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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, 1998 commission file number 0-11242
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1428528
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
22 NORTH SIXTH STREET INDIANA, PA 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (724) 349-7220
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XX No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
TITLE OF CLASS OUTSTANDING AT March 22, 1999
Common Stock, $1 Par Value 30,942,973 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 22, 1999), was approximately $606,292,260.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement related to the annual meeting of
security holders to be held April 26, 1999 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 7A. Quantitative and Qualitative Disclosures About
Market Risk..................................... 27
ITEM 8. Financial Statements and Supplementary Data...... 28
ITEM 9. Disagreements on Accounting and Financial
Disclosures..................................... 63
PART III
ITEM 10. Directors and Executive Officers of the
Registrant..................................... 63
ITEM 11. Management Renumeration and Transactions........ 64
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management................................. 64
ITEM 13. Certain Relationships and Related Transactions.. 64
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................ 65
Signatures..................................... 67
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business
Description of Business
First Commonwealth Financial Corporation (the "Corporation") was
incorporated as a Pennsylvania business corporation on November 15, 1982 and
is registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended. The Corporation operates two chartered banks, First
Commonwealth Bank and Southwest Bank. Financial services and insurance
products are also provided through First Commonwealth Trust Company and
First Commonwealth Insurance Agency. The Corporation also operates through
Commonwealth Systems Corporation, a data processing subsidiary and BSI
Financial Services Inc., a mortgage banking and loan servicing company.
First Commonwealth Bank ("FCB"), a Pennsylvania-chartered banking
corporation headquartered in Indiana, Pennsylvania operates through
divisions doing business under the following names: NBOC Bank, Deposit
Bank, Cenwest Bank, First Bank of Leechburg, Peoples Bank, Central Bank,
Peoples Bank of Western Pennsylvania, Unitas Bank and Reliable Bank.
On December 31, 1998 the Corporation affiliated, as a result of a statutory
merger, with Southwest National Corporation ("SNC") and its wholly-owned
subsidiary, Southwest Bank ("Southwest"). SNC was a Pennsylvania-chartered
bank holding company headquartered in Greensburg, Pennsylvania. Southwest
Bank is a Pennsylvania-chartered, federally insured commercial bank also
headquartered in Greensburg, Pennsylvania which traces its origin to 1900.
Upon merger, SNC was combined with the Corporation and Southwest Bank became
a subsidiary of the Corporation.
Through FCB, the Corporation traces its banking origins to 1866. FCB and
Southwest ("Subsidiary Banks") conduct business through 96 community banking
offices in the counties of Adams (1 office), Allegheny (6), Armstrong (3),
Beaver (1), Bedford (4), Blair (8), Cambria (11), Centre (2), Clearfield
(6), Elk (3), Franklin (2), Huntingdon (6), Indiana (9), Jefferson (4),
Lawrence (6), Somerset (5), Washington (1), and Westmoreland (18). The
Subsidiary Banks engage in general banking business and offer a full range
of financial services including such general retail banking services as
demand, savings and time deposits; mortgage, consumer installment and
commercial loans; and credit card loans through MasterCard and VISA.
The Subsidiary Banks operate a network of 79 automated teller machines
("ATMs") which permits customers to conduct routine banking transactions 24
hours a day. Of the ATMs, 60 are located on the premises of their main or
branch offices and 19 are in remote locations. All the ATMs are part of the
MAC network which consists of over 23,000 ATMs owned by numerous banks,
savings and loan associations and credit unions located throughout 45
states. The ATMs operated by the Subsidiary Banks are also part of the
global MasterCard/Cirrus network which is comprised of more than 300,000
ATMs located in the United States, Canada and 58 other countries and
territories, which services over 365 million card holders. Such networks
allow the Subsidiary Banks' customers to withdraw cash and in certain cases
conduct other banking transactions from ATMs of all participating financial
institutions.
In addition to funds access through the use of ATMs, the MAC debit card
offered to the Subsidiary Banks' deposit customers may be used at 300,000
point of sale terminals on the MAC system as well as being used on the
global MasterCard system for the purchase of goods and services. The MAC
debit card provides customers with the almost universal acceptability of a
credit card combined with the convenience of direct debit to the customers'
checking account.
2
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Description of Business (Continued)
First Commonwealth's corporate philosophy is to encourage its subsidiaries
to operate as locally-oriented, community-based financial service
affiliates, augmented by experienced, centralized support from the
Corporation in selected critical areas. This local market orientation is
reflected in the Subsidiary Banks' boards of directors and branch banking
centers, which generally have advisory boards comprised of local business
persons, professionals and other community representatives, that assist the
Subsidiary Banks in responding to local banking needs. The Subsidiary Banks
concentrate on customer service and business development, while relying upon
the support of the Corporation in identifying operational areas that can be
effectively centralized without sacrificing the benefits of a local
orientation. Primary candidates for centralization are those functions
which are not readily visible to customers and those which are critical to
risk management. Asset quality review, financial reporting, investment
activities, funds management, internal audit, data processing and loan
servicing are among the functions which are managed at the holding company
level, either directly or through utilization of non-bank subsidiaries as
professional resources providers.
Commonwealth Systems Corporation ("CSC") was incorporated as a Pennsylvania
business corporation in 1984 by the Corporation to function as its data
processing subsidiary and it has its principal place of business in Indiana,
Pennsylvania. Before August 1984, it had operated as the data processing
department of NBOC. CSC provides on-line general ledger accounting services
and bookkeeping services for deposit and loan accounts to the Corporation,
the Banking Subsidiaries and its other nonbank subsidiaries. CSC also acts
as a centralized purchasing agent for the purchase of computer hardware and
software products by the Corporation and subsidiaries as well as providing
technical support for the installation and use of these products. It
competes, principally with data processing subsidiaries of other, mostly
larger, banks, on the basis of the price and quality of its services and the
speed with which such services are delivered.
First Commonwealth Trust Company ("FCTC") was incorporated on January 18,
1991 as a Pennsylvania chartered trust company to render general trust
services. The trust departments of subsidiary banks were combined to form
FCTC, and the corporate headquarters are located in Indiana, Pennsylvania.
Upon the Corporation's merger with Southwest National, the trust department
of Southwest Bank was also merged into FCTC. FCTC has eight branch offices
in the service areas of the Subsidiary Banks and offers personal and
corporate trust services, including administration of estates and trusts,
individual and corporate investment management and custody services and
employee benefit trust services.
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. First Commonwealth Insurance Agency ("FCIA")
was incorporated as a Pennsylvania business corporation with its principal
place of business in Indiana, Pennsylvania. FCIA began operations in
January 1998 as a wholly-owned subsidiary of FCB and provides a full range
of insurance and annuity products to retail and commercial customers. The
Corporation and its subsidiaries employed approximately 1,500 persons (full-
time equivalents) at December 31, 1998.
On June 1, 1989 Commonwealth Trust Credit Life Insurance Company
("Commonwealth Trust") began operations. The Corporation owns 50% of the
voting common stock of Commonwealth Trust. Commonwealth Trust provides
reinsurance for credit life and credit accident and health insurance sold by
the subsidiaries of the two unrelated holding company owners under a joint
venture arrangement whereby the net income derived from such reinsurance
inures proportionally to the benefit of the holding company selling the
underlying insurance to its banks' customers.
3
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
The Corporation does not engage in any significant business activities other
than holding the stock of its subsidiaries. The Corporation does not at
present have any plans to expand or modify its business or that of its
subsidiaries, other than as described herein. Nevertheless, it will be
receptive to and may actively seek out mergers and acquisitions in the event
opportunities which management considers advantageous to the development of
the Corporation's business arise, and may otherwise expand or modify its
business as management deems necessary to respond to changing market
conditions or the laws and regulations affecting the business of banking.
Competition
The Subsidiary Banks, FCTC, BSI and FCIA face intense competition, both from
within and without their service areas, in all aspects of business. The
Subsidiary Banks compete for deposits, in such forms as checking, savings
and NOW (negotiable order of withdrawal) accounts, MMDA (money market
deposit accounts) and certificates of deposit, and in making consumer loans
and loans to smaller businesses, with numerous other commercial banks and
savings banks doing business within their service area. With respect to
loans to larger businesses the Subsidiary Banks also compete with much
larger banks located outside of their service area. The Subsidiary Banks
also compete, primarily in making consumer loans and for deposits, with
state and federally chartered savings and loan associations and with credit
unions. In recent years the Subsidiary Banks have encountered significant
competition for deposits from money market funds and institutions that offer
annuities located throughout the United States. Money market funds pay
dividends to their shareholders (which are the equivalent of the interest
paid by banks on deposits) and they are able to offer services and
conveniences similar to those offered by the Subsidiary Banks. Annuities
accumulate interest on the amounts deposited over a predetermined time
period. The depositor is then entitled to withdraw his funds for a fixed
period of time or until death. The effect of such competition has been to
increase the costs of the rest of deposits, which provide the funds with
which loans are made. In addition to savings and loan associations and
credit unions, the Subsidiary Banks also compete for consumer loans with
local offices of national finance companies and finance subsidiaries of
automobile manufacturers and with national credit card companies such as
MasterCard and VISA, whose cards, issued through financial institutions, are
held by consumers throughout their service area. The Subsidiary Banks
believe that the principal means by which they compete for deposits and
consumer and smaller commercial loans are the number and desirability of the
locations of their offices and ATMs, the sophistication and quality of their
services and the prices (primarily interest rates) of their services.
Additionally, the Subsidiary Banks intend to remain competitive by offering
financial services that target specific customer needs. Examples of such
specialized products include the "Sentry CD Watch" which provides
certificate of deposit rates of competitors to members of the Subsidiary
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 Subsidiary Banks' branch offices. The Corporation
will continue to enhance its customer delivery system in the future as the
Internet is utilized to provide customers access to product information and
on-line banking.
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
the Corporation of such percentage of voting shares or substantially all the
assets of any bank located in any state other than Pennsylvania unless the
laws of such state specifically authorize such an acquisition.
The Bank Holding Company Act generally prohibits a bank holding company from
engaging in a non-banking business or acquiring direct or indirect ownership
or control of more that 5% of the outstanding voting shares of any non-
banking corporation subject to certain exceptions, the principal exception
being where the business activity in question is determined by the Federal
Reserve Board to be closely related to banking or to managing or controlling
banks to be a proper incident thereto. The Bank Holding Company Act does
not place territorial restrictions on the activities of such banking related
subsidiaries of bank holding companies.
Under the Federal Reserve Act, subsidiary banks of a bank holding company
are subject to certain restrictions on extensions of credit to the bank
holding company or any of its subsidiaries, investments in the stock or
other securities thereof, or acceptance of such stock or securities as
collateral for loans to any one borrower. A bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit or the furnishing of property or
services.
Under the Pennsylvania Banking Code, there is no limit on the number of
Pennsylvania banks that may be owned or controlled by a Pennsylvania bank
holding company.
Subsidiary Banks
FCB and Southwest are Pennsylvania-chartered banks and are subject to the
supervision of and regularly examined by the Pennsylvania Department of
Banking and the Federal Deposit Insurance Corporation ("FDIC"), and subject
to certain regulations of the Federal Reserve Board. The areas of operation
subject to regulation by Federal and Pennsylvania laws, regulations and
regulatory agencies include reserves against deposits, maximum interest
rates for specific classes of loans, truth-in-lending disclosures,
permissible types of loans and investments, trust operations, mergers and
acquisitions, issuance of securities, payment of dividends, Community
Reinvestment Act evaluations, mandatory external audits, establishment of
branches and other aspects of operations. Under the Pennsylvania Banking
Code, a state bank located in Pennsylvania may establish branches anywhere
in the state.
5
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
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, 1998 enabling laws
have been passed so that the required reciprocity presently exists with
approximately 34 states, of which the following 18 are east of the
Mississippi River: Connecticut, Delaware, Illinois, Indiana, Kentucky,
Louisiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New
Jersey, New York, Ohio, Rhode Island, Tennessee, Vermont and West Virginia.
A similar law is applicable to savings associations and savings and loan
holding companies.
It is difficult to determine the precise effects that reciprocal regional
interstate banking will have on the Corporation in the future, but the law
has increased, and as reciprocity becomes effective for additional states
will increase further, the number of potential buyers for Pennsylvania banks
and bank holding companies. The law also permits Pennsylvania bank holding
companies and Pennsylvania savings and loan holding companies that desire to
expand outside Pennsylvania to acquire banks, savings institutions and bank
holding companies located in jurisdictions with which Pennsylvania has
reciprocity.
Effects of Governmental Policies
The business and earnings of the Corporation are affected not only by
general economic conditions, but also by the monetary and fiscal policies of
the United States Government and its agencies, including the Federal Reserve
Board. An important function of the Federal Reserve Board is to regulate
the national supply of bank credit. Among the instruments of monetary
policy used by the Federal Reserve Board to implement these objectives are
open market operations in United States government securities, changes in
the discount rate on borrowings by member banks and savings institutions
from the Federal Reserve System and changes in reserve requirements against
bank and savings institution deposits. These instruments, together with
fiscal and economic policies of various governmental entities, influence
overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans, received on investments or paid for
deposits.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of bank holding companies and their
subsidiary banks in the past and are expected to continue to do so in the
future. In view of changing conditions in the national and Pennsylvania
economies and in the money markets, as well as the effect of actions by
monetary and fiscal authorities, including the Federal Reserve Board, no
prediction can be made as to possible future changes in interest rates,
deposit levels and loan demand or the effect of such changes on the business
and earnings of the Corporation or its subsidiaries.
6
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. PROPERTIES
The Corporation's principal office is located in the old Indiana County
Courthouse complex. This certified Pennsylvania and national historic
landmark was built in 1870 and restored by NBOC in the early 1970s. The
Corporation, NBOC, CSC and FCB occupy this grand structure, which provides
32,000 square feet of floor space, under a 25-year restoration lease
agreement with Indiana County, which NBOC entered into in 1973 and renewed
during 1998 for an additional 25 years. Under the lease, NBOC is obligated
to pay all taxes, maintenance and insurance on the building and to restore
it in conformity with historic guidelines. In order to support future
expansion needs and centralization of various functional areas such as loan
processing, marketing, and accounting, the Corporation also owns two
additional structures, free of all liens and encumbrances. These facilities
currently provide office space for the Corporation, CSC, FCTC, FCB and FCIA.
