<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1994
REGISTRATION NO. 33-54381
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
FIRST COMMONWEALTH FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
PENNSYLVANIA 25-1428528
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6712
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
OLD COURTHOUSE SQUARE, 22 NORTH SIXTH STREET,
INDIANA, PENNSYLVANIA 15701-0400
412-349-7220
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DAVID R. TOMB, JR.
VICE PRESIDENT, SECRETARY AND TREASURER
FIRST COMMONWEALTH FINANCIAL CORPORATION
OLD COURTHOUSE SQUARE
22 NORTH SIXTH STREET
INDIANA, PA 15701-0400
412-349-7220
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
DAVID L. DENINNO
REED SMITH SHAW & MCCLAY
435 SIXTH AVENUE
PITTSBURGH, PA 15219
412-288-3214
----------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: The date of mailing the Proxy Statement/Prospectus contained
herein.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
CROSS-REFERENCE SHEET BETWEEN ITEMS OF
SECURITIES AND EXCHANGE COMMISSION FORM S-4
AND CAPTIONS IN THE PROXY STATEMENT/PROSPECTUS
<TABLE>
<CAPTION>
SECURITIES AND EXCHANGE CAPTION(S) OR LOCATION
COMMISSION FORM S-4 ITEM IN PROXY STATEMENT/PROSPECTUS
------------------------ -----------------------------
<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page
of Prospectus.......................... Outside Front Cover Page of
Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information.......... Summary; Outside Front Cover Page of Proxy
Statement/Prospectus
4. Terms of the Transaction................ Plan of Reorganization; Comparison of FCFC
Common Stock and Reliable Common Stock
5. Pro Forma Financial Information......... Comparative and Pro Forma Combined
Financial Information
6. Material Contacts with the Company Being
Acquired............................... Plan of Reorganization
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters.............. Not applicable
8. Interests of Named Experts and Counsel.. Management of FCFC--Board of Directors,
Interests of Directors and Officers in
Certain Transactions; Legal Opinions; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not applicable
10. Information with Respect to S-3
Registrants............................ Not applicable
11. Incorporation of Certain Information by
Reference.............................. Not applicable
12. Information with Respect to S-2 or S-3
Registrants............................ Not applicable
13. Incorporation of Certain Information by
Reference.............................. Not applicable
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants ..... Information Concerning FCFC--Business and
Properties of FCFC, FCFC and Subsidiaries
Selected Financial Data, FCFC Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Comparative and Pro Forma Combined
Financial Information-- Comparative Stock
Prices and Dividends; Relationships with
Independent Public Accounts--FCFC; Index to
Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITIES AND EXCHANGE CAPTION(S) OR LOCATION
COMMISSION FORM S-4 ITEM IN PROXY STATEMENT/PROSPECTUS
------------------------ -----------------------------
<S> <C> <C>
15. Information with Respect to S-3
Companies.............................. Not applicable
16. Information with Respect to S-2 or S-3
Companies.............................. Not applicable
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies........ Information Concerning Reliable--Business
and Properties of Reliable, Reliable and
Subsidiaries Selected Financial Data, Reliable
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Comparative and
Pro Forma Combined Financial Information--
Comparative Stock Prices and Dividends;
Relationships with Independent Public
Accountants--Reliable; Index to Financial
Statements
18. Information if Proxies, Consents or
Authorizations are to be Solicited..... Introduction; Introduction--Voting and
Revocation of Proxies, Solicitation of
Proxies; Plan of Reorganization--Dissenters'
Rights of Reliable Shareholders, Required Vote;
Management Recommendation, Management
Following the Merger; Management of FCFC--
Board of Directors, Compensation of
Directors, Executive Officers, Compensation of
Executive Officers, Interests of Directors and
Officers in Certain Transactions; Management of
Reliable--Board Directors, Compensation of Directors,
Executive Officers, Compensation of Executive
Officers, Interests of Directors and
Officers in Certain Transactions; Certain Beneficial
Owners of FCFC Common Stock; Certain Beneficial
Owners of Reliable Common Stock
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer................ Not applicable
</TABLE>
<PAGE>
[LETTERHEAD OF RELIABLE FINANCIAL CORPORATION APPEARS HERE]
August , 1994
Dear Shareholder:
A Special Meeting of the Shareholders of Reliable Financial Corporation
("Reliable") will be held on September , 1994 at 10:30 A.M., local time, in
the Norwood Party House, 316 Station Street, Bridgeville, Pennsylvania.
The purpose of the Special Meeting is to consider and vote upon a proposal to
approve the Agreement and Plan of Reorganization and the related Plan of Merger
(collectively, the "Plan of Reorganization") providing for the merger of
Reliable into a subsidiary of First Commonwealth Financial Corporation
("FCFC"). FCFC is a bank holding company with its principal office in Indiana,
Pennsylvania. Through its subsidiary banks, FCFC currently maintains 70
community banking offices in 14 Pennsylvania counties.
If the merger is approved, Reliable shareholders will receive 1.6 shares of
FCFC Common Stock in exchange for each share of Reliable Common Stock owned by
them. Upon consummation of the merger, Reliable shareholders will no longer
hold any interest in Reliable, other than indirectly through their ownership of
FCFC Common Stock. Your attention is directed to the attached Proxy
Statement/Prospectus which contains a more complete description of the terms of
the proposed merger and provides detailed financial, business and other
information concerning Reliable and FCFC.
The Board of Directors of Reliable has carefully considered the Plan of
Reorganization and believes that the proposed merger is in the best interests
of Reliable and its shareholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE PLAN OF
REORGANIZATION. The executive officers and directors of Reliable all have
advised Reliable of their intention to vote the shares of Reliable Common Stock
owned by them in favor of the Plan of Reorganization.
The affirmative vote of the holders of a majority of the issued and
outstanding shares of Reliable Common Stock entitled to vote at the Special
Meeting is necessary for approval of the Plan of Reorganization. Your vote is
important regardless of the number of shares you own. We urge you to
participate in this significant development by marking, signing, dating and
returning promptly the enclosed proxy card in the accompanying postage paid,
pre-addressed envelope, whether or not you plan to attend the Special Meeting.
You will retain the right to vote your shares in person at the Special Meeting
if you so desire. You may also revoke your proxy by submitting a later dated
proxy or by giving written notice to the Secretary of Reliable. All properly
executed proxies not theretofore revoked will be voted at the Special Meeting
in accordance with the instructions thereon. Proxies containing no voting
instructions regarding the proposal to approve the Plan of Reorganization will
be voted in favor thereof.
Sincerely yours,
/s/ Stephen Grippi
Stephen Grippi
President
<PAGE>
[LETTERHEAD OF RELIABLE FINANCIAL CORPORATION APPEARS HERE]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER , 1994
To the Shareholders of
Reliable Financial Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Reliable
Financial Corporation ("Reliable") will be held in the Norwood Party House, 316
Station Street, Bridgeville, Pennsylvania, on September , 1994 at 10:30 A.M.,
local time, to:
1. Consider and vote upon a proposal to approve the Agreement and Plan of
Reorganization between Reliable and First Commonwealth Financial
Corporation ("FCFC") and the related Plan of Merger (collectively, the
"Plan of Reorganization") between Reliable and Interim Reliable, Inc.
("Interim Reliable"), each of which is attached to and described in the
accompanying Proxy Statement/Prospectus; and
2. Transact such other business as may properly come before the Special
Meeting or any adjournment or adjournments thereof.
The Plan of Reorganization provides for the merger of Reliable into Interim
Reliable (the "Merger"). As a result of the Merger, Reliable will become a
wholly-owned subsidiary of FCFC and the shareholders of Reliable will receive
1.6 shares of FCFC Common Stock in exchange for each share of Reliable Common
Stock owned by them. Upon consummation of the merger, shareholders of Reliable
will no longer hold any interest in Reliable other than through their ownership
of FCFC Common Stock.
The Board of Directors of Reliable has established , 1994 as the record
date for the Special Meeting, and only holders of record of Reliable Common
Stock at the close of business on that date will be entitled to notice of and
to vote at the Special Meeting.
Approval of the first proposal described above requires the affirmative vote
of the holders of a majority of the issued and outstanding shares of Reliable
Common Stock entitled to vote at the Special Meeting. The executive officers
and directors of Reliable all have advised Reliable of their intention to vote
their shares of Reliable Common Stock in favor of the Plan of Reorganization.
By Order of the Board of Directors,
Jean L. David
Secretary
Bridgeville, Pennsylvania
August , 1994
<PAGE>
PROXY STATEMENT/PROSPECTUS
RELIABLE FINANCIAL CORPORATION FIRST COMMONWEALTH FINANCIAL
428 Station Street CORPORATION
Bridgeville, Pennsylvania 15017 Old Courthouse Square
(412) 221-7700 22 North Sixth Street
Indiana, Pennsylvania 15701-0400
(412) 349-7220
This Proxy Statement/Prospectus serves as a Proxy Statement of Reliable
Financial Corporation ("Reliable") and as a Prospectus of First Commonwealth
Financial Corporation ("FCFC"). It is being furnished to the shareholders of
Reliable in connection with the solicitation of proxies by the Board of
Directors of Reliable for use at a Special Meeting of Shareholders to be held
on September , 1994. The purpose of the Special Meeting is to consider and
take action on the proposed merger (the "Merger") of Reliable into a newly
formed Pennsylvania business corporation, which is a wholly-owned subsidiary of
FCFC. In the Merger, each outstanding share of Reliable Common Stock will be
converted into 1.6 shares of FCFC Common Stock. FCFC has filed this Proxy
Statement/Prospectus with the Securities and Exchange Commission as part of a
Registration Statement under the Securities Act of 1933 with respect to a
maximum of 2,274,448 shares of FCFC Common Stock which may be issued to the
shareholders of Reliable upon consummation of the Merger.
