing activities (20,509) (17,435) (11,591)
Net (decrease) increase in cash (2,184) 5,610 (451)
Cash at beginning of year 7,730 2,120 2,571
Cash at end of year $ 5,546 $ 7,730 $ 2,120
50
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(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 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 $1,071 in 1996,
$1,151 in 1995 and $983 in 1994 were made by the ESOP thereby reducing the
outstanding amount related to unearned ESOP shares to $3,474 at December 31,
1996.
Dividends from subsidiaries for 1996 include a special dividend in the
amount of $12,000 received from First Commonwealth Bank ("FCB"), a wholly-
owned subsidiary. After distribution of the special dividend, which was
within guidelines established by the banking regulators, FCB remains
classified as a well capitalized institution. Included in this special
dividend was a dividend-in-kind from FCB in the amount of $1,654, 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, 1996. Dividends from
subsidiaries for 1995 include a special dividend in the amount of $12,415
received from Reliable Savings Bank, a wholly-owned subsidiary. After
distribution of the special dividend, which was within guidelines
established by the banking regulators, Reliable remains classified as a well
capitalized institution. Included in this special dividend was a dividend-
in-kind from Reliable 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, 1996 and 1995, 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.
51
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
NOTE 22--Fair Values of Financial Instruments (Continued)
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.
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.
52
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1996, 1995 and 1994
(Dollar Amounts in Thousands)
The following table presents carrying amounts and estimated fair values of
the Corporation's financial instruments at December 31, 1996 and 1995.
1996 1995
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and due from banks $ 69,406 $ 69,406 $ 62,381 $ 62,381
Interest-bearing deposits with
banks 4,199 4,199 8,288 8,288
Federal funds sold -0- -0- 4,800 4,800
Securities available for sale 244,415 244,415 244,193 244,193
Investments held to maturity 459,746 457,189 504,509 503,568
Loans, net of allowance 1,728,011 1,766,390 1,469,390 1,509,057
Financial liabilities
Deposits 2,104,783 2,114,561 1,962,760 1,972,313
Short-term borrowings 150,330 150,330 120,774 120,774
Long-term debt 40,880 39,022 5,261 5,296
53
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Commonwealth Financial Corporation
We have audited the consolidated balance sheets of First Commonwealth
Financial Corporation and subsidiaries (the Corporation) as of December 31,
1996 and 1995, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
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 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 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, 1996
and 1995, and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period then ended
in conformity with generally accepted accounting principles.
/S/GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 17, 1997
54
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, 1996 and 1995 are as follows.
1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income.............................. $44,270 $44,694 $45,550 $47,815
Interest expense............................. 20,845 21,281 22,653 23,546
Net interest income..................... 23,425 23,413 22,897 24,269
Provision for possible credit losses......... 900 1,050 1,200 1,351
Net interest income after provision for
possible credit losses..................... 22,525 22,363 21,697 22,918
Securities gains (losses).................... 8 (57) 1 1,451
Other operating income....................... 2,933 2,992 3,267 3,146
Other operating expenses..................... 14,993 15,428 16,734 16,434
Income before taxes..................... 10,473 9,870 8,231 11,081
Applicable income taxes...................... 3,360 2,982 2,369 3,361
Net income.............................. $ 7,113 $ 6,888 $ 5,862 $ 7,720
Earnings per share........................... $ 0.32 $ 0.31 $ 0.27 $ 0.35
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 credit losses......... 793 837 815 1,680
Net interest income after provision for
possible credit 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
55
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 28, 1997
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 74 Chairman of the Board of the Corporation,
Chairman of the Board of FCTC, CSC, and
FCB; Director of CTCLIC and New Mexico
Banquest Investors Corp.; Former
President and Chief Executive Officer of
the Corporation
Joseph E. O'Dell 51 President and Chief Executive Officer of
the Corporation, Director of FCB and
FCTC, Vice Chairman of the Board of CSC;
Former Senior Executive Vice President
and Chief Operating Officer of the
Corporation; former President and Chief
Executive Officer of FCB
Gerard M. Thomchick 41 Senior Executive Vice President and Chief
Operating Officer of the Corporation;
President, Chief Executive Officer and
Director of CTCLIC; Director of FCB
and FCTC
David R. Tomb, Jr. 65 Senior Vice President, Secretary and
Treasurer of the Corporation; Secretary
and Cashier of FCB; Director of FCB,
CSC, FCTC and CTCLIC
John J. Dolan 40 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; Comptroller and Chief Financial
Officer of BSI
William R. Jarrett 62 Senior Vice President of the Corporation,
Director of RSB, Former managing partner
of Jarrett Stokes & Co. Certified Public
Accountants, until his employment by the
Corporation on April 15, 1994.
R. John Previte 47 Senior Vice President, Investments of the
Corporation
Rosemary Krolick 43 Senior Vice President and Chief
Information Officer of the Corporation;
President and Chief Executive Officer
of CSC
George E. Dash 46 Senior Executive Vice President and Chief
Operating Officer of FCB; former Senior
Vice President, Sales and Marketing of
the Corporation
56
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 28, 1997
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 28, 1997
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 28, 1997
is incorporated herein by reference in response to this item.
57
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 Exhibit 10.4 to Form 10-K
Agreement dated filed March 21, 1996
October 27, 1995
Joseph E. O'Dell
10.5 Change in Control Exhibit 10.5 to Form 10-K
Agreement dated filed March 21, 1996
October 27, 1995
Gerard M. Thomchick
10.6 Change in Control Exhibit 10.6 to Form 10-K
Agreement dated filed March 21, 1996
October 30, 1995, entered
into between First Commonwealth
Financial Corporation and
John J. Dolan, together with a
schedule listing substantially
identical Change in Control
Agreements with the following
individuals: George E. Dash,
William R. Jarrett, R. John Previte,
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
58
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
24.1 Power of Attorney
(B) Report on Form 8-K
None
59
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 25th day of March 1997.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
/S/JOSEPH E. O'DELL
Joseph E. O'Dell, President and Chief Executive Officer
60