The Subsidiary Banks have 96 banking facilities of which 27 are leased and
69 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 12,000. 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
1998
First Quarter $34.250 $27.313 $0.220
Second Quarter $29.750 $26.313 $0.220
Third Quarter $30.563 $23.000 $0.220
Fourth Quarter $26.813 $23.000 $0.230
Cash
Dividends
Period High Sale Low Sale Per Share
1997
First Quarter $18.875 $17.125 $0.200
Second Quarter $23.000 $17.500 $0.200
Third Quarter $22.000 $19.563 $0.200
Fourth Quarter $35.063 $21.625 $0.220
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,
1998 1997 1996 1995 1994
Interest income....................... $283,421 $254,772 $235,188 $227,182 $207,368
Interest expense...................... 148,282 124,427 109,189 103,019 86,133
Net interest income................. 135,139 130,345 125,999 124,163 121,235
Provision for possible credit losses.. 15,049 10,152 6,301 5,575 4,456
Net interest income after provision
for possible credit losses........ 120,090 120,193 119,698 118,588 116,779
Securities gains (losses)............. 1,457 6,825 1,599 (603) 5,536
Other operating income................ 24,881 18,716 17,359 15,996 15,468
Merger and related charges............ 7,915 -0- -0- -0- -0-
Other operating expenses.............. 92,286 88,857 85,299 83,689 82,680
Income before taxes and extra-
ordinary items................. 46,227 56,877 53,357 50,292 55,103
Applicable income taxes............... 12,229 17,338 16,164 15,728 17,761
Net income before extraordinary
items.......................... 33,998 39,539 37,193 34,564 37,342
Extraordinary items (less applicable
taxes of $336)...................... (624) -0- -0- -0- -0-
Net income............................ $ 33,374 $ 39,539 $ 37,193 $ 34,564 $ 37,342
Per Share Data
Net income before extraordinary
items.............................. $1.11 $1.28 $1.19 $1.11 $1.18
Extraordinary items................. (0.02) 0.00 0.00 0.00 0.00
Net income.......................... $1.09 $1.28 $1.19 $1.11 $1.18
Dividends declared.................. $0.89 $0.82 $0.74 $0.66 $0.58
Average shares outstanding.......... 30,666,786 30,835,949 31,155,043 31,236,202 31,689,718
Per Share Data Assuming Dilution
Net income before extraordinary
items.............................. $1.10 $1.28 $1.19 $1.10 $1.18
Extraordinary items................. (0.02) 0.00 0.00 0.00 0.00
Net income.......................... $1.08 $1.28 $1.19 $1.10 $1.18
Dividends declared.................. $0.89 $0.82 $0.74 $0.66 $0.58
Average shares outstanding.......... 30,833,013 30,922,837 31,190,895 31,281,960 31,763,564
At End of Period
Total assets........................ $4,096,789 $3,668,557 $3,339,996 $3,075,123 $3,020,204
Investment securities............... 1,525,332 1,015,798 901,411 960,588 1,018,228
Loans and leases, net of unearned
income............................ 2,374,850 2,436,337 2,236,523 1,935,938 1,790,684
Allowance for possible credit losses 32,304 25,932 25,234 23,803 22,375
Deposits............................ 2,931,131 2,884,343 2,756,111 2,586,545 2,493,135
Long-term debt...................... 630,850 193,054 52,737 7,168 9,549
Shareholders' equity................ 355,405 354,323 341,522 329,486 293,237
Key Ratios
Return on average assets............ 0.85% 1.15% 1.17% 1.14% 1.25%
Return on average equity............ 9.13% 11.31% 11.07% 11.02% 12.61%
Net loans to deposit ratio.......... 79.92% 83.57% 80.23% 73.93% 70.93%
Dividends per share as a percent of
net income per share.............. 81.65% 64.06% 62.18% 59.46% 49.15%
Average equity to average assets
ratio............................. 9.28% 10.16% 10.53% 10.38% 9.93%
9
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
This discussion and the related financial data are presented to assist in
the understanding and evaluation of the consolidated financial condition and
the results of operations of First Commonwealth Financial Corporation
including its subsidiaries (the "Corporation") for the years ended
December 31, 1998, 1997 and 1996 and are intended to supplement, and should
be read in conjunction with, the consolidated financial statements and
related footnotes.
In addition to historical information, this discussion and analysis contains
forward-looking statements. The forward-looking statements contained herein
are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include,
but are not limited to, those discussed in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The
Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise
after the date hereof.
The Corporation acquired Southwest National Corporation and its subsidiary
("Southwest") effective December 31, 1998. The merger was accounted for as
a pooling of interests and accordingly, all financial statements have been
restated as though the merger had occurred at the beginning of the earliest
period presented. During the fourth quarter of 1997 the Corporation formed
First Commonwealth Insurance Agency ("FCIA") as a subsidiary of First
Commonwealth Bank ("FCB"), a commercial banking subsidiary of the
Corporation. FCIA began marketing a wide range of insurance and annuity
products to the Corporation's retail and commercial customers beginning
January 1, 1998. 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.
Results of Operations
Net income in 1998 was $33.4 million, a decrease of $6.1 million from the
1997 level of $39.5 million and compared to $37.2 million reported in 1996.
Basic earnings per share decreased $0.19 per share in 1998 to $1.09. The
decrease in net income and basic earnings per share for 1998 was primarily
the result of merger and other related charges of $7.9 million incurred
during 1998. These charges include merger expenses for the acquisition of
Southwest National Corporation, early retirement and postretirement benefit
accruals and premises and equipment expenses to standardize depreciation
methods. On a net of tax basis the impact of these merger and other related
charges decreased earnings per share by $0.19 in 1998. Net income and basic
earnings per share for 1998 also reflected a pre-tax decrease of $0.17 as a
result of lower securities gains during 1998 compared to 1997 levels. Net
income and basic earnings per share for 1998 were impacted favorably by
increases in net interest margin and other income and negatively impacted by
an increase in the provision for possible credit losses. Extraordinary
items for 1998 resulted from a single transaction whereby the Corporation
incurred a cost of $960 thousand for the prepayment of FHLB term borrowings.
This transaction was executed as part of the Corporation's repositioning of
its balance sheet to reduce exposure to declining interest rates. The
increase in basic earnings per share of $0.09 generated during 1997
reflected increases in net interest income and securities gains. Net income
and basic earnings per share for 1997 were negatively impacted by increases
in the provision for possible credit losses and salary and benefit expenses.
Return on average assets was 0.85% and return on average equity was 9.13%
during 1998 compared to 1.15% and 11.31%, respectively for 1997. Return on
average assets was 1.17% during 1996 while return on average equity was
11.07%.
10
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
The following is an analysis of the impact of changes in net income on
earnings per share:
1998 1997
vs. vs.
1997 1996
Net income per share, prior year $1.28 $1.19
Increase (decrease) from changes in:
Net interest income 0.18 0.18
Provision for possible credit losses (0.16) (0.13)
Security transactions (0.17) 0.17
Other income 0.21 0.05
Salaries and employee benefits (0.06) (0.11)
Occupancy and equipment costs 0.01 (0.02)
Merger and other related charges (0.26) 0.00
Other expenses (0.08) (0.01)
Provision for income taxes 0.16 (0.04)
Extraordinary items, net of tax (0.02) 0.00
Net income per share $1.09 $1.28
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 $135.1 million in 1998
compared to $130.3 million in 1997 and $126.0 million in 1996. 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,
1998.
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)
1998 1997 1996
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 $ 3,692 $ 230 6.23% $ 4,663 $ 236 5.06% $ 7,504 $ 419 5.58%
Investment securities 1,271,319 78,205 6.43 931,017 55,490 6.24 950,684 56,006 6.16
Federal funds sold 35,521 1,893 5.33 12,653 689 5.45 22,752 1,207 5.31
Loans (b) (c), net of
unearned income 2,439,436 203,093 8.43 2,330,657 198,357 8.60 2,060,196 177,556 8.69
Total interest-
earning assets 3,749,968 283,421 7.72 3,278,990 254,772 7.91 3,041,136 235,188 7.87
Noninterest-earning assets:
Cash 78,999 77,259 81,115
Allowance for credit losses (27,388) (25,510) (24,827)
Other assets 138,114 110,112 94,163
Total noninterest-
earning assets 189,725 161,861 150,451
Total Assets $3,939,693 $3,440,851 $3,191,587
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing
demand deposits (d) $ 341,835 $ 7,579 2.22% $ 271,321 $ 5,042 1.86% $ 265,964 $ 4,093 1.54%
Savings deposits (d) 715,814 21,379 2.99 737,725 22,752 3.08 721,509 20,792 2.88
Time deposits 1,530,491 85,002 5.55 1,517,972 84,806 5.59 1,387,899 76,301 5.50
Short-term borrowings 195,334 10,214 5.23 156,470 8,108 5.18 132,527 6,777 5.11
Long-term debt 430,677 24,108 5.60 65,820 3,719 5.65 20,317 1,226 6.03
Total interest-
bearing liabilities 3,214,151 148,282 4.61 2,749,308 124,427 4.53 2,528,216 109,189 4.32
Noninterest-bearing
liabilities and capital:
Noninterest-bearing
demand deposits (d) 328,720 311,304 299,285
Other liabilities 31,177 30,541 28,073
Shareholders' equity 365,645 349,698 336,013
Total noninterest-
bearing funding sources 725,542 691,543 663,371
Total Liabilities and
Shareholders' Equity $3,939,693 $3,440,851 $3,191,587
Net Interest Income and
Net Yield On Interest-
earning Assets $135,139 3.77% $130,345 4.12% $125,999 4.28%
(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes net loan fees.
(d) Average balances for 1998 and 1997 do not include reallocations from noninterest-bearing demand deposits and interest-bearing
demand deposits into savings deposits which were made for regulatory purposes.
12
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Both interest income and interest expense increased over 1997 levels as
volumes increased. Average interest-earning assets increased $471.0 million
while average interest-bearing liabilities increased $464.8 million in 1998.
Average loans increased $108.8 million in 1998 and were supported by deposit
growth and short-term borrowings. Average investments increased $340.3
million and were funded by long-term Federal Home Loan Bank borrowings.
Asset yields, on a tax-equivalent basis, decreased 19 basis points (0.19%)
during 1998 to 7.72% from 7.91% reported in 1997 and compared to 7.87%
reported in 1996. The decline in loan yields which began in the fourth
quarter of 1995 has continued throughout 1997 and 1998. Loan yields
declined 17 basis points (0.17%) during 1998 to 8.43% from 8.60% reported
for 1997 and compared to 8.69% during 1996. The 1998 period reflected
decreased yields in all loan categories except personal revolving credit
loans which reflected an increase of 213 basis points (2.13%) over 1997
levels. The 1998 decline in loan yields included declines of 18 basis
points (0.18%) for mortgage loans, 34 basis points (0.34%) for installment
loans and 49 basis points (0.49%) for home equity loans. The mortgage
portfolio continues to be impacted by loan refinancings and loans maturing
at higher interest rates than current market rates. Loan yields on
innovative loan products introduced in previous years which bear lower
introductory interest rates began to increase during 1998 as these products
aged and introductory interest rates were no longer offered on aged loans
but since many of these loans are still at introductory rates these products
continue to generate lower yields than the mortgage loan portfolio as a
whole. Although loan yields declined during 1998, interest income on loans
increased $4.7 million over 1997 levels as a result of increases due to
volume of $9.3 million which were partially offset by decreases due to rate
of $4.6 million.
Interest income on investments increased $22.7 million during 1998 primarily
as a result of increases due to volume of $22.2 million and increases due to
rate of $1.3 million for U.S. government agency securities. Average
balances of U.S. government agency securities for 1998 increased $348.6
million over 1997 averages as part of a capital management leveraging
strategy whereby borrowings from the Federal Home Loan Bank classified as
long-term debt were invested in U.S. government agency securities. Yields
on investments for the 1998 period reflected an increase of 19 basis points
(0.19%) over 1997 yields and included an increase on U.S. government agency
securities of 20 basis points (0.20%) for the 1998 period compared to 1997.
Although prepayments of mortgage backed securities ("MBS") continued to
increase during 1998 over 1997 levels, these prepayments have not increased
beyond acceptable levels. 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 MBS's 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.
The cost of funds for 1998 increased 8 basis points (0.08%) over 1997 costs
of 4.53% and compared to costs of 4.32% for 1996. Interest on deposits
increased $1.4 million in 1998 and included increases in interest-bearing
demand deposits of $2.5 million which were partially offset by decreases in
interest on savings accounts of $1.4 million compared to 1997 levels.
Average interest-bearing demand deposits for 1998 increased $70.5 million
over 1997 averages. This increase in interest-bearing demand deposits for
1998 occurred primarily in a secured cash manager product utilized by
municipalities. This secured cash manager product allows the municipality
to sweep excess balances from noninterest-bearing accounts into an interest-
bearing account which offers higher interest rates than traditional N.O.W.
accounts.
13
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Interest expense on short-term borrowings increased $2.1 million during 1998
primarily as a result of increases in average borrowings of $38.9 million
over 1997 averages. Increases in interest expense on long-term debt of
$20.4 million during 1998 were primarily a result of increases in average
borrowings of $364.9 million over 1997 averages. The long-term debt
increase for 1998 was a result of borrowings from the Federal Home Loan Bank
with maturities of up to 10 years to be utilized as part of the above
mentioned capital management leveraging strategy. The average spread of
this leverage strategy was approximately 1.13% during the 1998 period.
During 1998 interest income before taxes on these investments exceeded the
funding costs by $4.9 million.
Net interest margin (net interest income, on a tax-equivalent basis as a
percentage of average earning assets), was 3.77% during 1998 compared to
4.12% in 1997 and 4.28% in 1996. The Corporation's use of computer modeling
to manage interest rate risk is described in the "Interest Sensitivity"
section of this discussion herein.
The following table shows the effect of changes in volumes and rates on
interest income and interest expense.
Analysis of Year-to-Year Changes in Net Interest Income
(Dollar Amounts in Thousands)
1998 Change from 1997 1997 Change from 1996
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 $ (6) $ (49) $ 43 $ (183) $ (158) $ (25)
Securities 22,715 21,241 1,474 (516) (1,211) 695
Federal funds sold 1,204 1,246 (42) (518) (536) 18
Loans 4,736 9,351 (4,615) 20,801 23,514 (2,713)
Total interest income 28,649 31,789 (3,140) 19,584 21,609 (2,025)
Interest-bearing liabilities:
Deposits 1,360 1,334 26 11,414 7,701 3,713
Short-term borrowings 2,106 2,014 92 1,331 1,224 107
Long-term debt 20,389 20,613 (224) 2,493 2,747 (254)
Total interest expense 23,855 23,961 (106) 15,238 11,672 3,566
Net interest income $ 4,794 $ 7,828 $(3,034) $ 4,346 $ 9,937 $(5,591)
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 $15.0 million in 1998 compared to $10.2 million in 1997 and $6.3
million in 1996. This brought the allowance for possible credit losses to
$32.3 million at December 31, 1998, for a ratio of 1.36% of actual loans
outstanding. Although net charge-offs for 1998 reflect a decrease of $777
thousand over 1997 levels, net charge-offs have not returned to historic
levels, therefore the additional provision of $4.2 million in the fourth
quarter of 1998 reflects changing economic conditions. Net charge-offs for
1998 reflected decreases in consumer installment and revolving credit loans
of $839 thousand and commercial loans not secured by real estate of $253
thousand which were partially offset by increases in net charge-offs of auto
leases of $329 thousand. Net charge-offs against the allowance for possible
credit losses were $8.7 million, or 0.36% of average total loans in 1998.
This compared to $9.5 million in 1997 and $4.9 million in 1996. Net charge-
offs were 0.41% and 0.24% of average total loans during 1997 and 1996,
respectively. Net charge-offs as a percent of average total loans exceed
peer averages when comparing the Corporation results at December 31, 1998 to
the most recent peer averages from September 30, 1998. The peer group was
defined as all bank holding companies in the country with assets ranging
between $3 billion and $10 billion. Although the allowance for possible
credit losses as a percentage of average loans outstanding is below peer
averages the additional provision recorded in the fourth quarter of 1998
brings the ratio closer to peer when comparing the Corporation's
14
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
ratio from December 31, 1998 to the most recent peer averages from
September 30, 1998. For an analysis of credit quality, see the "Credit
Review" section of this discussion.