THE SHARES OF FCFC COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR
HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF FCFC COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
No person has been authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus, and, if given
or made, any such information or representation should not be relied upon as
having been authorized by FCFC or Reliable. This Proxy Statement/Prospectus
does not constitute an offer or solicitation by any person in any State in
which such offer or solicitation is not authorized by the laws thereof or in
which the person making such offer or solicitation is not qualified to make the
same. Neither the delivery of this Proxy Statement/Prospectus at any time nor
the distribution of FCFC Common Stock hereunder shall imply that the
information contained herein is correct as of any time subsequent to its date.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS SEPTEMBER , 1994
<PAGE>
AVAILABLE INFORMATION
FCFC and Reliable are subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information filed
by FCFC and Reliable can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Commission, Public Reference Section, Washington, D.C. 20549. In addition,
material filed by FCFC can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein or previously filed with the Commission shall
be deemed to be modified or superseded by this Proxy Statement/Prospectus to
the extent that a statement contained herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to exist or constitute a part of this
Proxy Statement/Prospectus.
<PAGE>
S U M M A R Y
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. This Summary is qualified in its entirety
by the more detailed information contained elsewhere in this Proxy
Statement/Prospectus and in the Annexes hereto.
THE PARTIES
First Commonwealth Financial Corporation ("FCFC" or the "Corporation") is a
registered bank holding company. It conducts business principally through seven
subsidiary banks (the "Subsidiary Banks") and a subsidiary trust company, all
of which have principal offices located in central western Pennsylvania:
Central Bank ("Central"), a Pennsylvania-chartered bank and trust company, has
its principal office in Hollidaysburg; Cenwest National Bank ("Cenwest"), a
national banking association in Johnstown; Deposit Bank ("Deposit"), a
Pennsylvania-chartered bank and trust company in DuBois; First National Bank of
Leechburg ("Leechburg"), a national banking association in Leechburg; National
Bank of the Commonwealth ("NBOC"), a national banking association in Indiana;
Peoples Bank and Trust Company ("PBTC"), a Pennsylvania-chartered bank and
trust company in Jennerstown; Peoples Bank of Western Pennsylvania ("Peoples"),
a Pennsylvania bank in New Castle; and First Commonwealth Trust Company
("FCTC"), a Pennsylvania-chartered trust company in Indiana. The Subsidiary
Banks conduct their business through 70 community banking offices (including
one that is approved and under construction) in 52 communities in the counties
of Armstrong (3 offices), Beaver (1), Bedford (3), Blair (8), Cambria (11),
Centre (2), Clearfield (6), Elk (3), Huntingdon (1), Indiana (9), Jefferson
(4), Lawrence (7), Somerset (7) and Westmoreland (5). See "Information
Concerning FCFC--Business and Properties of FCFC." At June 30, 1994, FCFC
reported total consolidated assets of approximately $1,980,997,000.
Reliable Financial Corporation ("Reliable") is a Delaware corporation and a
savings and loan holding company with its principal office in Bridgeville,
Allegheny County, Pennsylvania. Reliable has one wholly-owned subsidiary,
Reliable Savings and Loan Association of Bridgeville, Pa., doing business as
Reliable Savings Bank, PaSA ("Reliable Savings Bank"). See "Information
Concerning Reliable--Business and Properties of Reliable." Following the Merger
described herein, Reliable will continue its business as a wholly-owned
subsidiary of FCFC. Its name will continue to be "Reliable Financial
Corporation", and it will have the same assets, liabilities, directors,
officers and employees as it had immediately prior to the Merger. Each of the
Reliable and the Reliable Savings Bank Board of Directors will be increased by
two members upon the effectiveness of the Merger, with one current Director and
one current officer of FCFC becoming members thereof. See "Plan of
Reorganization--The Merger." At June 30, 1994, Reliable reported total
consolidated assets of approximately $151,355,000.
Interim Reliable, Inc. ("Interim Reliable") is a newly-created Pennsylvania
business corporation formed by FCFC for purposes of the Merger. Prior to the
proposed merger with Reliable described herein, Interim Reliable will not
engage in any business activities. Interim Reliable will survive the Merger and
operate under the name "Reliable Financial Corporation." See "Plan of
Reorganization--The Merger."
THE SPECIAL MEETING
A Special Meeting of Shareholders of Reliable will be held at 10:30 A.M.,
local time, on , 1994, in the Norwood Party House, 316 Station Street,
Bridgeville, Pennsylvania. Only holders of record of the Common Stock of
Reliable, par value $.01 per share ("Reliable Common Stock"), at the close of
business on , 1994 will be entitled to notice of and to vote at the
meeting. On that date, 1,410,194 shares of Reliable Common Stock were
outstanding and held of record by approximately 1,300 persons, each share
entitling the holder thereof to one vote on each matter submitted for action at
the Special Meeting. See "Introduction."
i
<PAGE>
PROPOSED MERGER
At the Special Meeting, the shareholders of Reliable will be asked to approve
an Agreement and Plan of Reorganization between Reliable and FCFC and a related
Plan of Merger between Reliable and Interim Reliable (collectively, the "Plan
of Reorganization"). The Plan of Reorganization provides for the merger of
Reliable into Interim Reliable (the "Merger"). As a result of the Merger,
Interim Reliable, to be renamed Reliable Financial Corporation, will be a
wholly-owned subsidiary of FCFC, and the shareholders of Reliable will receive
1.6 shares of FCFC Common Stock for each share of Reliable Common Stock owned
by them. See "Plan of Reorganization--The Merger; Conversion of Reliable
Shares." The currently outstanding shares of FCFC Common Stock will remain
outstanding without change by reason of the Merger. Approval of the Plan of
Reorganization requires the affirmative vote of the holders of a majority of
the issued and outstanding shares of Reliable Common Stock entitled to vote at
the Special Meeting. See "Plan of Reorganization--Required Vote; Management
Recommendation."
REASONS FOR THE MERGER
The managements of both Reliable and FCFC believe that the combined entity
resulting from the Merger, by virtue of its increased financial, managerial,
technological and other resources, will be better able to meet increased
competition, to profit from the opportunities resulting from the changed legal
and regulatory environment facing banks, savings associations and bank holding
companies, to offer new services or expand into additional markets and to offer
existing services with increased efficiency. See "Plan of Reorganization--
Reasons for the Merger."
ACCOUNTING TREATMENT
The Merger is expected to qualify as a "pooling of interests" for accounting
and financial reporting purposes. The receipt of an opinion from FCFC's
auditors confirming that the Merger will qualify for pooling of interests
accounting is a condition to the consummation of the Merger. See "Plan of
Reorganization--Accounting Treatment."
MARKET PRICE TABLE
The following sets forth the last reported sales prices per share of the FCFC
Common Stock and the Reliable Common Stock on the New York Stock Exchange
Composite Transactions Tape and in the Nasdaq National Market System,
respectively, on March 11, 1994, the last trading day before announcement of
the Merger, and on August 5, 1994, the last practicable trading day before
printing this Proxy Statement/ Prospectus; and the equivalent per share prices
for the Reliable Common Stock based on the FCFC Common Stock prices:
<TABLE>
<CAPTION>
MARKET PRICE FCFC RELIABLE RELIABLE
PER SHARE AT COMMON STOCK COMMON STOCK EQUIVALENTS (A)
------------ ------------ ------------ ---------------
<S> <C> <C> <C>
March 11, 1994............... $17.75 $26.50 $28.40
August 5, 1994............... 17.58 28.00 28.13
</TABLE>
- --------
(a) Represents the equivalent of one share of Reliable Common Stock calculated
by multiplying the sales prices per share of FCFC Common Stock by 1.6.
INTERESTS OF RELIABLE OFFICERS AND DIRECTORS
The officers and directors of Reliable will receive no benefits in connection
with the Merger, other than any benefits which may accrue generally to holders
of FCFC Common Stock and, in the case of officers, benefits which apply
generally to officers of FCFC, including FCFC's employee stock option plan. The
Plan of Reorganization provides that each outstanding option to purchase shares
of Reliable Common Stock will
ii
<PAGE>
be converted into and become an option to purchase FCFC Common Stock at the
rate of 1.6 shares of FCFC Common Stock for each share of Reliable Common Stock
subject to the option. The employment agreement between Stephen Grippi,
President and Chief Executive Officer of Reliable, will continue in effect
between Mr. Grippi and Interim Reliable by operation of law as a result of the
Merger. Mr. Grippi's employment agreement contains an expiration date of
December 31, 1994. See "Plan of Reorganization--Interests of Reliable Officers
and Directors".
MANAGEMENT RECOMMENDATION AND VOTE
The Board of Directors of Reliable unanimously recommends that the Reliable
shareholders vote "FOR" approval of the Plan of Reorganization. Executive
officers and directors of Reliable hold, in the aggregate, approximately
114,394 shares of Reliable Common Stock, constituting approximately 8.11% of
all such shares outstanding. Such officers and directors have advised Reliable
of their intention to vote such shares "FOR" the proposal to approve the Plan
of Reorganization. See "Plan of Reorganization--Required Vote; Management
Recommendation."
MANAGEMENT FOLLOWING THE MERGER
Following the Merger, the Board of Directors of FCFC will remain unchanged.