The following table presents an analysis of the consolidated allowance for
possible credit losses for the five years ended December 31, 1998 (dollars
in thousands):
Summary of Loan Loss Experience
1998 1997 1996 1995 1994
Loans outstanding at end of year $2,374,850 $2,436,337 $2,236,523 $1,935,938 $1,790,684
Average loans outstanding $2,439,436 $2,330,657 $2,060,196 $1,846,507 $1,672,546
Allowance for possible credit losses:
Balance, beginning of year $ 25,932 $ 25,234 $ 23,803 $ 22,375 $ 20,934
Loans charged off:
Commercial, financial and agricultural 1,513 1,473 633 1,188 1,279
Loans to individuals 7,293 8,022 5,069 3,717 3,059
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial 812 664 440 218 23
Real estate-residential 690 819 195 481 266
Lease financing receivables 319 -0- 26 52 52
Total loans charged off 10,627 10,978 6,363 5,656 4,679
Recoveries of loans previously charged off:
Commercial, financial and agricultural 462 223 263 159 291
Loans to individuals 1,328 1,218 1,033 1,067 1,030
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial 70 13 83 56 249
Real estate-residential 87 57 109 128 87
Lease financing receivables 3 13 5 99 7
Total recoveries 1,950 1,524 1,493 1,509 1,664
Net loans charged off 8,677 9,454 4,870 4,147 3,015
Provision charged to expense 15,049 10,152 6,301 5,575 4,456
Balance, end of year $ 32,304 $ 25,932 $ 25,234 $ 23,803 $ 22,375
Ratios:
Net charge-offs as a percentage
of average loans outstanding 0.36% 0.41% 0.24% 0.22% 0.18%
Allowance for possible credit losses
as a percentage of average loans
outstanding 1.32% 1.11% 1.22% 1.29% 1.34%
Net securities gains decreased $5.4 million in 1998 from $6.8 million
reported in 1997 and compared to $1.6 million in 1996. The securities gains
during 1998 resulted in part from the third and fourth quarter sales of
floating collateralized mortgage obligations classified as securities
"available for sale" having book values of $87.9 million and $16.1 million
respectively, which resulted in security gains of $1.7 million during the
third quarter and security losses of $803 thousand during the fourth
quarter. These securities were sold to reduce the exposure to accelerated
prepayments as interest rates were expected to fall. The $89.6 million
proceeds from the sale of securities in the third quarter of 1998 were used
to reduce outstanding Federal funds purchased while the $15.3 million
proceeds in the fourth quarter were reinvested in higher yielding municipal
securities. The 1998 securities gains also included the first quarter sale
of U.S. Treasury securities classified as securities "available for sale"
having a book value of $45.8 million with the proceeds being reinvested in
mortgage backed and other U.S. government agency securities with similar
average expected maturities. Securities losses of $586 thousand were
incurred during the fourth quarter of 1998 primarily as a result of the sale
of mutual funds classified as equity securities having a book value of $5.8
million. Additional security gains were incurred during the fourth quarter
of 1998 as a result of the sale of Pennsylvania bank stocks having a book
value of $5.2 million.
15
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The securities gains during 1997 and 1996 resulted primarily from the sale
of investments in Pennsylvania bank stocks. These equity securities had
book values of $17.4 million and $6.8 million and were sold for gains of
$6.7 million and $1.5 million during 1997 and 1996 respectively.
Trust income reflected an increase in 1998 of $830 thousand over 1997 levels
as the book value of assets managed continued to increase. The 1998
increase in trust income occurred primarily in fees from employee benefit
accounts, agency/custodial accounts and retail mutual fund commissions and
trailer fees. Service charges on deposits decreased by $158 thousand during
1998 but are expected to increase during 1999 as fee schedules for the
Corporation's subsidiary banks are evaluated and standardized. Service
charges on deposits increased during 1997, primarily as a result of changes
in the fee structure and introduction of a debit card product at Southwest
Bank.
Other income increased $5.5 million in 1998 to $11.4 million from $5.9
million reported in 1997 and can be compared to $5.4 million in 1996.
Included in the increase in other revenue for 1998 were increases in gains
on sales of assets of $2.4 million over 1997 levels. The Corporation sold
$52.5 million of 1-4 family residential mortgage loans during the fourth
quarter of 1998 which resulted in a gain of $1.3 million. The Corporation
mitigated prepayment risk through the sale of mortgage loans bearing higher
interest rates than current market rates and reduced interest rate risk
through the sale of mortgage loans bearing interest rates which were lower
than current market rates. As a result of branch analysis including the
evaluation of the potential sale or consolidation of branches competing in
the same market area, the Corporation sold two of its branches located in
State College, Pennsylvania. The premium on sale of $10.1 million of
deposits from the State College branches resulted in a gain of $950 thousand
in the fourth quarter of 1998. Other revenue continued to be favorably
impacted by income from the increase in cash surrender value of bank owned
life insurance which increased by $1.2 million during 1998. Insurance
commissions, primarily those generated from FCIA increased $288 thousand
during 1998 compared to 1997. Charges for non-customer use of the
Corporation's ATMs continued to favorably impact other revenue, reflecting
an increase of $607 thousand for 1998 over 1997 levels. Additional
increases in other revenue for 1998 occurred in MAC and debit card income,
charge card merchant discount and charge card equipment rental compared to
1997 revenues.
Total other operating expenses increased $11.3 million to $100.2 million in
1998 and compared to $88.9 million and $85.3 million in 1997 and 1996,
respectively. Employee costs were $48.7 million for 1998, reflecting an
increase of $1.6 million over $47.1 million reported in 1997 and compared to
$44.1 million reported in 1996. The most notable increase in employee
benefit costs for 1998 over 1997 levels was an increase in health insurance
costs due to a rate increase. Salary and benefit increases of $3.0 million
for 1997 compared to 1996 reflected merit increases, an increase in full
time equivalent employees and the inclusion of BSI for twelve months of
1997. Decreases in deferred loan origination costs also increased employee
costs for 1997 over 1996 levels. Although employee costs in dollars has
increased, employee costs as a percentage of average assets has continued to
decline to 1.24% for 1998 from 1.37% in 1997 and 1.38% in 1996. Salary
levels are generally maintained through attrition management programs.
Net occupancy and furniture and equipment costs decreased $373 thousand
during 1998 after reflecting an increase of $621 thousand during 1997. All
categories of occupancy expense reflected decreases during 1998 while
furniture and equipment expense included decreases in maintenance and
repairs which were partially offset by an increase in depreciation during
1998. Net occupancy and furniture and equipment expense increases for 1997
resulted primarily from increases in building rental expense, building
repairs, and depreciation. These 1997 increases were primarily the result
of the construction of new branches during 1996 and 1997 as well as
remodeling of existing branches.
16
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Outside data processing expenses were $3.1 million for 1998 compared to $3.0
million and $3.1 million for 1997 and 1996 respectively. Outside data
processing expenses would be expected to decline in the future when
outsourced processing for Southwest Bank is converted to the Corporation's
data processing subsidiary. Pennsylvania shares tax expense increased $201
thousand during 1998 and $129 thousand in 1997 as shareholder's equity of
subsidiary banks continued to rise. FDIC expenses which are included in
other operating expenses, decreased $860 thousand for 1997 and $1.8 million
for 1996.
Merger expenses incurred during the acquisition of Southwest National
Corporation for legal, accounting, printing, filing and other professional
services total $1.6 million and were expensed during the fourth quarter of
1998. As part of the evaluation of appropriate staffing levels for the
Corporation after inclusion of Southwest, an early retirement plan was
offered to employees during the fourth quarter of 1998. Salary and benefit
costs of the early retirement plan in the amount of $4.7 million are
included in merger and other related charges for 1998, as approximately 5%
of employees took advantage of this opportunity. The success of the early
retirement plan accelerated the process of right-sizing the Corporation
beyond normal attrition management by adjusting employment levels quickly
while continuing the Corporation's tradition of not laying off employees due
to merger activity. In anticipation of the merger of Southwest benefit
plans into those of the Corporation in the near future, Southwest curtailed
their postretirement benefit plan during the fourth quarter of 1998. An
additional accrual adjustment of $1.1 million related to this curtailment is
included in merger and other related charges for 1998. Additional merger
and other related charges of $462 thousand were incurred during 1998 to
standardize depreciation for Southwest to that of the Corporation and to
write-off signs and supplies that become obsolete as a result of the merger.
Other operating expenses increased $1.9 million during 1998 to $24.5 million
and compared to $22.6 million reported in 1997 and $22.7 million reported in
1996. Lease residual insurance costs, operational losses and charge-offs
and software depreciation and maintenance expenses for 1998 reflected
increases of $192 thousand, $403 thousand and $325 thousand respectively
over 1997 levels. Loan processing expenses increased $353 thousand for 1998
compared to 1997, while accelerated prepayment speeds for loans in the
fourth quarter of 1998 resulted in an increase in the amortization of
purchased mortgage servicing rights of $336 thousand over 1997 amortization.
Other professional fees for 1998 increased $753 thousand over amounts
recorded for 1997. Outside professionals were contracted under limited
engagements to review the Corporation's asset/liability management model,
analyze fee structures and recommend modifications and to provide research
and consulting services for marketing, customer profitability analysis and
branch automation initiatives. It is anticipated that the use of outside
professionals for these types of limited engagements will decline in the
future as both Southwest and the Corporation benefit from the combined
resources and talents available as a result of the merger. Other
professional fees for 1998 also reflected increases due to the inclusion of
FCIA expenses for the 1998 period.
Income tax expense was $12.2 million during 1998 representing a decrease of
$5.1 million over the 1997 total of $17.3 million and compared to $16.2
million in 1996. The decrease in income tax expense for 1998 resulted
primarily from an increase in tax-free income and a decrease in income
before taxes due to early retirement and other merger related charges
incurred during 1998. Income tax expense increased $1.1 million during
1997. The Corporation's effective tax rate was 26.5% for 1998 compared to
30.5% for 1997 and 30.3% for 1996. The decrease in the Corporation's
effective tax rate for 1998 resulted primarily from an increase in tax-free
income, including income from tax-free investment securities and bank owned
life insurance.
17
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Liquidity
Liquidity is a measure of the Corporation's ability to efficiently meet
normal cash flow requirements of both borrowers and depositors. In the
ordinary course of business, funds are generated from deposits (primary
source) and the maturity or repayment of earning assets, such as securities
and loans. As an additional secondary source, short-term liquidity needs
may be provided through the use of overnight Federal funds purchased,
borrowings through the use of lines available for repurchase agreements, and
borrowings from the Federal Reserve Bank. Additionally, the banking
subsidiaries are members of the Federal Home Loan Bank and may borrow under
overnight and term borrowing arrangements. The sale of earning assets may
also provide an additional source of liquidity.
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 1998, it could
become more consequential in the future. Core deposits increased $76.7
million in 1998 while total deposits increased $46.8 million for 1998. Non-
core deposits, which are time deposits in denominations of $100 thousand or
more represented 10.21% of total deposits at December 31, 1998, down from
11.42% of total deposits at December 31, 1997. Non-core deposits increased
by $43.2 million in 1997 primarily as a result of an increase in public
funds. Time deposits of $100 thousand or more at December 31, 1998, 1997
and 1996 had remaining maturities as follows:
Maturity Distribution of
Large Certificates of Deposit
(Dollar Amounts in Thousands)
1998 1997 1996
Amount Percent Amount Percent Amount Percent
Remaining Maturity:
3 months or less $151,121 50% $ 92,481 28% $ 96,314 34%
Over 3 months through 6 months 40,363 14 64,874 20 41,404 15
Over 6 months through 12 months 27,546 9 53,428 16 49,942 17
Over 12 months 80,382 27 118,524 36 98,431 34
Total $299,412 100% $329,307 100% $286,091 100%
Net loans decreased $67.9 million during 1998 as consumer installment and
real estate loans secured by residential properties decreased by $42.4
million and $38.5 million respectively compared to year-end 1997. The
reduction in residential real estate loans was the result of the sale of
mortgage loans including the sale of $52.5 million during the fourth quarter
of 1998. As discussed previously, the sale of these loans allowed the
Corporation to reduce interest rate and prepayment risk. Although not
reflected in year-end balances, the volume of residential mortgage loans
originated during 1998 remained strong. New mortgage loan product offerings
scheduled for 1999 are expected to have a favorable impact on loan volumes.
The reduction in loans to individuals during 1998 was due in part to a
decrease in indirect auto loans at Southwest. Competitive rates and
aggressive marketing programs for loans to individuals including indirect
auto lending at Southwest are planned for 1999.
18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Below is a schedule of loans by classification for the five years ended
December 31, 1998.
Loans by Classification
(Dollar Amounts in Thousands)
1998 1997 1996 1995 1994
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial,
agricultural and
other $ 377,733 16% $ 363,699 15% $ 316,550 14% $ 254,311 13% $ 218,035 12%
Real estate-construction 33,097 1 35,308 1 39,120 2 32,914 2 34,204 2
Real estate-commercial 387,166 16 384,794 16 356,106 16 347,543 18 321,238 17
Real estate-residential 1,009,903 42 1,048,405 43 941,147 41 801,306 40 765,822 42
Loans to individuals 517,907 22 569,742 23 578,204 25 519,949 26 467,518 25
Net leases 56,423 3 51,245 2 36,329 2 24,190 1 30,498 2
Gross loans and
leases 2,382,229 100% 2,453,193 100% 2,267,456 100% 1,980,213 100% 1,837,315 100%
Unearned income (7,379) (16,856) (30,933) (44,275) (46,631)
Total loans, and leases
net of unearned income $2,374,850 $2,436,337 $2,236,523 $1,935,938 $1,790,684
An additional source of liquidity is marketable securities that the
Corporation holds in its investment portfolio. These securities are
classified as "securities available for sale." While the Corporation does
not have specific intentions to sell these securities, they have been
designated as "available for sale" because they may be sold for the purpose
of obtaining future liquidity, for management of interest rate risk or as
part of the implementation of tax management strategies. As of December 31,
1998, securities available for sale had an amortized cost of $1.0 billion
and an approximate fair value of $1.0 billion. Gross unrealized gains were
$5.6 million and gross unrealized losses were $2.1 million. Based upon the
Corporation's historical ability to fund liquidity needs from other sources,
the current available for sale portfolio is deemed to be more than adequate,
as the Corporation does not anticipate a need to liquidate the investments
until maturity. Below is a schedule of the contractual maturity
distribution of securities held to maturity and securities available for
sale at December 31, 1998.
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 $ 2,023 $ 2,556 $ -0- $ 4,579 6.41%
After 1 but within 5 years 66,769 24,192 11,728 102,689 6.33
After 5 but within 10 years 180,376 27,085 358 207,819 6.17
After 10 years 80,929 86,680 -0- 167,609 6.48
Total $330,097 $140,513 $12,086 $482,696 6.32%
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 $ 22,717 $ 1,074 $ 529 $ 24,320 5.51%
After 1 but within 5 years 129,112 10,877 380 140,369 6.18
After 5 but within 10 years 104,751 10,435 34,819 150,005 6.36
After 10 years 665,834 13,839 44,749 724,422 6.61
Total $922,414 $36,225 $80,477 $1,039,116 6.49%
*Yields are calculated on a tax-equivalent basis.
19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Interest Sensitivity
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks
associated with maximizing income through interest sensitivity imbalances.
While no single number can accurately describe the impact of changes in
interest rates on net interest income, interest rate sensitivity positions,
or "gaps" when measured over a variety of time periods may be helpful.
An asset or liability is considered to be interest-sensitive if the rate it
yields or bears is subject to change within a predetermined time period. If
interest-sensitive assets ("ISA") exceeds interest-sensitive liabilities
("ISL") during a prescribed time period, a positive gap results.
Conversely, when ISL exceeds ISA during a time period, a negative gap
results.
A positive gap tends to indicate that earnings will be impacted favorably if
interest rates rise during the period and negatively when interest rates
fall during the time period. A negative gap tends to indicate that earnings
will be affected inversely to interest rate changes. In other words, as
interest rates fall, a negative gap should tend to produce a positive effect
on earnings and when interest rates rise, a negative gap should tend to
affect earnings negatively.
The primary components of ISA include adjustable rate loans and investments,
loan repayments, investment maturities and money market investments. The
primary components of ISL include maturing certificates of deposit, money
market deposits, savings deposits, NOW accounts and short-term borrowings.
The following table lists the amounts and ratios of assets and liabilities
with rates or yields subject to change within the periods indicated as of
December 31, 1998 and 1997 (Dollar Amounts in Thousands):
1998
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
Loans $ 765,948 $168,297 $293,082 $1,227,327
Investments 59,942 87,042 149,497 296,481
Other interest-earning assets 38,048 4,120 6,207 48,375
Total interest-sensitive
assets 863,938 259,459 448,786 1,572,183
Certificates of deposit 359,487 323,760 318,282 1,001,529
Other deposits 1,094,125 -0- -0- 1,094,125
Borrowings 142,509 1,085 2,413 146,007
Total interest-sensitive
liabilities 1,596,121 324,845 320,695 2,241,661
Gap $ (732,183) $(65,386) $128,091 $ (669,478)
ISA/ISL 0.54 0.80 1.40 0.70
Gap/Total assets 17.87% 1.60% 3.13% 16.34%
1997
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
Loans $1,010,147 $153,279 $277,296 $1,440,722
Investments 68,650 86,001 126,173 280,824
Other interest-earning assets 157,721 5,214 10,043 172,978
Total interest-sensitive
assets 1,236,518 244,494 413,512 1,894,524
Certificates of deposit 341,898 214,522 310,138 866,558
Other deposits 1,013,190 -0- -0- 1,013,190
Borrowings 216,721 1,441 1,725 219,887
Total interest-sensitive
liabilities 1,571,809 215,963 311,863 2,099,635
Gap $ (335,291) $ 28,531 $101,649 $ (205,111)
ISA/ISL 0.79 1.13 1.33 0.90
Gap/Total assets 9.14% 0.78% 2.77% 5.59%
20
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Although the periodic gap analysis provides management with a method of
measuring current interest rate risk, it only measures rate sensitivity at a
specific point in time. Therefore, to more precisely measure the impact of
interest rate changes on the Corporation's net interest income, management
simulates the potential effects of changing interest rates through computer
modeling. The income simulation model used by the Corporation captures all
assets, liabilities, and off-balance sheet financial instruments, accounting
for significant variables that are believed to be affected by interest
rates. These variables include prepayment speeds on mortgage loans and
mortgage backed securities, cash flows from loans, deposits and investments
and balance sheet growth assumptions. The model also captures embedded
options, such as interest rate caps/floors or call options, and accounts for
changes in rate relationships as various rate indices lead or lag changes in
market rates. The Corporation is then better able to implement strategies
which would include an acceleration of a deposit rate reduction or lag in a
deposit rate increase. The repricing strategies for loans would be
inversely related.
The Corporation's asset/liability management policy guidelines limit
interest rate risk exposure for the succeeding twenty-four month period.
Simulations are prepared under the base case where interest rates remain
flat and most likely case where interest rates are defined using projections
of economic factors. Additional simulations are produced estimating the
impact on net interest income of a 300 basis point (3.00%) movement upward
or downward from the base case scenario. The Corporation's current
asset/liability management policy indicates that a 300 basis point (3.00%)
change in interest rates up or down cannot result in more than a 7.5% change
in net interest income when compared to a base case without Board approval
and a strategy in place to reduce interest rate risk below the established
maximum level. The analysis at December 31, 1998, indicated that a 300
basis point (3.00%) movement in interest rates in either direction over the
next twelve months would not have a significant impact on the Corporation's
anticipated net interest income over that time nor over the next twenty-four
months and the Corporation's position would remain well within current
policy guidelines.
The Corporation's "Asset/Liability Management Committee" ("ALCO") is
responsible for the identification, assessment and management of interest
rate risk exposure, liquidity, capital adequacy and investment portfolio
position. The primary objective of the ALCO process is to ensure that the
Corporation's balance sheet structure maintains prudent levels of risk
within the context of currently known and forecasted economic conditions and
to establish strategies which provide the Corporation with appropriate
compensation for the assumption of those risks. The ALCO attempts to
mitigate interest rate risk through the use of strategies such as asset
disposition, asset and liability pricing and matched maturity funding. The
ALCO strategies are established by the Corporation's senior management and
are approved by the Corporation's board of directors.
Final loan maturities and rate sensitivity of the loan portfolio excluding
consumer installment and mortgage loans and before unearned income at
December 31, 1998 were as follows (Dollar Amounts in Thousands):
Within One One to After
Year 5 Years 5 Years Total
Commercial and industrial $167,950 $ 55,098 $ 57,116 $280,164
Financial institutions -0- 105 -0- 105
Real estate-construction 17,277 7,142 8,678 33,097
Real estate-commercial 77,310 53,595 256,261 387,166
Other 33,640 19,246 44,578 97,464
Totals $296,177 $135,186 $366,633 $797,996
Loans at fixed interest rates 95,374 207,728
Loans at variable interest rates 39,812 158,905
Totals $135,186 $366,633
21
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Credit Review
Maintaining a high quality loan portfolio is of great importance to the
Corporation. The Corporation manages the risk characteristics of the loan
portfolio through the use of prudent lending policies and procedures and
monitors risk through a periodic review process provided by internal
auditors, regulatory authorities and our loan review staff. These reviews
include the analysis of credit quality, diversification of industry,
compliance to policies and procedures, and an analysis of current economic
conditions.
In the management of its credit portfolio, the Corporation emphasizes the
importance of the collectibility of loans and leases as well as asset and
earnings diversification. The Corporation immediately recognizes as a loss
all credits judged to be uncollectible and has established an allowance for
possible credit losses that may exist in the portfolio at a point in time,
but have not been specifically identified.
The Corporation's written lending policy requires certain underwriting
standards to be met prior to funding any loan, including requirements for
credit analysis, collateral value coverage, documentation, and terms. The
principal factor used to determine potential borrowers' creditworthiness is
business cash flows or consumer income available to service debt payments.
Secondary sources of repayment, including collateral or guarantees, are
frequently obtained.
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.
Additional credit review procedures regarding year 2000 issues were
established for commercial loan customers during 1998. These procedures
include the gathering of information to evaluate new customers' year 2000
risk and modifying loan covenants to mitigate the Corporation's credit risk
due to loan customers failure to remediate their year 2000 issues. All
current commercial loan customers were contacted by direct mail to increase
customer awareness of how the year 2000 date change may affect them. Credit
risk inherent in the existing loan portfolio related to year 2000 issues was
assessed through review of the Corporation's largest commercial credits. In
addition to direct mail contact, large commercial customers were contacted
by phone to improve awareness and to gather information needed for
evaluation of year 2000 credit risk. Economic factors used in evaluating
the adequacy of the allowance for possible credit losses have also been
expanded to include the impact of year 2000 problems.
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.
22
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Real estate loans secured by 1-4 family residential housing properties are
granted subject to statutory limits in effect for each bank regarding the
maximum percentage of appraised value of the mortgaged property.
Residential loan terms are normally established in compliance with secondary
market requirements. Residential mortgage portfolio interest rate risk is
controlled by secondary market sales, variable interest rate loans and
balloon maturities.
Loans to individuals represent financing extended to consumers for personal
or household purposes, including automobile financing, education, home
improvement, and personal expenditures. These loans are granted in the form
of installment, credit card, or revolving credit transactions. Consumer
creditworthiness is evaluated on the basis of ability to repay, stability of
income sources, and past credit history.
Since all identified losses are immediately charged off, no portion of the
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)
1998 1997 1996 1995 1994
Commercial, industrial, financial,
agricultural and other $ 4,375 $ 3,726 $ 3,628 $ 2,482 $ 2,870
Real estate-construction 414 415 461 330 329
Real estate-commercial 5,119 4,912 4,731 4,170 3,930
Real estate-residential 10,319 8,595 8,145 6,420 6,463
Loans to individuals 5,223 4,583 4,933 3,892 3,783
Lease financing receivables 512 393 285 162 243
Unallocated 6,342 3,308 3,051 6,347 4,757
Total $32,304 $25,932 $25,234 $23,803 $22,375
Allowance as percentage
of average total loans 1.32% 1.11% 1.22% 1.29% 1.34%
The unallocated portion of the allowance for possible credit losses
increased to $6.3 million for 1998 from $3.3 million reported in 1997. The
unallocated portion of the allowance for possible credit losses represented
19.6% of the total allowance for 1998 compared to 12.8% of the total
allowance for 1997 and is more in line with historical levels. Although net
charge-offs have decreased for the 1998 period compared to 1997 levels, net
charge-offs for 1998 became higher than peer averages. The allowance for
possible credit losses at December 31, 1998 provides for this change in the
Corporation's trend in credit loss experience exceeding peers, rather than
continuation of the historic trend which has been favorable in comparison to
peers. The Corporation continues to monitor changing economic conditions
and their potential impact on credit risk and based on this analysis deemed
it appropriate to provide for these economic conditions by increasing the
provision for possible credit losses in the fourth quarter of 1998. This
increase brings the allowance for possible credit losses, which has
historically lagged behind peer levels closer to peer averages when
comparing actual results from December 31, 1998 to the most recent peer
results available from September 30, 1998.
Other than those described below, there are no material credits that
management has serious doubts as to the borrower's ability to comply with
the present loan repayment terms. The following table identifies
nonperforming loans at December 31. A loan is placed in a nonaccrual status
at the time when ultimate collectibility of principal or interest, wholly or
partially, is in doubt. Past due loans are those loans which were
contractually past due 90 days or more as to interest or principal payments
but are well secured and in the process of collection. Renegotiated loans
are those loans which terms have been renegotiated to provide a reduction or
deferral of principal or interest as a result of the deteriorating financial
position of the borrower.
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)
1998 1997 1996 1995 1994
Loans on nonaccrual basis $ 9,677 $11,387 $ 9,536 $ 8,782 $10,811
Past due loans 15,780 13,955 14,046 9,410 7,829
Renegotiated loans 64 67 280 803 733
Total nonperforming loans $25,521 $25,409 $23,862 $18,995 $19,373
Nonperforming loans as a percentage of
total loans 1.07% 1.04% 1.07% 0.98% 1.08%
Allowance as percentage of nonperforming
loans 126.58% 102.06% 105.75% 125.31% 115.50%
Other real estate owned $ 2,370 $ 1,950 $ 1,732 $ 1,467 $ 2,405
Gross income that would have been
recorded at original rates $ 961 $ 1,017 $ 799 $ 946 $ 1,170
Interest that was reflected in income 286 146 223 241 287
Net reduction to interest income due to
nonaccrual $ 675 $ 871 $ 576 $ 705 $ 883
The reduction of income due to renegotiated loans was less than $50 thousand
in any year presented.
The level of nonperforming loans at year-end 1998 remains stable in dollar
amount when compared to 1997 levels. Nonperforming loans as a percentage of
total loans increased over 1997 levels but is in line with historic levels.
The increase in this ratio is due in part to the reduction in outstanding
loans at December 31, 1998. The ratio of the allowance for possible credit
losses as a percentage of nonperforming loans at December 31, 1998 was
126.58% an increase over 1997 levels.
Management believes that the allowance for possible credit losses and
nonperforming loans remained safely within acceptable levels.
Capital Resources
Equity capital increased $1.1 million in 1998 to $355.4 million. Dividends
declared decreased equity by $26.0 million during 1998, an increase over
dividends for the 1997 period as the dividend rate was increased. The
retained net income remains in permanent capital to fund future growth and
expansion. Additional advances by the Corporation's Employee Stock
Ownership Plan ("ESOP") to fund the acquisition of the Corporation's common
stock for future distribution as employee compensation, net of long-term
debt payments, and fair value adjustments to unearned ESOP shares, decreased
equity capital by $5.4 million. The market value adjustment to securities
available for sale increased capital by $43 thousand. Amounts paid to fund
the discount on reinvested dividends and optional cash payments reduced
equity by $1.0 million. The cost of purchasing treasury shares decreased
equity by $2.1 million while proceeds from the reissuance of treasury shares
to provide for stock options exercised and unearned ESOP shares increased
equity capital by $2.2 million during 1998.
24
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Capital Resources (Continued)
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.
Year 2000 Analysis
The year 2000 issue is the result of computer programs being written whereby
dates have been abbreviated by eliminating the first two digits of the year
under the assumption that these two digits would always be 19. Any computer
systems that have date sensitive programs may recognize a date using "00" as
the year 1900 rather than the year 2000. As the year 2000 approaches such
systems will be unable to accurately process certain date-based information
resulting in potential system failure or miscalculations.
During 1995 the Corporation began evaluating the size and complexity of the
year 2000 issue. An awareness effort to inform board of directors, senior
management and other staff of the year 2000 problem and its significance
began, and communications continue to provide progress updates. The
Corporation completed an inventory process and developed a plan for
addressing the year 2000 issue. The plan addressed mainframe and PC based
hardware and software systems and was later expanded to include
environmental systems that are dependent on embedded microchips. Examples
of environmental systems are vaults, security systems, elevators,
telephones, heating and electrical systems.
Project teams were established to identify and prioritize critical systems
and processes affected by the year 2000 date change. Critical mainframe and
PC based hardware and software systems were assessed for year 2000 readiness
and those with identified date issues were scheduled for modification or
replacement. Significant suppliers and outside professional service
contractors were also evaluated to determine the extent to which the
Corporation is vulnerable to those parties failure to remediate their own
year 2000 issues.
By fully dedicating numerous technical staff from Commonwealth Systems
Corporation, the Corporation's data processing subsidiary and utilizing
additional staff from various functional areas, multiple computer systems
can be addressed concurrently. Renovation whereby code enhancements,
hardware and software upgrades and system replacements are implemented was
95% complete for mission critical systems at December 31, 1998. An
application is considered mission critical if it is vital to the successful
continuation of a core business activity. Validation or testing of all
changes to hardware and software components, including connections with
other systems was 90% complete at year-end 1998, while implementation of
mission critical systems was approximately 80% completed by the same time
frame. Mission critical systems not in a state of readiness are primarily
smaller PC based systems. All mission critical systems are scheduled for
implementation by March 31, 1999 which places the Corporation within
guidelines established by federal regulatory agencies. Regulatory agencies
will continue to perform quarterly reviews of the Corporation's year 2000
readiness throughout 1999. The Corporation has also engaged outside
professionals to provide additional independent verification and validation
processes and to assure the reliability of internal risk and cost estimates.
25
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Year 2000 Analysis (Continued)
Due to the broad scope of risks and uncertainties associated with the year
2000 problem the Corporation established a separate business resumption plan
for year 2000 events which is integrated with its general business
resumption plan. The Corporation's remediation contingency plan addresses
major identifiable internal and external components and identifies
alternative processes in event that a system fails. Third party vendors
have been evaluated and outside sources have been tested where possible.
Contingencies established for critical systems and processes include manual
processing of transactions, utilization of tape transfer rather than
electronic medium, use of alternate communications lines or methods and the
installation of a generator as a backup power source. Contingencies for
communication with customers include maintaining access to the Corporation's
telephone banking center by relocation of the center if necessary. Short-
term liquidity needs have been estimated and multiple sources of funds have
been identified. Contingency planning will continue throughout 1999 and
although all possible problems can not possibly be anticipated, management
believes that potential difficulties associated with implementation are
likely to result in only minor delays in transaction or information
availability. The Corporation's greatest asset in dealing with year 2000
issues continues to be its dedicated staff who enable the Corporation to
redirect internal resources as needed.
The Corporation utilized internal resources to evaluate, reprogram and test
software and hardware for year 2000 issues to the extent possible. Salary
and benefit costs related to year 2000 activities were expensed as incurred.
External year 2000 expenditures included amounts for capitalized hardware
and software which will be amortized over three years for software and five
years for hardware. In most cases the new software and hardware offer
additional benefits in processing capability or efficiencies gained from
modernization in addition to achieving year 2000 compliance. Mainframe
software and hardware replaced will result in enhancements or features of
potential benefit in serving banking customers or processing financial
transactions. Year 2000 expenditures which were expensed as incurred during
1998 included the cost of leased off-site testing of mainframe systems,
outside professionals utilized for independent verification, travel and
lodging during off-site testing and vendor testing. The Corporation's
estimates of additional year 2000 expenditures to be incurred during 1999
are based on presently available information and estimates. Cash outlays
were funded through operating cash flows. Due to the Corporation's
commitment to mitigate year 2000 risks where possible, management does not
believe the year 2000 problem will have a material impact on the
Corporation's financial condition or results of operations.
The following table summarizes year 2000 expenditures during 1998 and 1997
and estimated amounts to be incurred during 1999.
Estimate
1998 1997 for 1999
Capitalized hardware and software $ 250 $106 $ 92
Non-employee expenses including testing 152 20 136
Employee related costs 1,003 163 353
Subtotal 1,405 289 581
Capitalized hardware and software replaced
without acceleration due to year 2000 2,043 70 671
Total expenditures $3,448 $359 $1,252
26
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Inflation and Changing Prices
Management is aware of the impact inflation has on interest rates and
therefore the impact it can have on a bank's performance. The ability of a
financial institution to cope with inflation can only be determined by
analysis and monitoring of its asset and liability structure. The
Corporation monitors its asset and liability position with particular
emphasis on the mix of interest-sensitive assets and liabilities in order to
reduce the effect of inflation upon its performance. However, it must be
remembered that the asset and liability structure of a financial institution
is substantially different from an industrial corporation in that virtually
all assets and liabilities are monetary in nature, meaning that they have
been or will be converted into a fixed number of dollars regardless of
changes in general price levels. Examples of monetary items include cash,
loans and deposits. Nonmonetary items are those assets and liabilities
which do not gain or lose purchasing power solely as a result of general
price level changes. Examples of nonmonetary items are premises and
equipment.