Following the United Merger, the FCFC Board will be increased by one member to
include Robert C. Williams, who is Vice Chairman, President and Chief Executive
Officer of United. See "Plan of Reorganization--Management Following the
Merger."
OPINION OF FINANCIAL ADVISOR
Ryan, Beck & Co., Inc. ("Ryan Beck") has delivered a written opinion dated
June 29, 1994 to Reliable's Board of Directors to the effect that, as of such
date, the terms of the Merger were fair to the shareholders of Reliable from a
financial point of view. See "Plan of Reorganization--Opinion of Financial
Advisor". A copy of the opinion of Ryan Beck is attached hereto as Annex II.
The opinion should be read in its entirety for a description of the procedures
followed, assumptions and qualifications made, matters considered and
qualifications and limitations on the review undertaken by Ryan Beck.
CERTAIN TAX ASPECTS OF THE MERGER
The Merger will qualify as a nontaxable reorganization for federal and
Pennsylvania income tax purposes, and no gain or loss will be recognized to the
Reliable shareholders upon the exchange of their Reliable Common Stock for FCFC
Common Stock. Reliable and FCFC have received opinions from their special
counsel, Reed Smith Shaw & McClay, to the foregoing effects and as to certain
other tax matters relating to the Merger. For a more complete description of
the federal and Pennsylvania income tax consequences of the exchange, see "Plan
of Reorganization--Certain Tax Aspects of the Merger."
NO DISSENTERS' RIGHTS
Under Section 262 of the Delaware General Corporation Law, the rights and
remedies of a dissenting shareholder are not available to a holder of Reliable
Common Stock who objects to the Merger.
CONDITIONS; AMENDMENT; TERMINATION
In addition to shareholder approval of the Plan of Reorganization,
consummation of the Merger is contingent upon the approval of the Merger by the
Pennsylvania Department of Banking, the Board of Governors of the Federal
Reserve System and the Office of Thrift Supervision, as well as the
satisfaction of a number of other conditions. See "Plan of Reorganization--
Conditions to the Merger."
iii
<PAGE>
Notwithstanding prior shareholder approval, the Plan of Reorganization may be
amended, by a written agreement between the parties. However, no such amendment
may be made after shareholder approval if it would affect in any material
respect the terms of the transaction without the further approval of the
Reliable shareholders. In such event, an additional proxy solicitation would be
required seeking the approval of the Reliable shareholders for such material
changes. It is the current intention of FCFC and Reliable to conduct such an
additional solicitation if material changes necessitating further shareholder
approval are made to the Plan of Reorganization after initial shareholder
approval. The Plan of Reorganization may also be terminated and the Merger
abandoned, notwithstanding prior shareholder approval, by written and mutual
agreement of FCFC and Reliable or by either of them in the event of failure by
the other to satisfy certain conditions to the Merger. See "Plan of
Reorganization--Amendment, Waiver and Termination."
EFFECTIVE DATE OF THE MERGER
It is presently anticipated that if the Plan of Reorganization is approved,
the Merger will become effective at the close of business on September 26,
1994. However, there can be no assurance that all conditions necessary to the
consummation of the Merger will be satisfied or that, if satisfied, such
conditions will be satisfied in time to permit the Merger to become effective
by that date. See "Plan of Reorganization--Effective Date of the Merger."
EXCHANGE OF RELIABLE CERTIFICATES
Instructions on how to effect the exchange of Reliable Common Stock
certificates for FCFC Common Stock certificates will be sent as promptly as
practicable after the effective date of the Merger to each Reliable shareholder
of record immediately prior to the Merger. See "Plan of Reorganization--
Conversion of Reliable Shares." Reliable shareholders should not send in stock
certificates until they receive written instructions to do so.
UNITED NATIONAL BANCORPORATION MERGER
FCFC has signed an Agreement and Plan of Reorganization, and a related Plan
of Merger (collectively, the "United Plan of Reorganization"), dated as of
March 25, 1994 with United National Bancorporation ("United" or "UNB"), a
Pennsylvania business corporation and a bank holding company for Unitas
National Bank, a national banking association ("Unitas Bank"), with its
principal place of business in Chambersburg, Pennsylvania. The United Plan of
Reorganization provides for the merger of United into FCFC (the "United
Merger"). On the effective date of the United Merger, each share of United
Common Stock will be converted into 2 shares of FCFC Common Stock for an
aggregate of 1,538,294 shares of FCFC Common Stock to be issued in the United
Merger. In connection with the United Merger, FCFC will assume the outstanding
stock options covering 49,643 shares of United Common Stock. After the
effective date of the United Merger these options will be exercisable for FCFC
Common Stock at the rate of 2 shares of FCFC Common Stock for each share of
United Common Stock covered by the option, for an aggregate of 99,286 shares of
FCFC Common Stock to be issued by FCFC if all the options are exercised. See
the United Consolidated Financial Statements and the notes thereto appearing
elsewhere in this Proxy Statement/Prospectus.
United's subsidiary, Unitas Bank, conducts its business through 12 community
banking offices in 11 communities in the counties of Adams (1 office), Bedford
(1), Centre (2), Franklin (2) and Huntingdon (6). See "Information Concerning
United." At June 30, 1994, United reported total consolidated assets of
approximately $147,974,000. It is contemplated that the United Merger and the
Reliable Merger will be consummated at the same time if all required regulatory
approvals have been received and all conditions precedent have been satisfied;
however, the United Merger and the Reliable Merger are separate and independent
transactions. The information presented in this Proxy Statement/Prospectus
concerning United is intended only to provide the holders of Reliable Common
Stock an understanding of United and the United
iv
<PAGE>
Merger. The holders of Reliable Common Stock have no rights to approve or
reject the consummation of the United Merger. The consummation of the Reliable
Merger is not a condition precedent to the United Merger, and the consummation
of the United Merger is not a condition precedent to the Reliable Merger. It is
contemplated that each Merger will be consummated as soon as its conditions
precedent have been satisfied.
SELECTED FINANCIAL DATA (UNAUDITED)
The following table sets forth certain historical and pro forma combined
financial information for the six month periods ended June 30, 1994 and for the
year ended December 31, 1993 for FCFC and United and for the six month period
ended June 30, 1994 and the year ended September 30, 1993 for Reliable. This
table should be read in conjunction with the separate historical balance sheets
and statements of income for FCFC, United and Reliable and the pro forma
combined financial statements appearing elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
PRO FORMA (2)(4)
FCFC (1) UNITED RELIABLE COMBINED
---------------- ---------------- --------------- ----------------
6/30/94 12/31/93 6/30/94 12/31/93 6/30/94 9/30/93 6/30/94 12/31/93
------- -------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (in
thousands) (3).......... $10,706 $22,690 $ 736 $1,820 $1,560 $3,155 $13,002 $27,665
Net income per share
(3)..................... 0.57 1.22 0.96 2.37 1.10 2.21 0.61 1.23
Pro forma net income per
1.6 FCFC shares........ -- -- -- -- -- -- 0.98 1.97
Cash dividends declared. 0.28 0.51 0.26 0.47 0.80 1.15 -- --
Pro forma cash dividends
declared per 1.6 FCFC
shares................. -- -- -- -- -- -- 0.45 0.82
Book value per share.... 9.73 10.00 16.37 15.97 21.78 21.31 10.02 10.21
Pro forma book value per
1.6 FCFC shares........ -- -- -- -- -- -- 16.03 16.34
</TABLE>
- --------
(1) FCFC per share data reflects the two-for-one stock split on January 18,
1994.
(2) The pro forma amounts assume that none of the holders of outstanding shares
of United Common Stock exercises his or her dissenters' rights with respect
to the Merger. It is a condition to the Merger that the total number of
shares of United Common Stock, if any, as to which such holders exercise
their rights as dissenting shareholders shall not be greater than 9% of the
United Common Stock outstanding. The pro forma information would not be
materially affected if the 9% threshold were reached. The Reliable
shareholders do not have dissenters' rights.
(3) For purposes of this pro forma data, net income and net income per share
exclude the cumulative effects of accounting changes.
(4) For the pro forma data combining only FCFC and Reliable, see "Comparative
Per Share Data."