Inflation can have a more direct impact on categories of noninterest
expenses such as salaries and wages, supplies and employee benefit costs.
These expenses are very closely monitored by management for both the effects
of inflation and increases relating to such items as staffing levels, usage
of supplies and occupancy costs.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information appearing in Item 7 of this report under the caption "Interest
Sensitivity" is incorporated herein by reference in response to this item.
27
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
(Dollar Amounts in Thousands)
December 31,
1998 1997
Assets
Cash and due from banks.....................$ 96,615 $ 82,500
Interest-bearing bank deposits.............. 1,914 5,040
Federal funds sold.......................... 1,000 29,880
Securities available for sale, at market.... 1,042,636 505,918
Securities held to maturity, at cost, (market
value $486,185 in 1998 and $511,711 in 1997) 482,696 509,880
Loans....................................... 2,382,229 2,453,193
Unearned income........................... (7,379) (16,856)
Allowance for possible credit losses...... (32,304) (25,932)
Net loans............................ 2,342,546 2,410,405
Property and equipment...................... 41,929 41,531
Other real estate owned..................... 2,370 1,950
Other assets................................ 85,083 81,453
Total assets.........................$4,096,789 $3,668,557
Liabilities
Deposits (All Domestic):
Noninterest-bearing.......................$ 264,082 $ 259,565
Interest-bearing.......................... 2,667,049 2,624,778
Total deposits....................... 2,931,131 2,884,343
Short-term borrowings....................... 140,547 203,449
Other liabilities........................... 38,856 33,388
Long-term debt.............................. 630,850 193,054
Total liabilities.................... 3,741,384 3,314,234
Shareholders' Equity
Preferred stock, $1 par value per
share, 3,000,000 shares authorized,
none issued............................... -0- -0-
Common stock, $1 par value per share,
100,000,000 shares authorized, 31,262,706
shares issued and 30,937,973 shares
outstanding in 1998; 31,660,910 shares
issued and 30,934,565 shares outstanding
in 1997................................... 31,263 31,661
Additional paid-in capital.................. 100,240 106,659
Retained earnings........................... 235,623 228,230
Accumulated other comprehensive income...... 2,199 2,156
Treasury stock (324,733 and 726,345 shares at
December 31, 1998 and 1997, respectively
at cost).................................. (5,913) (11,947)
Unearned ESOP shares........................ (8,007) (2,436)
Total shareholders' equity........... 355,405 354,323
Total liabilities and
shareholders' equity..........$4,096,789 $3,668,557
The accompanying notes are an integral part of these consolidated
financial statements.
28
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Income
(Dollar Amounts in Thousands, except per share data)
Years Ended December 31,
1998 1997 1996
Interest Income
Interest and fees on loans................ $203,093 $198,357 $177,556
Interest and dividends on investments:
Taxable interest........................ 69,467 49,246 49,741
Interest exempt from Federal
income taxes.......................... 6,600 4,869 4,692
Dividends............................... 2,138 1,375 1,573
Interest on Federal funds sold............ 1,893 689 1,207
Interest on bank deposits................. 230 236 419
Total interest income................. 283,421 254,772 235,188
Interest Expense
Interest on deposits..................... 113,960 112,600 101,186
Interest on short-term borrowings........ 10,214 8,108 6,777
Interest on long-term debt............... 24,108 3,719 1,226
Total interest expense............... 148,282 124,427 109,189
Net interest income........................ 135,139 130,345 125,999
Provision for possible credit losses....... 15,049 10,152 6,301
Net interest income after provision for
possible credit losses................... 120,090 120,193 119,698
Other Income
Securities gains......................... 1,457 6,825 1,599
Trust income............................. 5,251 4,421 3,920
Service charges on deposits.............. 8,274 8,432 8,060
Other income............................. 11,356 5,863 5,379
Total other income................... 26,338 25,541 18,958
Other Expenses
Salaries and employee benefits........... 48,710 47,074 44,066
Net occupancy expense.................... 6,750 7,063 6,475
Furniture and equipment expense.......... 6,105 6,165 6,132
Data processing expense.................. 3,101 3,049 3,081
Pennsylvania shares tax expense.......... 3,152 2,951 2,822
Merger and related charges............... 7,915 -0- -0-
Other operating expenses................. 24,468 22,555 22,723
Total other expenses................. 100,201 88,857 85,299
Income before income taxes and extra-
ordinary items............................ 46,227 56,877 53,357
Applicable income taxes.................... 12,229 17,338 16,164
Net income before extraordinary items...... 33,998 39,539 37,193
Extraordinary items (less applicable
income taxes of $336).................... (624) -0- -0-
Net Income................................. $33,374 $39,539 $37,193
Average Shares Outstanding................. 30,666,786 30,835,949 31,155,043
Average Shares Outstanding Assuming
Dilution................................. 30,833,013 30,922,837 31,190,895
Earnings per common share:
Net income before extraordinary items.... $1.11 $1.28 $1.19
Extraordinary items...................... $(0.02) $0.00 $0.00
Net income............................... $1.09 $1.28 $1.19
Earnings per common share assuming dilution:
Net income before extraordinary items.... $1.10 $1.28 $1.19
Extraordinary items...................... $(0.02) $0.00 $0.00
Net income............................... $1.08 $1.28 $1.19
The accompanying notes are an integral part of these consolidated financial
statements.
29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Changes in Shareholders' Equity
(Dollar Amounts in Thousands)
Accumulated
Additional Other Unearned Total
Common Paid-in Retained Comprehensive Treasury ESOP Shareholders'
Stock Capital Earnings Income Stock Shares Equity
Balance at December 31, 1995............. $31,661 $107,714 $193,968 $1,617 $(929) $(4,545) $329,486
Comprehensive income
Net income............................. -0- -0- 37,193 -0- -0- -0- 37,193
Other comprehensive income, net of tax:
Unrealized holding gains on securities
arising during the period............ -0- -0- -0- 798 -0- -0- 798
Less: reclassification adjustment
for gains on securities included
in net income...................... -0- -0- -0- (986) -0- -0- (986)
Total other comprehensive income....... -0- -0- -0- (188) -0- -0- (188)
Total comprehensive income.............. -0- -0- 37,193 (188) -0- -0- 37,005
Cash dividends declared.................. -0- -0- (20,318) -0- -0- -0- (20,318)
Decrease in unearned ESOP shares......... -0- 105 -0- -0- -0- 1,071 1,176
Discount on dividend reinvestment plan
purchases............................... -0- (529) -0- -0- -0- -0- (529)
Treasury stock acquired.................. -0- -0- -0- -0- (5,850) -0- (5,850)
Treasury stock reissued.................. -0- (138) -0- -0- 690 -0- 552
Balance at December 31, 1996............. 31,661 107,152 210,843 1,429 (6,089) (3,474) 341,522
Comprehensive income
Net income............................. -0- -0- 39,539 -0- -0- -0- 39,539
Other comprehensive income, net of tax:
Unrealized holding gains on securities
arising during the period. -0- -0- -0- 5,159 -0- -0- 5,159
Less: reclassification adjustment
for gains on securities included
in net income...................... -0- -0- -0- (4,432) -0- -0- (4,432)
Total other comprehensive income....... -0- -0- -0- 727 -0- -0- 727
Total comprehensive income.............. -0- -0- 39,539 727 -0- -0- 40,266
Cash dividends declared.................. -0- -0- (22,152) -0- -0- -0- (22,152)
Decrease in unearned ESOP shares......... -0- 171 -0- -0- -0- 1,038 1,209
Discount on dividend reinvestment plan
purchases............................... -0- (630) -0- -0- -0- -0- (630)
Treasury stock acquired.................. -0- -0- -0- -0- (5,908) -0- (5,908)
Treasury stock reissued.................. -0- (34) -0- -0- 50 -0- 16
Balance at December 31, 1997............. 31,661 106,659 228,230 2,156 (11,947) (2,436) 354,323
Comprehensive income
Net income............................. -0- -0- 33,374 -0- -0- -0- 33,374
Other comprehensive income, net of tax:
Unrealized holding gains on securities
arising during the period............. -0- -0- -0- 971 -0- -0- 971
Less: reclassification adjustment
for gains on securities included
in net income...................... -0- -0- -0- (928) -0- -0- (928)
Total other comprehensive income....... -0- -0- -0- 43 -0- -0- 43
Total comprehensive income.............. -0- -0- 33,374 43 -0- -0- 33,417
Cash dividends declared.................. -0- -0- (25,981) -0- -0- -0- (25,981)
Net increase in unearned ESOP shares..... -0- 158 -0- -0- -0- (5,571) (5,413)
Discount on dividend reinvestment plan
purchases............................... -0- (1,016) -0- -0- -0- -0- (1,016)
Treasury stock acquired.................. -0- -0- -0- -0- (2,123) -0- (2,123)
Treasury stock reissued.................. -0- (38) -0- -0- 2,255 -0- 2,217
Treasury stock cancelled in merger....... (397) (5,505) -0- -0- 5,902 -0- -0-
Cash issued for partial shares in merger. (1) (18) -0- -0- -0- -0- (19)
Balance at December 31, 1998............. $31,263 $100,240 $235,623 $2,199 $(5,913) $(8,007) $355,405
The accompanying notes are an integral part of these consolidated financial statements.
30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Years Ended December 31,
1998 1997 1996
Operating Activities
Net income............................................ $ 33,374 $ 39,539 $ 37,193
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............... 15,049 10,152 6,301
Depreciation and amortization...................... 7,914 7,033 6,403
Net gains on sales of assets....................... (3,829) (7,148) (2,216)
Income from increase in cash surrender value of
bank owned life insurance........................ (1,365) (204) -0-
Increase in interest receivable.................... (4,011) (8,241) (1,280)
Increase in interest payable....................... 1,159 2,842 2,569
Increase (decrease) in income taxes payable........ (584) (451) (47)
Change in deferred taxes........................... (1,404) 1,327 600
Other - net........................................ 6,567 3,621 (3,288)
Net cash provided by operating activities....... 52,870 48,470 46,235
Investing Activities
Transactions with securities held to maturity:
Sales.............................................. -0- -0- -0-
Maturities and redemptions......................... 211,948 137,124 97,597
Purchases of investment securities................. (184,668) (125,078) (42,576)
Transactions with securities available for sale:
Sales.............................................. 171,891 50,049 30,482
Maturities and redemptions......................... 184,508 87,936 89,961
Purchases of investment securities................. (891,718) (256,444) (114,957)
Proceeds from sales of loans and other assets......... 104,609 22,772 23,208
Investment in bank owned life insurance............... -0- (25,000) -0-
Acquisition of affiliate and branch, net of cash
received........................................... -0- -0- 7,836
Changes net of acquisitions and disposals:
Net decrease (increase) in time deposits with banks 3,127 (759) 4,116
Net increase in loans.............................. (50,580) (232,881) (328,693)
Purchases of premises and equipment................ (7,702) (6,141) (7,828)
Net cash used by investing activities........... (458,585) (348,422) (240,854)
Financing Activities
Proceeds from issuance of long-term debt.............. 469,800 204,842 43,000
Repayments of long-term debt.......................... (37,576) (63,487) (8,509)
Discount on dividend reinvestment plan purchases...... (1,016) (630) (529)
Dividends paid........................................ (25,746) (21,739) (19,907)
Net increase (decrease) in Federal funds purchased.... (60,675) 53,675 23,740
Net increase (decrease) in other short-term borrowings (2,228) (7,417) 21,385
Sale of branch and deposits, net of cash received..... (8,612) -0- -0-
Changes, net of acquisitions:
Acquisition of treasury stock....................... (2,123) (5,908) (5,850)
Reissuance of treasury stock........................ 2,217 16 108
Net increase in deposits............................ 56,909 128,253 161,273
Net cash provided by financing activities....... 390,950 287,605 214,711
Net increase (decrease) in cash and cash
equivalents................................... (14,765) (12,347) 20,092
Cash and cash equivalents at January 1.................. 112,380 124,727 104,635
Cash and cash equivalents at December 31................ $ 97,615 $112,380 $124,727
The accompanying notes are an integral part of these consolidated financial
statements.
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
NOTE 1--Statement of Accounting Policies
General
The following summary of accounting and reporting policies is presented to
aid the reader in obtaining a better understanding of the financial
statements and related financial data of First Commonwealth Financial
Corporation and its subsidiaries (the "Corporation") contained in this
report.
The financial information is presented in accordance with generally accepted
accounting principles and general practice for financial institutions. In
preparing financial statements management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. In addition, these estimates and assumptions affect revenues
and expenses in the financial statements and as such, actual results could
differ from those estimates.
Through its subsidiaries which include two commercial banks, a nondepository
trust company, and insurance agency, the Corporation provides a full range
of loan, deposit, trust and insurance services primarily to individuals and
small to middle-market businesses in nineteen 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.
Investments of 20 to 50 percent of the outstanding common stock of investees
are accounted for using the equity method of accounting.
Effective January 1, 1998, the Corporation adopted the Financial Accounting
Standards Board Statement No. 130 "Reporting Comprehensive Income" ("FAS No.
130"). Comprehensive income is defined as "the change in equity of a
business enterprise during a period from transactions and other events from
nonowner sources. Comprehensive income includes all changes in equity
except those resulting from investments by owners and distributions to
owners." Comprehensive income includes net income and other nonowner
changes in equity which qualify as components of comprehensive income but
bypass a statement of income and are reported in a separate component of
equity in a balance sheet. FAS No. 130 does not change the calculation of
net income or earnings per share but requires companies to provide
additional disclosures for comprehensive income and its components in
financial statements for fiscal years beginning after December 15, 1997,
including interim periods.
32
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
NOTE 1--Statement of Accounting Policies (Continued)
Basis of Presentation (Continued)
The Corporation has elected, as permitted under FAS No. 130, to report
comprehensive income in the Statement of Changes in Shareholders' Equity and
has reclassified comparative financial statements to conform to the required
presentation under FAS No. 130 for comprehensive income. For all periods
presented, "other comprehensive income" (comprehensive income excluding net
income) includes only one component, which is the change in unrealized
holding gains and losses on available for sale securities. The following
table identifies the related tax effects allocated to each component of
other comprehensive income in the Statements of Changes in Shareholders'
Equity (dollar amounts in thousands):
December 31, 1998 December 31, 1997 December 31, 1996
Tax Net of Tax Net of Tax Net of
Pre-tax (Expense) Tax Pre-tax (Expense) Tax Pre-tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $1,495 $(524) $971 $7,936 $(2,777) $5,159 $1,317 $(519) $ 798
Less: reclassification adjustment for
gains realized in net income (1,428) 500 (928) (6,819) 2,387 (4,432) (1,582) 596 (986)
Net unrealized gains 67 (24) 43 1,117 (390) 727 (265) 77 (188)
Other comprehensive income $ 67 $ (24) $ 43 $1,117 $ (390) $ 727 $ (265) $ 77 $(188)
The adoption of FAS No. 130 did not have a material impact on the
Corporation's financial condition or results of operations.
In June, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS No. 131") which is effective for financial statements for
periods beginning after December 15, 1997. FAS No. 131 redefines how
operating segments are determined and requires disclosures of certain
financial and descriptive information about a company's operating segments.
Under current conditions, the Corporation is reporting one business segment.
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.
In June 1998, the FASB issued statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133") which is effective for
the first quarter of years beginning after June 15, 1999. FAS No. 133
establishes accounting and reporting standards for derivative instruments
and for hedging activities which require that an entity recognize all
derivatives as either assets or liabilities in a balance sheet and measure
those instruments at fair value. Management believes that adoption of FAS
No. 133 will not have a material impact on the Corporation's financial
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
NOTE 1--Statement of Accounting Policies (Continued)
Securities (Continued)
condition or results of operations. As of December 31, 1998, the
Corporation did not own or trade derivatives, although such instruments may
be appropriate to use in the future to manage interest rate risk.
In October, 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise" ("FAS No. 134") which
is effective for quarters beginning after December 15, 1998. FAS No. 134
amends FASB Statement No. 65 "Accounting for Certain Mortgage Banking
Activities" ("FAS No. 65"). FAS No. 65 required that after the
securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed
securities as trading securities while FAS No. 134 requires the resulting
mortgage-backed securities or other retained interests to be classified
based on the entity's ability and intent to sell or hold those investments.
On the date FAS No. 134 is initially applied, an enterprise may reclassify
mortgage backed securities and other beneficial interests retained after the
securitization of mortgage loans held for sale from the trading category,
except for those with sales commitments in place. Management believes that
adoption of FAS No. 134 will not have a material impact on the Corporation's
financial condition or results of operations.
Loans
Loans are carried at the principal amount outstanding. Unearned income on
installment loans and leases is taken into income on a declining basis which
results in an approximately level rate of return over the life of the loan
or lease. Interest is accrued as earned on nondiscounted loans.
The Corporation considers a loan to be impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect principal or interest due according to the contractual terms of the
loan. Loan impairment is measured based on the present value of expected
cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent.
Payments received on impaired loans are applied against the recorded
investment in the loan. For loans other than those that the Corporation
expects repayment through liquidation of the collateral, when the remaining
recorded investment in the impaired loan is less than or equal to the
present value of the expected cash flows, income is recorded on a cash
basis.
Mortgage Servicing Rights
Effective January 1, 1997, the Corporation adopted the Financial Accounting
Standards Board Statement No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("FAS No. 125"). FAS
No. 125 supersedes FAS No. 122 "Accounting for Mortgage Servicing Rights."
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
34
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Mortgage Servicing Rights (Continued)
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. 125 also requires mortgage servicing rights to be
periodically evaluated for impairment based on fair values. The adoption of
FAS No. 125 did not have a material impact on the Corporation's financial
condition or results of operations.
Loan Fees
Loan origination and commitment fees, net of associated direct costs, are
deferred and the net amount is amortized as an adjustment to the related
loan yield on the interest method, generally over the contractual life of
the related loans or commitments.
Other Real Estate Owned
Real estate, other than bank premises, is recorded at the lower of cost or
fair value less selling costs at the time of acquisition. Expenses related
to holding the property, net of rental income, are generally charged against
earnings in the current period.
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.
Bank-Owned Life Insurance
In November 1997, the Corporation purchased insurance on the lives of a
certain group of employees. The policy accumulates asset values to meet
future liabilities including the payment of employee benefits such as health
care. The premium for such coverage was $25,000 and is shown in the
Consolidated Statements of Cash Flows. Increases in the cash surrender
value are recorded as other income in the Consolidated Statements of Income.
The cash surrender value of bank-owned life insurance is reflected in "other
assets" on the Consolidated Balance Sheets.
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.
35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Accounting for the Impairment of Long-Lived Assets
The Corporation reviews long-lived assets, such as premises and equipment
and intangibles for impairment whenever events or changes in circumstances,
such as a significant decrease in the market value of an asset or the extent
or manner in which an asset is used indicate that the carrying amount of an
asset may not be recoverable. If there is an indication that the carrying
amount of an asset may not be recoverable, future discounted cash flows
expected to result from the use of the asset are estimated. If the sum of
the expected cash flows is less than the carrying value of the asset a loss
is recognized for the difference between the carrying value and fair market
value of the asset.
Income Taxes
The Corporation records taxes in accordance with the asset and liability
method utilized by 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.
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
1998 1997 1996
Cash paid during the year for:
Interest $147,123 $121,600 $106,621
Income taxes $ 14,200 $ 16,685 $ 14,976
Noncash investing and financing activities:
ESOP borrowings $ 6,000 $ -0- $ -0-
ESOP loan reductions $ 429 $ 1,038 $ 1,071
Gross increase in Market
Value adjustment to
securities available
for sale pursuant to FAS
No. 115 $ 67 $ 1,117 $ (265)
Loans transferred to
other real estate owned
and repossessed assets $ 6,624 $ 7,314 $ 4,236
36
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128 "Earnings per Share" ("FAS No. 128") which is effective
for financial statements issued after December 15, 1997. This statement
replaces the presentation of primary and fully diluted earnings per share
with a presentation of basic and diluted earnings per share, respectively.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. FAS No. 128 also requires a reconciliation of the
numerator and denominator of the basic earnings per share calculation to the
numerator and denominator of the diluted earnings per share calculation.
All periods presented have been restated to report earnings per share in
conformity with the provisions of FAS No. 128. Adoption of this statement
did not have a material impact on the disclosure of earnings per share in
the financial statements.
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 Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25").
37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Employee Stock Option Plan (Continued)
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 December 31, 1998, the Corporation acquired all of the outstanding
shares of Southwest National Corporation ("Southwest"), a Pennsylvania-
chartered bank holding company headquartered in Greensburg, Pennsylvania.
Each of the 3,043,738 outstanding shares of Southwest National Corporation
were exchanged for 2.9 shares of the Corporation's common stock. The
aggregate number of shares issued by the Corporation, excluding partial
shares was 8,826,078. The merger was accounted for as a pooling of
interests, and accordingly, all financial statements were restated as though
the merger had occurred at the beginning of the earliest period presented.
The following table reconciles net interest income and net income as
previously reported and as restated for the merger. Results of the nine-
month period ended September 30, 1998 were unaudited.
Nine Months
Ended
September 30, Years Ended December 31,
1998 1997 1996
Net interest income as previously reported:
Corporation $ 76,294 $ 97,057 $ 94,004
Southwest 24,966 33,288 31,995
Net interest income as restated $101,260 $130,345 $125,999
Net income as previously reported:
Corporation $ 25,227 $ 30,534 $ 27,583
Southwest 6,793 9,005 9,610
Net income as restated $ 32,020 $ 39,539 $ 37,193
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 on 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.
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 $18,561 during 1998 and $15,006 during
1997.
38
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(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, 1998 and 1997:
1998 1997
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 $ 29,961 $ 400 $ -0- $ 30,361 $112,701 $ 796 $(105) $113,392
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities 715,882 2,342 (1,167) 717,057 237,841 2,374 (102) 240,113
Other 176,571 1,149 (152) 177,568 110,020 499 (206) 110,313
Obligations of States and
Political Subdivisions 36,225 744 (185) 36,784 18,587 736 (2) 19,321
Debt Securities Issued
by Foreign Governments 460 -0- -0- 460 460 -0- -0- 460
Corporate Securities 1,099 -0- (7) 1,092 1,301 -0- (28) 1,273
Other Mortgage Backed
Securities 34,169 61 (552) 33,678 -0- -0- -0- -0-
Total Debt Securities 994,367 4,696 (2,063) 997,000 480,910 4,405 (443) 484,872
Equities 44,749 887 -0- 45,636 21,472 2 (428) 21,046
Total Securities
Available for Sale $1,039,116 $5,583 $(2,063) $1,042,636 $502,382 $4,407 $(871) $505,918
Mortgage backed securities include mortgage backed obligations of U.S.
Government agencies and corporations, mortgage backed securities issued by
other organizations and other asset backed securities. These obligations
have contractual maturities ranging from less than one year to 30 years and
have an anticipated average life to maturity ranging from less than one year
to 17 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, 1998 and 1997, 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.
39
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 4--Securities Available For Sale (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 1998, 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 $ 23,696 $ 23,820
Due after 1 but within 5 years 139,382 140,778
Due after 5 but within 10 years 67,399 68,001
Due after 10 years 13,839 13,666
244,316 246,265
Mortgage Backed Securities 750,051 750,735
Total Debt Securities $994,367 $997,000
Proceeds from the sales of securities available for sale were $171,891,
$50,049 and $30,482 during 1998, 1997 and 1996 respectively. Gross gains of
$2,817, $6,833 and $1,821 and gross losses of $1,284, $14 and $239 were
realized on those sales during 1998, 1997 and 1996 respectively.
Securities available for sale with a book value of $179,943 and $132,776
were pledged at December 31, 1998 and 1997, respectively to secure public
deposits and for other purposes required or permitted by law.
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:
1998 1997
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 $224,312 $ 655 $(429) $224,538 $280,594 $ 608 $ (857) $280,345
Other 105,785 1,296 (92) 106,989 139,938 792 (98) 140,632
Obligations of States and
Political Subdivisions 140,513 2,556 (512) 142,557 86,833 1,436 (50) 88,219
Debt Securities Issued by
Foreign Governments 358 -0- -0- 358 360 -0- -0- 360
Corporate Securities 5,249 10 -0- 5,259 -0- -0- -0- -0-
Other Mortgage Backed
Securities 6,479 5 -0- 6,484 2,155 1 (1) 2,155
Total Securities Held to
Maturity $482,696 $4,522 $(1,033) $486,185 $509,880 $2,837 $(1,006) $511,711
40
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
Note 5--Securities Held to Maturity (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 1998, 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 $ 3,557 $ 3,564
Due after 1 but within 5 years 81,335 82,375
Due after 5 but within 10 years 80,334 81,481
Due after 10 years 86,679 87,743
251,905 255,163
Mortgage Backed Securities 230,791 231,022
Total Debt Securities $482,696 $486,185
There were no sales of securities held to maturity in 1998, 1997 or 1996.
Securities held to maturity with a book value of $277,345 and $312,701 were
pledged at December 31, 1998 and 1997, 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,
1998 1997
Commercial, financial,
agricultural and other $ 377,733 $ 363,699
Real estate loans:
Construction and land
development 33,097 35,308
1-4 Family dwellings 1,009,903 1,048,405
Other real estate loans 387,166 384,794
Loans to individuals for household,
family and other personal
expenditures 517,907 569,742
Leases, net of unearned income 56,423 51,245
Subtotal 2,382,229 2,453,193
Unearned income (7,379) (16,856)
Total loans and leases $2,374,850 $2,436,337
Most of the Corporation's business activity was with customers located
within Pennsylvania. The portfolio is well diversified, and as of
December 31, 1998 and 1997, there were no significant concentrations of
credit.
NOTE 7--Allowance for Possible Credit Losses
Description of changes:
1998 1997 1996
Allowance at January 1 $25,932 $25,234 $23,803
Additions:
Recoveries of previously
charged off loans 1,950 1,524 1,493
Provision charged to operating
expense 15,049 10,152 6,301
Deductions:
Loans charged off 10,627 10,978 6,363
Allowance at December 31 $32,304 $25,932 $25,234
41
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 7--Allowance for Possible Credit Losses (Continued)
Relationship to impaired loans:
1998 1997
Recorded investment in impaired loans
at end of period $ 9,741 $11,387
Average balance of impaired loans for
the year $10,756 $10,258
Allowance for possible credit losses
related to impaired loans $ 1,593 $ 2,089
Impaired loans with an allocation
of the allowance for possible
credit losses $ 4,530 $ 6,978
Impaired loans with no allocation
of the allowance for possible
credit losses $ 5,211 $ 4,409
Income recorded on impaired loans
on a cash basis $ 286 $ 146
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, 1998 and 1997, 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, 1998 and 1997.
1998 1997
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $481,354 $489,938
Standby letters of credit $ 38,456 $ 39,851
Commercial letters of credit $ -0- $ 1,194
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.
42
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(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 1998 1997
Land Indefinite $ 5,481 $ 5,461
Buildings and improvements 5 - 50 Years 44,368 41,631
Leasehold improvements 5 - 39 Years 9,725 9,774
Furniture and equipment 3 - 25 Years 44,124 42,462
Subtotal 103,698 99,328
Less accumulated depreciation
and amortization 61,769 57,797
Total premises and
equipment $41,929 $41,531
Depreciation and amortization related to premises and equipment was $5,669
in 1998, $5,171 and $4,844 in 1997 and 1996, respectively.
NOTE 10--Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
1998 1997
NOW and Super NOW accounts $ 107,947 $ 89,234
Savings and MMDA accounts 1,078,534 982,574
Time deposits 1,480,568 1,552,970
Total interest-bearing deposits $2,667,049 $2,624,778
Interest-bearing deposits at December 31, 1998 and 1997, include
reallocations from demand deposits of $94,588 and $60,717 and reallocations
from NOW and Super NOW accounts of $272,320 and $222,504 respectively into
Savings and MMDA accounts. These reallocations are based on a formula
approved by the regulatory authorities and have been made to reduce the
Corporation's reserve requirement.
Included in time deposits at December 31, 1998 and 1997, were certificates
of deposit in denominations of $100 or more of $299,412 and $329,307
respectively.
Interest expense related to $100 or greater certificates of deposit amounted
to $16,921 in 1998, $17,574 in 1997, and $12,376 in 1996.
Included in time deposits at December 31, 1998, were certificates of deposit
with the following scheduled maturities:
1999 $ 984,771
2000 217,243
2001 145,646
2002 70,557
2003 and thereafter 59,889
43 $1,478,106
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 11--Short-term Borrowings
Short-term borrowings at December 31 were as follows:
1998 1997
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
Federal funds
purchased $ 47,975 $ 72,511 5.68% $108,650 $ 61,232 5.66%
Borrowings from
FHLB -0- 18,336 5.73% 5,000 4,997 5.48%
Securities sold
under agreements
to repurchase 84,228 90,383 4.76% 83,547 78,842 4.78%
Treasury, tax and
loan note option 8,344 14,104 5.24% 6,252 11,399 5.23%
Total $140,547 $195,334 5.23% $203,449 $156,470 5.18%
Maximum total at
any month-end $278,247 $203,449
At December 31, 1998 and 1997, the Corporation had unused borrowing capacity
with the FHLB of $200,000 and $184,845, respectively.
Interest expense on short-term borrowings for the years ended December 31 is
detailed below:
1998 1997 1996
Federal funds purchased $ 4,119 $3,466 $1,916
Borrowings from FHLB 1,051 274 374
Securities sold under agreements to
repurchase 4,305 3,772 3,849
Treasury, tax and loan note option 739 596 638
Total interest on
short-term borrowings $10,214 $8,108 $6,777
44
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 12--Long-term Debt
Long-term debt at December 31, follows:
1998 1997
Amount Rate Amount Rate
ESOP loan due December, 2005 $8,007 Libor +1% $2,436 Libor +1%
Borrowings from FHLB due:
March, 1998 -0- 43 7.22%
March, 1998 -0- 8,000 7.22%
March, 1998 -0- 10,000 5.99%
May, 1998 -0- 733 5.94%
August, 1998 -0- 188 6.43%
February, 2000 25,000 4.72% -0-
July, 2000 25,000 4.72% -0-
August, 2002 25,000 5.36% 25,000 5.36%
November, 2002 50,000 5.82% 50,000 5.82%
November, 2002 25,000 5.33% 25,000 5.33%
December, 2002 50,000 5.71% 50,000 5.71%
March, 2007 -0- 1,204 6.51%
May, 2007 -0- 3,903 6.29%
August, 2007 -0- 1,719 6.57%
February, 2008 100,000 5.45% -0-
February, 2008 100,000 5.48% -0-
May, 2008 55,000 5.67% -0-
May, 2008 45,000 5.67% -0-
November, 2008 50,000 5.03% -0-
December, 2008 65,000 4.96% -0-
January, 2009 -0- 2,775 6.27%
July, 2017 -0- 4,007 6.52%
December, 2017 7,476 6.17% 7,659 6.17%
Mortgage loan due July, 2012 177 2.00% 188 2.00%
Mortgage loan due January, 2013 190 4.50% 199 4.50%
$630,850 $193,054
All Federal Home Loan Bank stock, along with an interest in unspecified
mortgage loans and mortgage-backed securities, with an aggregate statutory
value equal to the amount of the above advances, have been pledged as
collateral with the Federal Home Loan Bank of Pittsburgh.