v
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TABLE OF CONTENTS
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INTRODUCTION.............................................................. 1
Record Date; Voting Rights............................................... 1
Purpose of the Special Meeting........................................... 1
Voting and Revocation of Proxies......................................... 2
Solicitation of Proxies.................................................. 2
PLAN OF REORGANIZATION.................................................... 2
The Merger............................................................... 2
Reasons for the Merger................................................... 3
Opinion of Financial Advisor............................................. 4
Required Vote; Management Recommendation................................. 8
Conversion of Reliable Shares............................................ 8
Interests of Reliable Officers and Directors............................. 9
Conversion of Reliable Stock Options..................................... 9
Management Following the Merger.......................................... 10
Conditions to the Merger................................................. 10
Representations and Warranties........................................... 10
Amendment, Waiver and Termination........................................ 11
No Dissenters' Rights of Reliable Shareholders........................... 11
Certain Tax Aspects of the Merger........................................ 11
Accounting Treatment..................................................... 12
Restrictions on Resales of FCFC Common Stock by Reliable Affiliates...... 13
Expenses................................................................. 13
Effective Date of the Merger............................................. 13
UNITED NATIONAL BANCORPORATION MERGER..................................... 13
COMPARATIVE AND PRO FORMA COMBINED FINANCIAL INFORMATION.................. 15
Comparative Stock Prices and Dividends................................... 15
Certain Information About the Pro Forma Combined Financial Data.......... 16
Comparative Per Share Data............................................... 18
Pro Forma Combined Financial Statements.................................. 19
INFORMATION CONCERNING FCFC............................................... 22
Business and Properties of FCFC.......................................... 22
FCFC Selected Financial Data............................................. 25
FCFC Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 26
MANAGEMENT OF FCFC........................................................ 47
Board of Directors....................................................... 47
The Board and Its Committees............................................. 50
Compensation of Directors................................................ 51
Executive Officers....................................................... 51
Compensation of Executive Officers....................................... 52
Executive Compensation Committee Interlocks and Insider Participation.... 52
Employment Contracts, Termination of Employment and Change-in-Control
Agreements.............................................................. 52
Interests of Nominees, Directors and Officers in Certain Transactions.... 53
CERTAIN BENEFICIAL OWNERS OF FCFC COMMON STOCK............................ 54
INFORMATION CONCERNING RELIABLE........................................... 55
Business and Properties of Reliable...................................... 55
Reliable Selected Financial Data......................................... 56
</TABLE>
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Reliable Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 57
MANAGEMENT OF RELIABLE........................................................... 77
Board of Directors............................................................. 77
The Board and Its Committees................................................... 78
Compensation of Directors...................................................... 79
Executive Officers............................................................. 79
Compensation of Executive Officers............................................. 79
Compensation Committee Interlocks and Insider Participation.................... 80
401(k) Profit Sharing Plan..................................................... 81
Employment Contracts........................................................... 81
Interests of Nominees, Directors and Officers in Certain Transactions.......... 81
INFORMATION CONCERNING UNITED.................................................... 82
The United Merger.............................................................. 82
Business and Properties of United.............................................. 82
United Selected Financial Data................................................. 84
United Management's Discussion of Operations and Financial Condition........... 85
REGULATION AND SUPERVISION....................................................... 102
FCFC........................................................................... 102
Reliable....................................................................... 103
Subsidiary Banks and Reliable Savings Bank..................................... 103
Reciprocal Interstate Banking.................................................. 104
EFFECTS OF GOVERNMENTAL POLICIES................................................. 104
COMPARISON OF FCFC COMMON STOCK AND RELIABLE COMMON STOCK........................ 105
General........................................................................ 105
Voting Rights.................................................................. 105
Procedures to Bring Business Before a Meeting.................................. 106
Liabilities and Indemnification of Directors and Officers...................... 107
Qualifications for Directors................................................... 107
"Anti-Takeover" Provisions..................................................... 108
Dividend Reinvestment Plan..................................................... 109
Miscellaneous.................................................................. 109
Preferred Stock................................................................ 109
RELATIONSHIPS WITH INDEPENDENT PUBLIC ACCOUNTANTS................................ 110
FCFC........................................................................... 110
Reliable....................................................................... 110
LEGAL OPINIONS................................................................... 110
EXPERTS.......................................................................... 110
SHAREHOLDER PROPOSALS............................................................ 111
</TABLE>
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INDEX TO FINANCIAL STATEMENTS.................................................... F-1
ANNEXES
I Agreement and Plan of Reorganization........................................ A-I-1
Appendix A--Plan of Merger................................................. App. A-1
II Fairness Opinion............................................................ A-II-1
</TABLE>
<PAGE>
PROXY STATEMENT/PROSPECTUS
FOR
SPECIAL MEETING OF SHAREHOLDERS
OF RELIABLE FINANCIAL CORPORATION
TO BE HELD ON
, 1994
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of Reliable Financial Corporation
("Reliable") of proxies to be voted at a Special Meeting of Shareholders of
Reliable to be held in the Norwood Party House, 316 Station Street,
Bridgeville, Pennsylvania on , 1994 at 10:30 A.M., local time (the
"Special Meeting"), and at any adjournment or adjournments thereof. The
approximate date on which this Proxy Statement/Prospectus shall first be mailed
to the shareholders of Reliable is , 1994.
RECORD DATE; VOTING RIGHTS
The Board of Directors of Reliable has fixed the close of business on ,
1994 as the record date for determining which shareholders of Reliable shall be
entitled to notice of and to vote at the Special Meeting. On that date,
1,410,194 shares of Common Stock of Reliable, par value $.01 per share
("Reliable Common Stock"), were outstanding. Each such share entitles its
holder of record at the close of business on the record date to one vote on
each matter properly submitted for action to the shareholders at the Special
Meeting. Reliable has no other outstanding class of capital stock.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the shareholders of Reliable will be asked to
consider and vote upon a proposal to approve the Agreement and Plan of
Reorganization dated as of April 21, 1994 between Reliable and First
Commonwealth Financial Corporation ("FCFC"), a bank holding company, and the
related Plan of Merger dated April 21, 1994 between Reliable and Interim
Reliable, Inc. ("Interim Reliable"), a newly-created, wholly-owned subsidiary
of FCFC. Complete copies of the Plan of Reorganization and the Plan of Merger
(collectively, the "Plan of Reorganization") are attached hereto as Annex I and
Appendix A to Annex I, respectively.
As more fully described below under "Plan of Reorganization", the Plan of
Reorganization provides for the merger of Reliable into Interim Reliable (the
"Merger"). The surviving corporation will be renamed "Reliable Financial
Corporation" and will exist as a wholly-owned subsidiary of FCFC. Following the
Merger, Reliable Savings Bank, PaSA ("Reliable Savings Bank"), a wholly-owned
subsidiary of Reliable, will continue its business as a savings association.
In the Merger, each issued and outstanding share of Reliable Common Stock
will be converted into 1.6 shares of Common Stock of FCFC, par value $1 per
share ("FCFC Common Stock"). See "Plan of Reorganization--Conversion of
Reliable Shares."
On the effective date of the Merger (the "Effective Date"), the Board of
Directors of FCFC will remain unchanged. Following the Merger, the Board of
Directors of Reliable Savings Bank and Reliable will consist of all of the
current directors thereof plus E. James Trimarchi, who is currently Chairman of
the Board, President and Chief Executive Officer of FCFC, and Joseph E. O'Dell,
who is currently Senior Executive Vice President and Chief Operating Officer of
FCFC. See "Plan of Reorganization--Management Following the Merger."
THE BOARD OF DIRECTORS OF RELIABLE BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF RELIABLE AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF RELIABLE VOTE TO APPROVE THE PLAN OF REORGANIZATION.
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<PAGE>
VOTING AND REVOCATION OF PROXIES
All properly executed proxies not theretofore revoked will be voted at the
Special Meeting in accordance with the instructions thereon. Proxies containing
no voting instructions regarding the proposal to approve the Plan of
Reorganization will be voted in favor thereof so long as they are properly
signed and dated. Unsigned and undated proxies will not be voted. As to any
other matter brought before the Special Meeting and submitted to a shareholder
vote, proxies will be voted in accordance with the judgment of the proxyholders
named thereon.
Approval of the Plan of Reorganization requires the affirmative vote of the
holders of a majority of the issued and outstanding shares of Reliable Common
Stock entitled to vote at the Special Meeting. Therefore, each abstention and
each broker non-vote will have the practical effect of voting against the
Merger since it is one less vote for approval.
A shareholder who has executed and returned a proxy may revoke it at any time
before it is voted by giving written notice to the Secretary of Reliable, by
submitting a later-dated proxy or by attending the Special Meeting and voting
in person. Presence at the Special Meeting does not itself revoke the proxy.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
Reliable may, for no additional compensation, solicit proxies from the
shareholders of Reliable in person or by telephone or otherwise. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to forward
proxy soliciting materials to the beneficial owners of shares held of record by
them and will be reimbursed for their expenses. It is anticipated that all
expenses in connection with the solicitation of proxies for the Special Meeting
will be borne by Reliable.
PLAN OF REORGANIZATION
This section of the Proxy Statement/Prospectus describes certain of the more
important aspects of the Plan of Reorganization. The following description does
not purport to be complete and is qualified in its entirety by reference to the
Plan of Reorganization and the Plan of Merger, which are set forth as Annex I
and Appendix A to Annex I, respectively, in the back of this Proxy
Statement/Prospectus and which are incorporated herein by reference. All
shareholders are urged to read the Plan of Reorganization and the Plan of
Merger in their entirety.
THE MERGER
The Plan of Reorganization provides for the merger of Reliable into Interim
Reliable, a newly-created, wholly-owned subsidiary of FCFC. FCFC is a bank
holding company, the principal business of which is the ownership of all the
outstanding stock of seven banks (the "Subsidiary Banks"), a trust company, and
a data processing company and 50% of the outstanding stock of an insurance
company. See "Information Concerning FCFC." Interim Reliable was created
specifically for the purpose of the Merger and prior to the Merger will not
have engaged in any business. Reliable is a Delaware corporation and a savings
and loan holding company, the principal business of which is the ownership of
all the outstanding stock of Reliable Savings Bank, a Pennsylvania savings
association in Bridgeville, Pennsylvania. See "Business and Properties of
Reliable."
On the Effective Date, Reliable will be merged into Interim Reliable, and
Reliable's separate corporate existence will cease. The Articles of
Incorporation and By-Laws of Interim Reliable will remain in effect, except
that, as a result of the Merger, Article 1 of Interim Reliable's Articles of
Incorporation will be amended to provide that its name shall be Reliable
Financial Corporation. The Articles of Incorporation of Interim Reliable are
set forth as Appendix B to Annex I to this Proxy Statement/Prospectus. Upon the
effectiveness of the Merger, each outstanding share of Reliable Common Stock
will be converted into 1.6
2
<PAGE>
shares of FCFC Common Stock. Following the Merger, Interim Reliable will
continue its present business as a wholly-owned subsidiary of FCFC. At that
time, its Board of Directors will consist of all current Reliable Directors
plus one current Director and one current officer of FCFC.
It is presently contemplated that following the Merger, Reliable Savings Bank
will continue to operate the same offices it currently operates and will
continue to provide the same services to its customers as those currently
provided. See "Information Concerning Reliable--Business and Properties of
Reliable."
Each outstanding share of Reliable Common Stock held of record on the
Effective Date will, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into 1.6 shares of FCFC Common Stock. Each
holder of Reliable Common Stock will therefore receive 1.6 shares of FCFC
Common Stock for each share of Reliable Common Stock held of record on the
Effective Date.
NO REPRESENTATION IS MADE HEREBY AS TO THE VALUE OF THE 1.6 SHARES OF FCFC
COMMON STOCK OFFERED FOR EACH SHARE OF RELIABLE COMMON STOCK.
There are currently 1,410,194 shares of Reliable Common Stock outstanding.
Once all of the outstanding shares of Reliable Common Stock are converted into
shares of FCFC Common Stock in the Merger, 2,256,310 shares of FCFC Common
Stock would be issued in the Merger to the shareholders of Reliable.
REASONS FOR THE MERGER
In 1982, the Pennsylvania Banking Code of 1965, as amended (the "Pennsylvania
Banking Code"), was amended to permit Pennsylvania banks to expand into
counties bicontiguous to the counties of their principal offices and to permit
bank holding companies to own more than one Pennsylvania bank. All legislative
restrictions on statewide banking in Pennsylvania were eliminated as of March
4, 1990. See "Regulation and Supervision." The 1982 legislation resulted in an
increased volume of merger activity among Pennsylvania banks and bank holding
companies as the larger metropolitan banking organizations sought to position
themselves to enter into statewide banking, and smaller nonmetropolitan banking
organizations sought to increase their size in order to be able to remain
competitive on a regional basis. Since adoption of the legislation, both FCFC
and Reliable have seen acquisitions of bank and savings association competitors
by large Philadelphia-based, Harrisburg-based and Pittsburgh-based bank and
savings and loan holding companies and mergers of other bank competitors with
banks and savings associations outside their market areas. At the same time,
deregulation of the banking and savings industries has both increased the
opportunities available to banks, savings associations and bank and savings and
loan holding companies to offer new types of financial services and increased
the potential for competition in the area of traditional banking services from
nonbank financial institutions.
The managements of FCFC and Reliable believe that combining the resources of
Reliable with those of the Subsidiary Banks under common holding company
ownership and control will enable Reliable and the Subsidiary Banks to more
effectively meet the increased competition and to profit from the opportunities
made available by the elimination of legislative restrictions on statewide
banking in Pennsylvania. The increased financial, managerial, technological and
other resources available to the parties will place each bank in a better
position to offer the expanding variety of financial services that will be
necessary to meet the competition from larger bank and nonbank financial
institutions. FCFC's holding company structure will provide additional
opportunities for the expansion of services. Under federal law, a bank holding
company is permitted to engage, either directly or through subsidiaries, in the
provision of certain types of mortgage, consumer finance, factoring, leasing,
loan servicing, credit insurance, investment and other financial services, some
of which either cannot be provided by banks or savings associations or can be
provided more efficiently by a holding company or nonbank subsidiary.
The increased resources of the combined entity following the Merger and the
flexibility afforded by FCFC's holding company structure will also place FCFC
in a better position to take advantage of the opportunities for expansion into
new markets, either through expansion of the service areas of the Subsidiary
Banks or through the acquisition of additional banks and savings associations.
FCFC remains receptive to and continues to evaluate potential opportunities for
such expansion and acquisitions. See "United National Bancorporation Merger."
3
<PAGE>
The Merger will also enable the Subsidiary Banks and Reliable to increase
their efficiency and competitiveness in providing existing banking services.
For example, each bank will be better able to profit from the lending
opportunities in the combined area served by them by drawing upon the other
banks' knowledge of their market areas and by combining lending limits through
loan participations to make loans that none of the banks could make
individually or in which they might otherwise have to involve their
competitors. Each bank will also be able to draw upon the combined skills and
experience of the holding company, Reliable and all of the Subsidiary Banks
following the Merger in other areas such as marketing, investments,
asset/liability management and deposit and trust services. In addition,
economies of scale may be achieved by combining purchases of supplies and
services, eliminating duplication of contract services and combining certain
internal management, accounting and other functions under one holding company.
While the combined holding company and its shareholders will benefit from the
increased size and strength and the diversification of assets, liabilities and
revenue sources resulting from the ownership of several banks having different
geographical markets, the separate corporate identities of the Subsidiary Banks
will be maintained so long as it is advantageous to do so. As a result, each
bank will be able to maintain its regional market identification and its
inherent advantage, in competing with larger financial institutions, of greater
flexibility in tailoring its services to respond to the particular needs of the
communities it serves.
Ryan, Beck & Co., Inc. ("Ryan Beck") was retained by the Reliable Board of
Directors on May 26, 1992 to act as its consultant and financial advisor in
connection with various matters, including the possible sale of Reliable, a
business combination with any other entity, merger and acquisition trends, and
planning, forecasting and competitive strategy. On February 20, 1994, the
Reliable Board of Directors commenced discussions with FCFC on the feasibility
of a possible combination with FCFC.
After review and deliberation, the Reliable Board of Directors decided that
it would be in the best interests of the Reliable shareholders to merge with
FCFC. This conclusion was based on a consideration of the reasons described
above, including the advantages and disadvantages of remaining independent, the
proposed terms and conditions of the transaction and the opinion of Ryan Beck,
Reliable's independent financial advisor, that the terms of the merger were
fair to the shareholders of Reliable from a financial point of view.
OPINION OF FINANCIAL ADVISOR
In April 1993, Reliable renewed a pre-existing agreement with Ryan Beck
pursuant to which Ryan Beck acts as its financial advisor and as such, among
other things, advised the Reliable Board of Directors on the enhancement of
shareholder value, including the possible sale of Reliable to a third party.
The Reliable Board of Directors retained Ryan Beck based upon its experience
and expertise. Ryan Beck is regularly engaged in the valuation of banks, bank
holding companies, savings and loan associations, and savings and loan holding
companies in connection with mergers, acquisitions and other securities
transactions. Ryan Beck has knowledge of, and experience with, the Pennsylvania
banking market and banking organizations operating in that market and was
selected by Reliable because of its knowledge of, experience with, and
reputation in the financial services industry, and because of its past
relationship with Reliable.
In such capacity, Ryan Beck participated in the negotiations with respect to
the pricing and other terms and conditions of the Reliable Merger, but the
decision as to whether to accept and the final price of the offer was
ultimately made by the Board of Directors of Reliable. Ryan Beck rendered its
oral opinion to the Reliable Board of Directors on April 20, 1994, and rendered
its written opinion on June 29, 1994 that, in its opinion, as of April 20, 1994
and as of June 29, 1994, the financial terms of FCFC's offer were "fair" to
Reliable and to its shareholders from a financial point of view. No limitations
were imposed by the Reliable Board of Directors upon Ryan Beck with respect to
the investigations made or procedures followed by it in arriving at its
opinion.
The full text of the written opinion of Ryan Beck dated as of June 29, 1994,
which sets forth assumptions made and matters considered, is attached as Annex
II to this Proxy Statement/Prospectus. Reliable shareholders are urged to read
this opinion in its entirety. Ryan Beck's opinion is directed only to the
4
<PAGE>
consideration to be received by Reliable shareholders in the merger and does
not constitute a recommendation to any Reliable shareholder as to how such
shareholder should vote at the Reliable Special Meeting. The summary of the
opinion of Ryan Beck set forth in this Proxy Statement/Prospectus is qualified
in its entirety by reference to the full text of such opinion. Ryan Beck's oral
opinion as of April 20, 1994 was to the same effect as the opinion attached
hereto.
In arriving at its written opinion, Ryan Beck reviewed certain publicly
available business and financial information relating to Reliable, United and
FCFC. For purposes of such opinion and in connection with its review of the
proposed Reliable Merger, Ryan Beck: (i) reviewed the Reliable Plan of Merger,
(ii) reviewed the United Plan of Merger, (iii) reviewed this Proxy
Statement/Prospectus; (iv) reviewed FCFC's Annual Reports to Shareholders and
Annual Reports on Form 10-K for the years ended December 31, 1991 through 1993
and the Quarterly Reports on Form 10-Q for the period ended March 31, 1994; (v)
reviewed Reliable's Annual Reports to Shareholders and Annual Reports on Form
10-K for the years ended September 30, 1991 through 1993, and the Quarterly
Reports on Form 10-Q for the periods ended March 31, 1994 and December 31,
1993; (vi) reviewed United's Annual Reports to Shareholders and Annual Reports
on Form 10-K for the years ended December 31, 1991 through 1993, and the
Quarterly Reports on Form 10-Q for the period ended March 31, 1994; (vii)
reviewed certain operating and financial information provided to Ryan Beck by
the management of each of Reliable, United and FCFC relating to their
respective business and prospects; (viii) met separately with certain members
of Reliable, United and FCFC senior management to discuss their respective
operations, historical financial statements and future prospects; (ix) reviewed
the historical stock prices and trading volume of the common stock of Reliable
and FCFC; (x) as more particularly described below under "Comparable Companies
and Comparable Acquisitions Analysis", reviewed the publicly-available
financial data and stock market performance data of publicly-traded savings
institutions and banking institutions which Ryan Beck deemed generally
comparable to Reliable and FCFC; (xi) as more particularly described below
under "Comparable Companies and Comparable Acquisitions Analysis", reviewed the
terms of recent acquisitions of publicly-traded savings institutions which Ryan
Beck deemed generally comparable to Reliable; and (xii) conducted such other
studies, analyses, inquiries and examinations as Ryan Beck deemed appropriate.