Scheduled loan payments are summarized below:
1999 2000 2001 2002 2003 Thereafter
Loan payments $1,372 $50,819 $1,424 $151,350 $1,357 $424,528
During 1998, the Corporation incurred a cost of $960 for the prepayment
of FHLB term borrowings with original maturities scheduled for 2007.
This amount was recorded on the Consolidated Statements of Income as an
extraordinary item, net of $336 of applicable income taxes.
NOTE 13--Common Share Commitments
At December 31, 1998, the Corporation had 100,000,000 common shares
authorized and 30,937,973 shares outstanding. Outstanding shares were
reduced by 324,733 shares of treasury stock at December 31, 1998 and 726,345
shares at December 31, 1997. 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. The dilutive effect of stock
options outstanding on average shares outstanding in the diluted earnings
per share reported on the income statement in accordance with FAS No. 128
were 166,227, 86,888 and 35,852 shares at December 31, 1998, 1997 and 1996
respectively.
45
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands, except per share data)
NOTE 13--Common Share Commitments (Continued)
During 1998, 43,400 shares of treasury stock were acquired at an average
price of $24.45 and reissued to the leveraged ESOP. In 1997 150,900 shares
of treasury stock were acquired at an average price of $19.01 for the
purpose of funding stock options upon exercise. Treasury shares consisting
of 65,569 and 2,800 were reissued during 1998 and 1997 upon exercise of
stock options. Southwest treasury shares were cancelled upon merger with
the Corporation.
NOTE 14--Income Taxes
The income tax provision consists of:
1998 1997 1996
Current tax provision for income
exclusive of securities
transactions:
Federal $13,097 $13,384 $14,869
State (11) 238 135
Securities transactions 547 2,389 560
Total current tax
provision 13,633 16,011 15,564
Deferred tax provision (benefit) (1,404) 1,327 600
Total tax provision $12,229 $17,338 $16,164
The Corporation had deferred tax assets of $13,014 and $9,809 and deferred
tax liabilities of $11,820 and $10,062 at December 31, 1998 and 1997,
respectively.
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, 1998 and 1997, were as
follows:
1998 1997
Deferred tax assets:
Allowance for possible credit
losses $11,132 $ 8,801
Postretirement benefits other
than pensions 973 475
Accumulated depreciation 278 -0-
Other 631 533
Deferred tax liabilities:
Accumulated accretion of
bond discount (325) (554)
Unrealized gain on securities
available for sale (1,184) (1,160)
Lease financing deduction (7,829) (5,704)
Loan origination fees and costs (849) (656)
Accumulated depreciation -0- (82)
Basis difference in assets acquired (1,143) (1,356)
Pension expense (233) (306)
Other (257) (244)
Net deferred tax asset (liability) $ 1,194 $ (253)
46
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 14--Income Taxes (Continued)
The total tax provision for financial reporting purposes differs from the
amount computed by applying the statutory income tax rate to income before
income taxes. The differences are as follows:
1998 1997 1996
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Tax at statutory rate $16,179 35.0 $19,907 35.0 $18,675 35.0
Increase (decrease)
resulting from:
Effect of
nontaxable
interest (3,894) (8.4) (2,660) (4.7) (2,458) (4.6)
Merger expenses 542 1.2 -0- 0.0 -0- 0.0
State income taxes (11) (0.0) 238 0.4 135 0.3
Other (587) (1.3) (147) (0.2) (188) (0.4)
Total tax
provision $12,229 26.5 $17,338 30.5 $16,164 30.3
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 242,089 shares of the Corporation's common stock in 1998 at a
corresponding cost of $6,000, which the Corporation borrowed and
concurrently loaned this amount to the ESOP. This amount represents
leveraged and unallocated shares, and accordingly has been recorded as long-
term debt and the offset as a reduction of the common shareholders' equity.
Compensation costs related to the plan were $1,068 in 1998, $1,032 in 1997
and $1,224 in 1996. (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.
Employees of Southwest are covered by a 401(k) plan whereby each participant
may contribute up to 10% of compensation to the plan of which up to 4% is
matched 100% by the employer's contribution. The Southwest Board of
Directors may also authorize an annual discretionary contribution to the
plan. It is anticipated that Southwest's 401(k) plan will merge into the
Corporation's 401(k) plan during 1999. In 1999, the Corporation's plan will
change whereby each participant may contribute up to 10% of compensation to
the plan, of which up to 4% is matched 100% by the employer's contribution.
The 401(k) plan expense was $2,261 in 1998, $2,415 in 1997 and $2,432 in
1996.
Pension Plan of Acquired Subsidiary
Southwest's noncontributory defined benefit pension plan covers all eligible
employees and provides benefits that are based on each employee's years of
service and compensation.
47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 15--Retirement Plans (Continued)
Pension Plan of Acquired Subsidiary (Continued)
Net periodic pension cost of this plan for each of the last three years was
as follows:
1998 1997 1996
Service cost $365 $ 327 $303
Interest cost on projected benefit obligation 469 411 375
Actual return on plan assets (425) (1,042) 126
Net amortization and deferral (179) 507 (590)
Net periodic pension cost $230 $ 203 $214
The following table sets forth the plan's funded status and the amounts
recognized on the Corporation's consolidated balance sheet as of
December 31:
1998 1997
Market value of plan assets, primarily registered
investment companies, U.S. government and agency
obligations and money markets $7,132 $7,679
Projected benefit obligation 7,926 6,794
Plan assets (less) greater than projected benefit
obligation (794) 885
Unrecognized net transition asset (123) (154)
Unrecognized prior service cost due to plan amendment -0- 130
Unrecognized net gain 1,470 34
Prepaid pension expense recognized on the balance sheet $ 553 $ 895
Actuarial present value of accumulated benefits,
including vested benefits of $7,615 and $4,102 $7,926 $4,617
The following table sets forth the change in benefit obligation:
1998 1997
Benefit obligation at beginning of year $6,794 $5,915
Service cost 365 327
Interest cost 469 411
Benefit payment (973) (625)
Actuarial loss 5,343 766
Curtailment (4,072) -0-
Benefit obligation at end of year $7,926 $6,794
The following table sets forth the change in plan assets:
1998 1997
Fair value of plan assets at beginning of year $7,679 $6,970
Return on plan assets 425 1,042
Employer contribution -0- 292
Benefits paid (972) (625)
Fair value of plan assets at end of year $7,132 $7,679
Assumptions used in determining the actuarial present value of the projected
benefit obligation were as follows at December 31:
1998 1997
Discount rates 5.0% 7.0%
Rates of increase in compensation levels 3.5 4.5
Expected long-term rate of return on assets 6.0 7.0
48
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 15--Retirement Plans (Continued)
Pension Plan of Acquired Subsidiary (Continued)
Effective December 31, 1998, participants' accrued benefit in the Southwest
Bank Pension Plan was frozen. Participants will become participants in the
First Commonwealth Financial Corporation ESOP Plan with no lapse in credited
service, and no loss of accrued benefits. The Southwest Bank Plan will be
terminated at some future date, with distribution made in accordance with
Plan provisions and applicable regulations.
Postretirement Benefits other than Pensions for Acquired Subsidiary
Employees of Southwest were covered by a postretirement benefit plan.
Net periodic benefit cost of this plan was as follows:
1998 1997
Service cost $ 61 $ 75
Interest cost on projected benefit obligation 259 265
Amortization of transition obligation 55 119
Loss amortization 82 29
Net periodic benefit cost $457 $488
The following table sets forth the plan's funded status and the amounts
recognized on the Corporation's consolidated balance sheet as of
December 31:
1998 1997
Accumulated postretirement obligation:
Retirees $2,941 $2,853
Fully eligible active plan participants 155 40
Other plan participants 318 912
Total accumulated postretirement benefit obligation 3,414 3,805
Plan assets at fair value -- --
Accumulated postretirement benefit obligation in
excess of plan assets 3,414 3,805
Unrecognized transition obligation (610) (1,234)
Unrecognized net loss (23) (1,183)
Accrued benefit liability recognized on the
balance sheet $2,781 $1,388
The following table sets forth the change in benefit obligation:
1998 1997
Benefit obligation at beginning of year $3,805 $3,785
Service cost 61 75
Interest cost 259 265
Benefit payments (193) (170)
Amendments -0- (555)
Actuarial loss 642 405
Curtailment (1,160) -0-
Benefit obligation at end of year $3,414 $3,805
49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 15--Retirement Plans (Continued)
Postretirement Benefits other than Pensions for Acquired Subsidiary
(Continued)
The discount rates used in determining the actuarial present value of the
accumulated postretirement benefit obligation were 6.0% and 7.0% for 1998
and 1997 respectively. The health care cost trend rates used for 1998 were
projected at level rates of 5.75% for grandfathered participants and 5.0%
for non-grandfathered participants. This grandfathering is related to cost
sharing requirements for different groups of participants for these
benefits. The health care cost trend rates used for 1997 were an initial
rate of 8.0% and decreasing over time to an annual rate of 6.0% and
remaining at that level thereafter for all participants.
The health care cost trend rate assumption can have a significant impact on
the amounts reported. Increasing the assumed health care cost trend by one
percentage point in each year would increase the accumulated postretirement
benefit obligation by approximately $251 and the aggregate of the service
and interest cost components of net periodic postretirement health care
benefit cost by $15.
Southwest amended this plan to discontinue participation for active
employees December 31, 1998 and to limit participation to employees retiring
before January 1, 2002. As the result of this plan curtailment, an
additional expense of $1,129 was recorded for 1998.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("FAS No. 132") which is
effective for years beginning after December 15, 1997. FAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans
but does not change the measurement or recognition of those plans.
The adoption of FAS No. 132 will not have a material impact on the
Corporation's financial condition or results of operations.
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 $8,007 at December 31, 1998 and $2,436 at December 31, 1997.
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 seven year period from
contributions to the ESOP by the Corporation and dividends on unallocated
ESOP shares.
50
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands, except per share data)
NOTE 16--Unearned ESOP Shares (Continued)
The following is an analysis of ESOP shares held in suspense:
(See NOTE 1 for the definition of "old" and "new shares").
Old New
Total Shares Shares
Shares in suspense December 31, 1996 246,088 145,423 100,665
Shares allocated during 1997 (74,837) (44,224) (30,613)
Shares in suspense December 31, 1997 171,251 101,199 70,052
Shares acquired during 1998 242,089 -0- 242,089
Shares allocated during 1998 (48,033) (11,760) (36,273)
Shares in suspense December 31, 1998 365,307 89,439 275,868
The fair market value of the new shares remaining in suspense was
approximately $6,759 and $2,456 at December 31, 1998 and 1997 respectively.
Interest on ESOP loans was $255 in 1998, $211 in 1997 and $313 in 1996.
During 1998, 1997 and 1996 dividends on unallocated shares in the amount of
$196, $213 and $256 respectively were used for debt service while all
dividends on allocated shares were allocated to the participants.
NOTE 17--Stock Option Plan
At December 31, 1998, 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, all options granted
during 1997 became vested at December 31, 1997 and expire ten years from the
grant date, and all options granted during 1998 became vested at
December 31, 1998 and expire ten years from the grant date. The Corporation
has elected, as permitted by FAS No. 123, to apply APB Opinion 25 and
related Interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized for its stock options outstanding.
Had compensation cost for the Corporation's stock option plan been
determined based upon the fair value at the grant dates for awards under the
plan consistent with the method of FASB Statement 123, the Corporation's net
income and earnings per share would have been reduced to the pro forma
amounts shown below:
1998 1997 1996
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
Net Income $33,374 $33,374 $39,539 $33,597 $37,193 $37,158
Basic earnings per share $ 1.09 $ 1.09 $ 1.28 $ 1.09 $ 1.19 $ 1.19
Diluted earnings per share $ 1.08 $ 1.08 $ 1.28 $ 1.09 $ 1.19 $ 1.19
51
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands, except per share data)
NOTE 17--Stock Option Plan (Continued)
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes options pricing model with the following weighted
average assumptions used:
1998 1997 1996
Dividend yield 3.75% per annum 2.5% per annum 3.0% per annum
Expected volatility 90.0% 28.0% 10.0%
Risk-free interest rate 5.1% 5.6% 6.7%
Expected option life 9.1 years 5.7 years 9.3 years
The Corporation also assumed the Stock Options of United National Bank
Corporation ("Unitas") and Reliable Financial Corporation ("RFC") upon the
merger of these financial institutions into the Corporation in 1994.
A summary of the status of the Corporation's outstanding stock options as of
December 31, 1998, 1997 and 1996 and changes for the years ending on those
dates is presented below:
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 526,274 $17.49 233,308 $16.10 58,134 $ 6.47
Granted 202,008 $29.375 312,280 $18.50 195,048 $18.375
Exercised (65,569) $17.44 (2,800) $ 6.44 (9,140) $ 6.44
Forfeited (9,540) $19.62 (16,514) $18.44 (10,734) $13.38
Outstanding at end of year 653,173 $21.05 526,274 $17.49 233,308 $16.10
Exercisable at end of year 478,029 $22.12 345,019 $16.93 44,374 $ 6.47
The following table summarizes information about the stock options
outstanding at December 31, 1998.
Options Outstanding Options Exercisable
Weighted-Average
Range of Number Outstanding Remaining Contract Weighted-Average Number Exercisable Weighted-Average
Exercise Prices at 12/31/98 Life Exercise Price at 12/31/98 Exercise Price
$5.00-5.99 24,543 3.3 $ 5.50 24,543 $ 5.50
$6.00-8.99 15,400 4.2 $ 8.07 15,400 $ 8.07
$18.375-18.50 414,651 8.0 $18.46 239,507 $18.50
$29.375 198,579 9.2 $29.375 198,579 $29.375
Total 653,173 $21.05 478,029 $22.12
52
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
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 1998.
Balances December 31, 1997 $11,174
Advances 8,303
Repayments (8,865)
Other (304)
Balances December 31, 1998 $10,308
"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. At December 31, 1998, dividends from subsidiary banks were
restricted not to exceed $56,228. These restrictions have not had, and are
not expected to have, a significant impact on the Corporation's ability to
meet its cash obligations.
The Corporation is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific
capital guidelines that involve quantitative measures of the Corporation's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of total and
Tier I capital (common and certain other "core" equity capital) to risk
weighted assets, and of Tier I capital to average assets. As of
December 31, 1998, the Corporation and its banking subsidiaries meet all
capital adequacy requirements to which they are subject.