Ryan Beck also reviewed the budget of Reliable for the fiscal year ending
September 30, 1994 and met with management of Reliable to discuss Reliable's
past and current business operations and financial condition. In rendering its
opinion, Ryan Beck also considered the future prospects of Reliable in the
event it remained independent.
As more fully described below, Ryan Beck also considered certain financial
and stock market data relating to Reliable and compared it to similar data
relating to other publicly-held savings associations, savings and loan holding
companies, banks and bank holding companies and, as more particularly described
below under "Comparable Companies and Comparable Acquisitions Analysis,"
considered financial terms of comparable transactions which have been either
recently announced or effected.
In connection with its review, Ryan Beck relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information regarding FCFC, United and Reliable provided to Ryan Beck by
the companies and their representatives. Ryan Beck also did not independently
verify but instead assumed that the allowances for loan losses set forth in the
balance sheets of Reliable, United and FCFC at March 31, 1994 were adequate and
complied fully with applicable law, regulatory policy and sound banking
practice as of the date of such financial statements. Ryan Beck was not
retained to nor did it conduct a physical inspection of any of the properties
or facilities of FCFC, Reliable or United nor was it retained to nor did Ryan
Beck make any independent evaluation or appraisal of FCFC's, Reliable's or
United's assets or liabilities. Ryan Beck also assumed that the Reliable Merger
in all respects is, and will be, undertaken and consummated in compliance with
all laws and regulations that are applicable to FCFC and Reliable.
In rendering its opinion, Ryan Beck assumed that, in the course of obtaining
the necessary regulatory approvals for the Reliable Merger and the United
Merger and in preparation of this Proxy Statement/Prospectus, no conditions
will be imposed that will have a material adverse effect on the contemplated
benefits of the Reliable Merger or the United Merger, on a pro forma basis, to
FCFC.
5
<PAGE>
In arriving at its opinion, Ryan Beck performed a variety of financial
analyses. Ryan Beck believes that its analyses must be considered as a whole
and that consideration of portions of such analyses and the factors considered
therein, without all factors and analyses, could create an incomplete view of
the analyses and the process underlying Ryan Beck's opinion. No one of the
analyses was assigned a greater significance than any other. The preparation of
a fairness opinion is a complex process involving subjective judgments and is
not necessarily susceptible to partial analysis and summary description.
In its analyses, Ryan Beck made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond FCFC's or Reliable's control. Any estimates contained in Ryan Beck's
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than such estimates. Estimates of
values of companies do not purport to be appraisals or necessarily reflect the
prices at which companies or their securities may actually be sold.
The following is a brief summary of the analyses and procedures performed by
Ryan Beck in the course of arriving at its April 20, 1994 oral opinion, which
analyses and procedures were presented to the Reliable Board of Directors on
that date:
Impact Analysis--Ryan Beck analyzed the changes in the amount of earnings,
book value and indicated dividends represented by the issuance of 1.6 shares of
FCFC Common Stock and the number of outstanding shares of Reliable Common
Stock, Ryan Beck assumed a price of $28.80 per share of Reliable Common Stock.
The analysis evaluated, among other things, possible dilution in earnings and
book value per share for FCFC and the dividends to be received by Reliable
shareholders. This analysis was based upon December 31, 1993 data for FCFC and
Reliable and future earnings estimates for each, and December 31, 1993 data for
United and constitutes a prospective analysis. Accordingly, the data used in
this analysis is not comparable to the historical data as of or for the six
months ended June 30, 1994 incorporated by reference or appearing elsewhere
herein. See "Summary-Comparative Per Share Data (unaudited)."
At the time performed, this analysis indicated that the Reliable Merger would
be approximately 1.64% dilutive to FCFC's earnings per share (after giving pro
forma effect to the United Merger). Ryan Beck's analysis also evaluated, among
other things, the Reliable Merger's approximate 5.00% accretive effect on
FCFC's book value per share, the percentage of reserves to non-performing loans
and the pro forma capitalization of FCFC after the Reliable Merger and the
United Merger. In addition, Ryan Beck's analysis considered dividends paid by
Reliable to date and FCFC's annualized dividend of $0.56 per share. This impact
analysis was based upon data available at the time performed and should not be
construed as indicative of the actual impact of the Reliable Merger when
consummated.
Impact per Share Analysis. Ryan Beck also analyzed the impact of the Reliable
Merger on certain FCFC values (giving pro forma effect to the United Merger)
per Reliable share based on the exchange ratio of 1.6 shares of FCFC Common
Stock for one share of Reliable. That analysis, which was based on certain
assumptions made by Ryan Beck found that, based on the proposed exchange ratio,
FCFC's equivalent earnings per share would be $1.94 or 13.88% greater than
existing Reliable earnings per share; that FCFC's equivalent tangible book
value would be $15.12 or 29.64% less than the existing Reliable tangible book
value per share; and that FCFC's equivalent dividend income would be $0.90 per
share or 10.40% less than Reliable's current dividend income per share.
Comparable Companies and Comparable Acquisitions Analysis. Ryan Beck also
compared the financial data of Reliable as of December 31, 1993 to median data
calculated from a selected group of 36 peer savings institutions with assets as
of December 31, 1993 between $50 million and $300 million, equity to assets
greater than 10%, non-performing assets to total assets less than 3.0% and a
return on average assets of greater than 1% that Ryan Beck deemed comparable to
Reliable. Reliable's tangible equity to assets ratio of 20.12%, non-performing
assets to total assets of 1.98% and year-to-date (annualized) return on average
equity of 12.42% (7.88%, net of securities gains) were compared to the median
ratios for the selected thrifts described above. The median ratios were as
follows: tangible equity to assets: 14.46%; non-performing assets to total
assets: 0.35%; and year-to-date (annualized) return on average equity of 9.43%.
6
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Ryan Beck compared Reliable's December 31, 1993 total assets of $150 million,
tangible equity to total assets of 20.12%, year-to-date (annualized) return on
average assets of 2.51%, year-to-date (annualized) return on average equity of
12.42% and non-performing assets to total assets of 1.98% with medians of
selected thrifts that had announced acquisition transactions since January 1,
1993 that Ryan Beck deemed comparable. These medians included tangible equity
to total assets of 11.27%, year-to-date (annualized) return on average assets
of 1.53%, year-to-date (annualized) return on average equity of 13.76% and non-
performing assets to total assets of 0.14%. The comparable companies consisted
of 14 savings institutions having assets between $50 and $300 million with non-
performing assets less than 3.0%, return on average assets greater than 0.75%
and equity to assets greater than 10.0% which had announced acquisition
transactions since January 1, 1993. However, Ryan Beck did not assign greater
weight to any specific transaction.
Ryan Beck also calculated certain ratios based on the proposed transaction
price for the Reliable shares of $28.80 per share, or an aggregate of $40.7
million, and certain of Reliable's results for the quarter ended December 31,
1993. Those ratios included the proposed transaction price to Reliable's stated
book value: 133.50%; the proposed transaction price to Reliable's stated book
value: 133.50%; the proposed transaction price to Reliable's tangible book
value; 133.50%; the proposed transaction price to Reliable's earnings per
share: 11.8 times Reliable's latest twelve-month earnings (net of securities
gains); and the proposed transaction price premium over tangible book value as
a percentage of core deposits: 8.94%. Ryan Beck then compared these ratios to
the median ratios for the selected thrifts described above. The median ratios
were as follows: transaction price to stated book value: 135.37%; transaction
price to tangible book value: 135.37%; transaction price to earnings per share:
11.92 times and the proposed transaction price as a percentage of the premium
over tangible book value to core deposits: 5.64%. Ryan Beck also compared
Reliable's tangible equity to assets ratio of 20.12% to that of the selected
thrifts of 11.27% and then analyzed Reliable's adjusted tangible capital to
account for Reliable's excess capital over its comparable peer group and the
proposed transaction price premium to the resultant Reliable's adjusted
tangible capital.
Ryan Beck also compared FCFC's stock price multiple of 14.04 times earnings
and 198.02% of tangible book value, tangible capital as a percentage of assets
of 8.75% and non-performing assets plus accruing loans 90 days past due of
1.04% of total assets, with those for selected U.S. banks and bank holding
companies that Ryan Beck deemed to be comparable to FCFC. The comparable range
of stock prices was 7.71 to 53.98 times earnings and the median stock price was
11.65 times earnings. The comparable range of tangible book value to range of
stock prices was 96.1% to 248.0% and the median stock price to tangible book
value ratio was 154.76%. The median ratio of tangible capital as a percentage
of assets was 7.95% and the median ratio of non-performing assets plus accruing
loans 90 days past due to total assets was 0.67%. Ryan Beck compared FCFC's
return on average equity of 12.91% to the median return on average equity of
12.63%. Ryan Beck also compared other income, expense and balance sheet
information of such companies with similar information about FCFC. The selected
companies included 46 banks and bank holding companies with total assets
between $1 billion and $2 billion whose stock is traded on a national exchange
or quoted on NASDAQ.
No company or transaction used in this composite analysis is identical to
Reliable, FCFC or the Reliable Merger, and Ryan Beck did not assign greater
weight to any specific company or transaction. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather, it involves complex
considerations and judgment concerning differences in financial and operating
characteristics of the companies involved and other factors that could affect
the public trading values of the securities of the company or companies to
which they are being compared.
Discounted Cash Flow Analysis: Ryan Beck estimated the future earnings per
share and the future dividend stream that Reliable could produce over a five-
year period, assuming the satisfaction of minimum capital requirements and
growth rates of 5%, 10% and 15% in earnings per share. Ryan Beck also estimated
the terminal value of the Reliable Common Stock after the five-year period by
applying a range of 10 to 15 times Reliable's terminal year earnings. Using a
discounted cash flow analysis, the dividend streams and terminal values were
then discounted to present values using discount rates ranging from 8% to 20%,
which reflects different assumptions regarding the required rates of return of
holders and prospective buyers of
7
<PAGE>
Reliable Common Stock. The range of present values per fully diluted share of
Reliable Common Stock resulting from these assumptions was from $12.13 to
$40.97. The low end of this range was based upon assumptions of a 5% rate of
growth of earnings per share, an earnings per share multiple of 10 and a 20%
discount rate, while the high end of the range was based on a 15% growth rate,
a multiple of 15 times earnings per share and 8% discount rate.
In connection with its written Opinion dated as of June 29, 1994, Ryan Beck
confirmed the appropriateness of its reliance on the analyses used to render
its April 20, 1994 oral opinion by performing procedures to update certain of
such analyses and by reviewing the assumptions on which such analyses were
based and the factors considered in connection herewith.
RYAN BECK'S WRITTEN OPINION DATED AS OF JUNE 29, 1994 WAS BASED SOLELY UPON
THE INFORMATION AVAILABLE TO IT AND THE ECONOMIC, MARKET AND OTHER
CIRCUMSTANCES AS THEY EXISTED AS OF THE DATE OF SUCH OPINION, INCLUDING THE
MARKET PRICE OF FCFC COMMON STOCK. EVENTS OCCURRING AFTER THAT DATE, INCLUDING
A MATERIAL CHANGE IN THE MARKET PRICE OF FCFC COMMON STOCK, COULD MATERIALLY
AFFECT THE ASSUMPTIONS AND CONCLUSIONS CONTAINED IN THIS OPINION. RYAN BECK HAS
NOT UNDERTAKEN TO REAFFIRM OR REVISE ITS OPINION OR OTHERWISE COMMENT UPON ANY
EVENTS OCCURRING AFTER THE DATE THEREOF.
The summary set forth above does not purport to be a complete description,
but is a brief summary, of the material analyses and procedures performed by
Ryan Beck in the course of arriving at its opinions.
For Ryan Beck's services in connection with the Reliable Merger, Reliable
agreed to pay Ryan Beck a contingent cash fee equal to 1.00% of the aggregate
dollar value of the consideration received by the Reliable shareholders as of
the date of the Definitive Agreement. Accordingly, Ryan Beck's fee would be
approximately $406,000. This fee is payable 50% upon the execution of the
definitive agreement and 50% upon the closing of the Reliable Merger. In
addition, Reliable has agreed to reimburse Ryan Beck for its reasonable out-of-
pocket costs and expenses incurred in connection with the services rendered to
Reliable pursuant to its engagement, including the fees and expenses of its
legal counsel. Reliable has agreed to indemnify Ryan Beck against certain
liabilities, including liabilities under federal securities laws, incurred in
connection with its services. Reliable has paid Ryan Beck $203,279 of its fee
to date. The amount of all of Ryan Beck's fees were determined by negotiation
between Reliable and Ryan Beck.
Ryan Beck has been Reliable's financial advisor from time to time since 1992.
Ryan Beck has actively engaged in making a market in the Reliable Common Stock.
Ryan Beck has not had an investment banking relationship with FCFC or United
for the past three years, nor has it actively engaged in making a market in the
Common Stock of either FCFC or United. Ryan Beck's equity research department
compiles and publishes statistical data on Pennsylvania bank and thrift stocks,
including FCFC, United and Reliable but has not issued a research report or
produced on earnings estimate on FCFC, United or Reliable during the past three
years.
REQUIRED VOTE; MANAGEMENT RECOMMENDATION
Approval of the Plan of Reorganization by the shareholders of Reliable
requires the affirmative vote of the holders of a majority of the issued and
outstanding shares of Reliable Common Stock entitled to vote at the Special
Meeting. The Board of Directors of Reliable has carefully considered the Plan
of Reorganization and believes that the proposed Merger is in the best
interests of Reliable and its shareholders. Executive officers and directors of
Reliable hold, in the aggregate, approximately 114,394 shares of Reliable
Common Stock, constituting approximately 8.11% of all such shares outstanding.
ACCORDINGLY, THE BOARD OF DIRECTORS OF RELIABLE UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF RELIABLE VOTE TO APPROVE THE PLAN OF REORGANIZATION.
CONVERSION OF RELIABLE SHARES
On the Effective Date, each outstanding share of Reliable Common Stock will,
by virtue of the Merger and without any action on the part of the holder
thereof, be converted into 1.6 shares of FCFC Common Stock.
8
<PAGE>
Surrender and Exchange of Reliable Stock Certificates. As promptly as
practicable after the Effective Date, FCFC will send or cause to be sent to
each Reliable shareholder of record as of the close of business on the
Effective Date transmittal materials containing instructions on how to effect
the exchange of Reliable Common Stock certificates for certificates
representing shares of FCFC Common Stock. HOLDERS OF RELIABLE COMMON STOCK
CERTIFICATES SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE SUCH
TRANSMITTAL MATERIALS AND INSTRUCTIONS. However, certificates should be
surrendered promptly after instructions to do so are received.
Any dividends declared on FCFC Common Stock after the Effective Date will
apply to all whole shares of FCFC Common Stock into which shares of Reliable
Common Stock have been converted by virtue of the Merger. HOWEVER, NO FORMER
RELIABLE SHAREHOLDER WILL BE ENTITLED TO RECEIVE ANY SUCH DIVIDEND UNTIL SUCH
SHAREHOLDER'S RELIABLE COMMON STOCK CERTIFICATES HAVE BEEN SURRENDERED FOR
EXCHANGE AS PROVIDED IN THE LETTER OF TRANSMITTAL. Upon such surrender, the
former Reliable shareholder will be entitled to receive all such dividends
payable on the whole shares of FCFC Common Stock issuable in exchange for the
surrendered certificate or certificates (without interest thereon and less the
amount of taxes, if any, which may have been imposed or paid thereon).
NO INTEREST WILL ACCRUE OR BE PAYABLE IN RESPECT OF ANY CASH PAYABLE UPON
SURRENDER FOR EXCHANGE OF RELIABLE COMMON STOCK CERTIFICATES, AND NO SUCH CASH
WILL BE PAID TO ANY FORMER RELIABLE SHAREHOLDER UNTIL SUCH SHAREHOLDER'S
RELIABLE COMMON STOCK CERTIFICATES ARE SURRENDERED FOR EXCHANGE AS PROVIDED IN
THE LETTER OF TRANSMITTAL.
Payment for Fractional Shares. No fractional shares of FCFC Common Stock will
be issued in connection with the Merger. Instead, each Reliable shareholder who
surrenders for exchange Reliable Common Stock certificates which would
otherwise entitle such shareholder to receive a fraction of a share of FCFC
Common Stock will be entitled to receive, in addition to a certificate for the
whole shares of FCFC Common Stock to which such shareholder is entitled, cash
in an amount equal to such fractional part of a share multiplied by the value
of $19 for one whole share of FCFC Common Stock.
Unexchanged Certificates. On the Effective Date, the stock transfer books for
Reliable Common Stock will be closed, and no further transfers of Reliable
Common Stock will be made or recognized. Certificates for Reliable Common Stock
which are surrendered for exchange after the Effective Date will entitle the
holder only to receive, upon surrender as provided in the letter of
transmittal, a certificate for the number of shares of FCFC Common Stock into
which the shares represented by such Reliable Common Stock certificates were
converted by virtue of the Merger.
INTERESTS OF RELIABLE OFFICERS AND DIRECTORS
The officers and directors of Reliable will receive no benefits in connection
with the Merger, other than any benefits which may accrue generally to holders
of FCFC Common Stock and, in the case of officers, benefits which apply
generally to officers of FCFC, including FCFC's employee stock option plan. The
Plan of Reorganization provides that each outstanding option to purchase shares
of Reliable Common Stock will be converted into and given an option to purchase
FCFC Common Stock at the rate of 1.6 shares of FCFC Common Stock for each share
of Reliable Common Stock subject to the option. The employment agreement
between Stephen Grippi, President and Chief Executive Officer of Reliable, will
continue in effect between Mr. Grippi and Interim Reliable by operation of law
as a result of the Merger. Mr. Grippi's employment agreement contains an
expiration date of December 31, 1994.
CONVERSION OF RELIABLE STOCK OPTIONS
In connection with the Merger, FCFC will assume the outstanding stock options
covering 11,336 shares of Reliable Common Stock. After the effective date of
the Reliable Merger these options will be exercisable
9
<PAGE>
for FCFC Common Stock at the rate of 1.6 shares of FCFC Common Stock for each
share of Reliable Common Stock covered by the option, for an aggregate of
18,137 shares of FCFC Common Stock to be issued by FCFC if all the options are
exercised.