53
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 20--Regulatory Restrictions and Capital Adequacy (Continued)
As of December 31, 1998, the most recent notifications from the Federal
Reserve Board and Federal Deposit Insurance Corporation categorized First
Commonwealth Bank and Southwest Bank as well capitalized under the
regulatory framework for prompt corrective action. To be considered as well
capitalized, the banks must maintain minimum total risk-based capital, Tier
I risk-based capital and Tier I leverage ratios as set forth in the table
below. There are no conditions or events since that notification that
management believes have changed the 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, 1998
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $372,538 15.8% $188,929 8.0% Not Applicable Not Applicable
First Commonwealth Bank $269,259 14.4% $149,993 8.0% $187,492 10.0%
Southwest Bank $ 86,040 18.4% $ 37,364 8.0% $ 46,705 10.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $342,999 14.5% $ 94,464 4.0% Not Applicable Not Applicable
First Commonwealth Bank $245,823 13.1% $ 74,997 4.0% $112,495 6.0%
Southwest Bank $ 80,184 17.2% $ 18,682 4.0% $ 28,023 6.0%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $342,999 8.6% $159,321 4.0% Not Applicable Not Applicable
First Commonwealth Bank $245,823 8.0% $123,178 4.0% $153,972 5.0%
Southwest Bank $ 80,184 9.2% $ 35,032 4.0% $ 43,790 5.0%
As of December 31, 1997
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $367,106 15.6% $188,210 8.0% Not Applicable Not Applicable
First Commonwealth Bank $252,457 13.8% $146,276 8.0% $182,845 10.0%
Southwest Bank $ 87,840 17.4% $ 40,291 8.0% $ 50,364 10.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $341,174 14.5% $ 94,105 4.0% Not Applicable Not Applicable
First Commonwealth Bank $232,691 12.7% $ 73,138 4.0% $109,707 6.0%
Southwest Bank $ 81,674 16.2% $ 20,146 4.0% $ 30,219 6.0%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $341,174 9.6% $142,113 4.0% Not Applicable Not Applicable
First Commonwealth Bank $232,691 8.3% $111,772 4.0% $139,715 5.0%
Southwest Bank $ 81,674 11.1% $ 29,444 4.0% $ 36,805 5.0%
54
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only)
Balance Sheets
December 31,
1998 1997
Assets
Cash $ 4,501 $ 7,744
Securities available for sale 145 3,547
Loans to affiliated parties 498 469
Investment in subsidiaries 348,597 336,588
Investment in jointly-owned company 3,059 2,622
Premises and equipment 6,022 4,507
Dividends receivable from subsidiaries 2,914 4,924
Receivable from related parties 3,588 810
Other assets 526 1,636
Total assets $369,850 $362,847
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 1,352 $ 1,237
Dividends payable 5,086 4,851
Loans payable 8,007 2,436
Shareholders' equity 355,405 354,323
Total liabilities and
shareholders' equity $369,850 $362,847
Statements of Income
Years Ended December 31,
1998 1997 1996
Interest and dividends $ 251 $ 94 $ 129
Dividends from subsidiaries 28,559 37,023 29,465
Net securities gains (losses) 203 382 (169)
Other revenue 1,008 16 92
Operating expenses (8,366) (8,476) (8,555)
Income before taxes and equity
in undistributed earnings of
subsidiaries 21,655 29,039 20,962
Applicable income tax benefits 2,348 2,610 2,802
Income before equity in
undistributed earnings of
subsidiaries 24,003 31,649 23,764
Equity in undistributed
earnings of subsidiaries 9,371 7,890 13,429
Net income $33,374 $39,539 $37,193
55
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(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,
1998 1997 1996
Operating Activities
Net income $ 33,374 $ 39,539 $ 37,193
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 1,470 1,522 1,198
Net (gains) losses on sale of
assets (203) (381) 167
Decrease (Increase) in prepaid
income taxes 13 229 69
Undistributed equity in
subsidiaries (9,371) (7,890) (13,429)
Other - net (1,642) (403) (1,044)
Net cash provided by
operating activities 23,641 32,616 24,154
Investing Activities
Transactions with securities
available for sale:
Purchases of investment
securities (10,091) (6,734) (317)
Sales of investment
securities 13,709 5,419 3,331
Net change in loans to
affiliated parties (28) 48 (236)
Purchases of premises and
equipment (2,036) (1,005) (1,714)
Acquisition of and additional
investment in subsidiary,
net of cash received (1,770) -0- (1,913)
Net cash used by
investing activities (216) (2,272) (849)
Financing Activities
Net increase (decrease) in
short-term borrowings -0- (103) 103
Discount on dividend reinvestment
plan purchases (1,016) (630) (529)
Treasury stock acquired (2,123) (5,908) (5,850)
Treasury stock reissued 2,217 16 108
Cash dividends paid (25,746) (21,739) (19,907)
Net cash used by
financing activities (26,668) (28,364) (26,075)
Net increase (decrease) in cash (3,243) 1,980 (2,770)
Cash at beginning of year 7,744 5,764 8,534
Cash at end of year $ 4,501 $ 7,744 $ 5,764
56
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(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 $6,000 in 1998 and concurrently loaned this amount
to the ESOP on identical terms. The loan was recorded as long-term debt and
the offset was recorded as a reduction of the common shareholders' equity.
Loan payments in the amount of $429 in 1998, $1,038 in 1997 and $1,071 in
1996 were made by the ESOP thereby reducing the outstanding amount related
to unearned ESOP shares to $8,007 at December 31, 1998.
NOTE 22--Fair Values of Financial Instruments
Below are various estimated fair values at December 31, 1998 and 1997, as
required by Statement of Financial Accounting Standards No. 107 ("FAS No.
107"). Such information, which pertains to the Corporation's financial
instruments, is based on the requirements set forth in FAS No. 107 and does
not purport to represent the aggregate net fair value of the Corporation.
It is the Corporation's general practice and intent to hold its financial
instruments to maturity, except for certain securities designated as
securities available for sale, and not to engage in trading activities. Many
of the financial instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Therefore, the Corporation had to use significant estimations
and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and the methodologies in absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
The following methods and assumptions were used by the Corporation in
estimating financial instrument fair values:
Cash and short-term instruments: The balance sheet carrying amounts for
cash and short-term instruments approximate the estimated fair values of
such assets.
Securities: Fair values for securities held to maturity and securities
available for sale are based on quoted market prices, if available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments. The carrying value of
nonmarketable equity securities, such as Federal Home Loan Bank stock, is
considered a reasonable estimate of fair value.
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.
57
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(Dollar Amounts in Thousands)
NOTE 22--Fair Values of Financial Instruments (Continued)
Off-balance-sheet instruments: Many of the Corporation's off-balance-sheet
instruments, primarily loan commitments and standby letters of credit, are
expected to expire without being drawn upon, therefore the commitment
amounts do not necessarily represent future cash requirements. Management
has determined that due to the uncertainties of cash flows and difficulty in
predicting the timing of such cash flows, fair values were not estimated for
these instruments.
Deposit liabilities: For deposits which are payable on demand at the
reporting date, representing all deposits other than time deposits,
management estimates that the carrying value of such deposits is a
reasonable estimate of fair value. The carrying amounts of variable rate
time deposit accounts and certificates of deposit approximate their fair
values at the report date. Fair values of fixed rate time deposits are
estimated by discounting the future cash flows using interest rates
currently being offered and a schedule of aggregated expected maturities.
The carrying amount of accrued interest approximates its fair value.
Short-term borrowings: The carrying amounts of short-term borrowings such
as Federal funds purchased, securities sold under agreements to repurchase,
borrowings from the Federal Home Loan Bank and treasury, tax and loan notes
approximate their fair values.
Long-term debt: The carrying amounts of variable rate debt approximate
their fair values at the report date. Fair values of fixed rate debt are
estimated by discounting the future cash flows using the Corporation's
estimated incremental borrowing rate for similar types of borrowing
arrangements.
The following table presents carrying amounts and estimated fair values of
the Corporation's financial instruments at December 31, 1998 and 1997.
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and due from banks $ 96,615 $ 96,615 $ 82,500 $ 82,500
Interest-bearing deposits with
banks 1,914 1,914 5,040 5,040
Federal funds sold 1,000 1,000 29,880 29,880
Securities available for sale 1,042,636 1,042,636 505,918 505,918
Investments held to maturity 482,696 486,185 509,880 511,711
Loans, net of allowance 2,342,546 2,389,039 2,410,405 2,459,313
Financial liabilities
Deposits 2,931,131 2,946,535 2,884,343 2,897,108
Short-term borrowings 140,547 140,547 203,449 203,449
Long-term debt 630,850 635,252 193,054 189,134
58
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of First Commonwealth Financial
Corporation:
We have audited the accompanying consolidated balance sheets of First
Commonwealth Financial Corporation and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Corporation's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
The consolidated financial statements give retroactive effect to the merger
of First Commonwealth Financial Corporation and Southwest National
Corporation on December 31, 1998, which has been accounted for as a pooling
of interests as described in Note 2 to the consolidated financial
statements. We did not audit the balance sheet of Southwest National
Corporation as of December 31, 1998 and 1997, or the related statements of
income, shareholders' equity, and cash flows of Southwest National
Corporation for the years then ended, which statements reflect total assets
constituting 23% and 20%, respectively, of consolidated total assets at
December 31, 1998 and 1997, and net interest income constituting 25% and
26%, respectively, of consolidated net interest income for the years then
ended. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Southwest National Corporation, is based solely on the report
of such other auditors.
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 financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such 1998 and 1997 consolidated financial statements present fairly, in all
material respects, the financial position of First Commonwealth Financial
Corporation and subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The financial statements of First Commonwealth Financial Corporation for the
year ended December 31, 1996, before giving retroactive effect to the
pooling of interests, and the financial statements of Southwest National
Corporation for the year ended December 31, 1996, were audited by other
auditors whose reports, dated January 17, 1997 and February 17, 1999,
respectively, expressed unqualified opinions on those statements. We
audited the combination of the accompanying consolidated statements of
income, shareholders' equity and cash flows for the year ended December 31,
1996, after restatement for the 1998 pooling of interests; in our opinion,
such consolidated financial statements have been properly combined on the
basis described in Note 2 to the consolidated financial statements.
/S/Deloitte & Touche, LLP
Pittsburgh, Pennsylvania
February 17, 1999
59
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Southwest National Corporation:
We have audited the consolidated balance sheets of Southwest National
Corporation and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of
Southwest National Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Southwest National Corporation and subsidiary at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/S/KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
February 17, 1999
60
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 accompanying consolidated statements of income,
shareholders' equity and cash flows of First Commonwealth Financial
Corporation and Subsidiaries for the year ended December 31, 1996, before
giving retroactive effect to the pooling of interest as described in Note 2
to the consolidated financial statements. These consolidated financial
statements are the responsibility of First Commonwealth Financial
Corporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit 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 our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above,
before giving retroactive effect to the pooling of interest as described in
Note 2 to the consolidated financial statements present fairly, in all
material respects, the consolidated results of their operations and their
consolidated cash flows of First Commonwealth Financial Corporation and
Subsidiaries for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/S/GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 17, 1997
61
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, restated to reflect pooling
of interests for the years ended December 31, 1998 and 1997 are as follows:
1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income.............................. $68,450 $72,016 $72,408 $70,547
Interest expense............................. 35,201 38,023 38,394 36,664
Net interest income..................... 33,249 33,993 34,014 33,883
Provision for possible credit losses......... 2,475 2,625 2,857 7,092
Net interest income after provision for
possible credit losses..................... 30,774 31,368 31,157 26,791
Securities gains (losses).................... 982 -0- 1,657 (1,182)
Other operating income....................... 5,056 5,833 5,798 8,194
Merger and other related charges............. -0- -0- -0- 7,915
Other operating expenses..................... 22,930 22,843 23,005 23,508
Income before taxes and extraordinary
items................................. 13,882 14,358 15,607 2,380
Applicable income taxes...................... 3,900 3,864 4,063 402
Net income before extraordinary items... 9,982 10,494 11,544 1,978
Extraordinary items, net of income taxes..... -0- -0- -0- (624)
Net income.............................. $ 9,982 $10,494 $11,544 $ 1,354
Basic earnings per share, before extra-
ordinary items............................. $ 0.32 $ 0.34 $ 0.38 $ 0.07
Diluted earnings per share, before extra-
ordinary items............................. $ 0.32 $ 0.34 $ 0.37 $ 0.06
Average shares outstanding..................30,803,977 30,772,797 30,751,604 30,342,912
Average shares outstanding assuming
dilution.................................31,011,647 30,950,698 30,898,079 30,476,801
1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
Interest income.............................. $61,251 $62,758 $64,919 $65,844
Interest expense............................. 28,975 30,182 32,032 33,238
Net interest income..................... 32,276 32,576 32,887 32,606
Provision for possible credit losses......... 1,691 2,035 2,458 3,968
Net interest income after provision for
possible credit losses..................... 30,585 30,541 30,429 28,638
Securities gains............................. 1,758 1,039 3,181 847
Other operating income....................... 4,276 4,662 4,795 4,983
Other operating expenses..................... 22,187 22,240 22,296 22,134
Income before income taxes.............. 14,432 14,002 16,109 12,334
Applicable income taxes...................... 4,417 4,334 5,011 3,576
Net income.............................. $10,015 $ 9,668 $11,098 $ 8,758
Basic earnings per share..................... $ 0.32 $ 0.31 $ 0.36 $ 0.28
Diluted earnings per share................... $ 0.32 $ 0.31 $ 0.36 $ 0.28
Average shares outstanding..................31,015,133 30,837,256 30,750,565 30,744,752
Average shares outstanding assuming
dilution.................................31,046,364 30,894,119 30,838,248 30,914,989
62
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Form 8K dated September 24, 1997, reporting a change in accountants
is incorporated herein by reference.
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 26, 1999
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 76 Chairman of the Board of the Corporation,
Chairman of the Board of FCTC, CSC, and
FCB, FCIA and Berkshire Securities
Corporation; Director of CTCLIC and New
Mexico Banquest Investors Corp.; Former
President and Chief Executive Officer of
the Corporation
Joseph E. O'Dell 53 President, Chief Executive Officer and
director of the Corporation; Director of
FCB, FCTC, BSI, Southwest Bank and FCIA;
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 43 Senior Executive Vice President and Chief
Operating Officer of the Corporation;
President, Chief Executive Officer and
Director of CTCLIC; Director of FCB,
FCTC, BSI and FCIA
David R. Tomb, Jr. 67 Senior Vice President, Secretary,
Treasurer and Director of the
Corporation; Secretary and Cashier of
FCB; Secretary of FCIA, FCTC and CSC;
Director of FCB, CSC, FCTC, BSI, FCIA and
CTCLIC
David S. Dahlmann 49 Vice Chairman of the Corporation;
President and Chief Executive Officer of
Southwest Bank; Former President and
Chief Executive Officer of Southwest
National; Director of Southwest Bank
John J. Dolan 42 Senior Vice President and Chief
Financial Officer of the Corporation;
Chief Financial Officer of FCB; Chief
Financial Officer, Comptroller of
CTCLIC;, Treasurer and Assistant
Secretary of FCTC; Comptroller and Chief
Financial Officer of BSI; Treasurer of
FCIA
William R. Jarrett 64 Senior Vice President of the Corporation,
Former managing partner of Jarrett Stokes
& Co. Certified Public Accountants, until
his employment by the Corporation on
April 15, 1994
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FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT (Continued)
R. John Previte 49 Senior Vice President, Investments of the
Corporation; Investment Officer of FCB
Rosemary Krolick 45 Senior Vice President and Chief
Information Officer of the Corporation;
President, Chief Executive Officer and
director of CSC
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 26, 1999
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 26, 1999
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 26, 1999
is incorporated herein by reference in response to this item.
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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 10.4 to Form S-4
Robert C. Williams filed June 17, 1994
10.3 Change in Control Exhibit 10.4 to Form 10-K
Agreement dated filed March 21, 1996
October 27, 1995
Joseph E. O'Dell
10.4 Change in Control Exhibit 10.5 to Form 10-K
Agreement dated filed March 21, 1996
October 27, 1995
Gerard M. Thomchick
10.5 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,
Robert C. Wagner and C. Dean Wingard.
10.6 Employment Contract Exhibit 10.4 to Form S-4
David S. Dahlmann filed November 2, 1998
10.7 Supplemental Executive Page 68
Retirement Plan
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FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K
PART IV (Continued)
10.8 Deferred Compensation Page 86
Plan
10.9 Cash Incentive Bonus Page 91
Program
21.1 Subsidiaries of the Page 96
Registrant
23.1 Consent of Deloitte & Page 97
Touche LLP Certified
Public Accountants
23.2 Consent of KPMG Peat Page 98
Marwick LLP Certified
Public Accountants
23.3 Consent of Grant Thornton Page 99
LLP Certified Public
Accountants
24.1 Power of Attorney Page 100
27.1 Financial Data Schedule Page 101
(B) Report on Form 8-K
(1) Form 8-K dated January 15, 1999 reporting the Corporation's
acquisition of Southwest National Corporation.
(2) Form 8-K/A dated March 16, 1999, amending Form 8-K dated
January 15, 1999, reporting the Corporation's acquisition of
Southwest National Corporation, to include financial
statements of acquired subsidiary and Pro Forma financial
statements.
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FIRST COMMONWEALTH FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Indiana,
Pennsylvania, on the 29th day of March 1999.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
/S/JOSEPH E. O'DELL
Joseph E. O'Dell, President and Chief Executive Officer
67