MANAGEMENT FOLLOWING THE MERGER
On the Effective Date, the Boards of Directors of Reliable and Reliable
Savings Bank will consist of all those persons who are, respectively, the
current Directors of these institutions, plus E. James Trimarchi, Chairman of
the Board, President and Chief Executive Officer of FCFC, and Joseph E. O'Dell,
Senior Executive Vice President and Chief Operating Officer of FCFC. At that
time, all officers and employees of Reliable and Reliable Savings Bank will
continue to hold the positions they held with these institutions prior to the
Effective Date.
Following the Merger, the Board of Directors of FCFC will remain unchanged.
Following the United Merger, the FCFC Board will be increased by one member to
include Robert C. Williams, who is Vice Chairman, President and Chief Executive
Officer of United.
CONDITIONS TO THE MERGER
In addition to approval by the shareholders of Reliable, the Merger is
contingent upon the satisfaction of a number of other conditions, including:
(i) approval of the Merger by the Pennsylvania Department of Banking; (ii)
approval of the Merger by the Office of Thrift Supervision ("OTS") and the
Board of Governors of The Federal Reserve System (the "Federal Reserve Board")
and the absence of any action or suit to enjoin or prohibit the Merger under
the antitrust laws filed by the United States within the 30-day period
following Federal Reserve Board approval; (iii) the continued effectiveness of
FCFC's registration statement filed with the Securities and Exchange Commission
(the "SEC") with respect to the shares of FCFC Common Stock issuable in
connection with the Merger; (iv) receipt of a favorable tax opinion described
below from the law firm of Reed Smith Shaw & McClay, special counsel to
Reliable and FCFC; (v) authorization of the shares of FCFC Common Stock
issuable to Reliable shareholders pursuant to the Merger for listing on the New
York Stock Exchange upon official notice of issuance; (vi) receipt by FCFC from
each of the affiliates of Reliable of an executed agreement referred to below
under "Restrictions on Resales of FCFC Common Stock by Reliable Affiliates";
(vii) receipt by FCFC of a favorable opinion from Jarrett * Stokes & Co.,
certified public accountants, that the Merger meets the requirements for
pooling of interests accounting treatment; and (viii) receipt by Reliable of a
favorable opinion from Ryan Beck, that the terms of the Merger are fair, from a
financial point of view, to Reliable and its shareholders. In addition, unless
waived, each party's obligation to consummate the Merger is subject to the
performance by the other party of its obligations under the Plan of
Reorganization, the accuracy of the representations and warranties of the other
party contained therein and the receipt of certain certificates and opinions
from the other party and its counsel.
REPRESENTATIONS AND WARRANTIES
The representations and warranties of FCFC and Reliable are set forth in
Sections 3 and 4, respectively, of the Agreement and Plan of Reorganization.
The representations and warranties relate to, among other things, the
organization and good standing of FCFC and Reliable; the capitalization of FCFC
and Reliable and ownership of their subsidiaries; the authorization by FCFC and
Reliable of the Plan of Reorganization and the absence of conflict with other
agreements; the accuracy of financial statements furnished to the other party;
the absence of undisclosed liabilities and the absence of material adverse
changes subsequent to December 31, 1993; payment of taxes and title to
properties; compliance with laws and the absence of undisclosed material
litigation; compliance by employee benefit plans with the terms thereof and
laws applicable thereto; and the accuracy of the information furnished by FCFC
and Reliable for inclusion in this Proxy Statement/Prospectus. Except for the
representations and warranties relating to the accuracy of the information
furnished by the parties for inclusion herein, none of the representations and
warranties contained in the Plan of Reorganization will survive the
consummation of the Merger.
10
<PAGE>
AMENDMENT, WAIVER AND TERMINATION
Subject to applicable law, at any time before the Effective Date, the Plan of
Reorganization may, by written instrument signed by an authorized officer of
FCFC and Reliable, be amended in any respect, except that after shareholder
approval no amendment may affect the rates of exchange of FCFC Common Stock for
Reliable Common Stock provided in the Plan of Reorganization, alter or change
any term of the certificate of incorporation of Interim Reliable to be effected
by the Merger, or alter or change any of the terms or conditions of the Plan of
Reorganization if such alteration or change would adversely affect the holder
of any class or series of Reliable or Interim Reliable. Any amendment to the
Plan of Reorganization which would materially adversely affect the rights of
Reliable shareholders would require further approval by the Reliable
shareholders. It is the current intention of FCFC and Reliable to seek such
further approval by the Reliable shareholders in the event that any material
changes are made to the Plan of Reorganization after initial shareholder
approval. FCFC or Reliable may also (i) extend the time for performance of any
of the obligations of the other; (ii) waive any inaccuracies in the
representations and warranties of the other; (iii) waive compliance by the
other with any of its covenants or agreements under the Plan of Reorganization
and the performance of any obligations contained therein; and (iv) waive any
condition precedent to its obligations under the Plan of Reorganization other
than shareholder approval of the Plan of Reorganization, governmental
regulatory approvals required to consummate the Merger, registration
requirements incident to the issuance of FCFC Common Stock and authorization of
the FCFC Common Stock for listing on the New York Stock Exchange.
The Plan of Reorganization may be terminated by the mutual written consent of
the Boards of Directors of FCFC and Reliable at any time prior to the Effective
Date without liability of any party, notwithstanding prior approval by the
shareholders of Reliable.
Notwithstanding prior shareholder approval, either FCFC or Reliable, by
written notice to the other, may terminate the Plan of Reorganization without
liability of any party in the event of failure to satisfy prior to June 30,
1995 any condition precedent to its obligation to consummate the Merger, if
such failure occurs despite the good faith effort of the terminating party to
perform all agreements and covenants and satisfy all conditions required of
such party.
NO DISSENTERS' RIGHTS OF RELIABLE SHAREHOLDERS
Under Section 262 of the Delaware General Corporation Law, the rights and
remedies of a dissenting shareholder are not available to a holder of Reliable
Common Stock who objects to the Merger.
CERTAIN TAX ASPECTS OF THE MERGER
FCFC and Reliable have received an opinion (summarized below) from their
special counsel, Reed Smith Shaw & McClay, addressing certain federal and
Pennsylvania tax aspects of the Merger. Such opinion is included as an exhibit
to the Registration Statement of which this Proxy Statement/Prospectus is a
part.
Federal Income Tax. FCFC and Reliable have been advised by Reed Smith Shaw &
McClay that, for federal income tax purposes, it is their opinion that:
(1) The Merger will constitute a reorganization under the provisions of
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986
(the "Code"); Reliable, Interim Reliable and FCFC will each be a party to
the reorganization within the meaning of Section 368(b) of the Code;
(2) No gain or loss will be recognized to Reliable, Interim Reliable or
FCFC as a result of the Merger;
(3) No gain or loss will be recognized to the Reliable shareholders upon
the exchange of their Reliable Common Stock for FCFC Common Stock
(including fractional share interests to which they may be entitled);
11
<PAGE>
(4) The basis of the FCFC Common Stock (including fractional share
interests to which they may be entitled) to be received by the Reliable
shareholders will be the same as the basis of the Reliable Common Stock
surrendered in exchange therefor;
(5) The holding period of the FCFC Common Stock (including fractional
share interests to which they may be entitled) to be received by the
Reliable shareholders will include the holding period of the Reliable
Common Stock surrendered in exchange therefor, provided that the Reliable
Common Stock was held as a capital asset in the hands of the Reliable
shareholders on the date of the exchange; and
(6) The payment of cash in lieu of fractional share interests of FCFC
Common Stock will be treated as if the fractional shares were distributed
as part of the exchange and then were redeemed by FCFC; these cash payments
will be treated as having been received in full payment in exchange for the
share redeemed as provided in Section 302(a) of the Code.
Pennsylvania Personal Income Tax. Reliable and FCFC have been advised by Reed
Smith Shaw & McClay that, for Pennsylvania Personal Income Tax purposes, it is
their opinion that no gain or loss will be recognized to the Reliable
shareholders who are subject to the Pennsylvania Personal Income Tax upon the
receipt by them of FCFC Common Stock (including fractional share interests to
which they may be entitled) in exchange for their Reliable Common Stock, and
that the state tax basis for the FCFC Common Stock (including fractional share
interests to which they may be entitled) to be received by the Reliable
shareholders will be the same as the state tax basis of the Reliable Common
Stock surrendered in exchange therefor. Cash received in lieu of a fractional
share of FCFC Common Stock by a Reliable shareholder who is subject to the
Pennsylvania Personal Income Tax will be treated as if the fractional share had
actually been received by the Reliable shareholder and then immediately sold by
him to FCFC for the cash received and taxed accordingly.
Pennsylvania Personal Property Tax. Reliable and FCFC have been advised by
Reed Smith Shaw & McClay that, it is their opinion that the shares of FCFC
Common Stock to be received by the Reliable shareholders are exempt from the
Pennsylvania county personal property tax.
The foregoing opinions cover only certain federal, Pennsylvania and local
Pennsylvania tax aspects and are based upon existing law and regulations, as
presently interpreted by judicial decisions and administrative rulings, all of
which are subject to change without notice and any such change might be applied
retroactively to the transactions contemplated by the Merger. Among other
things, the foregoing opinions do not address the federal or state income tax
considerations that may affect the treatment of a shareholder who acquired his
Reliable Common Stock pursuant to an employee or nonemployee stock option.
Accordingly, each Reliable shareholder should consult his personal tax advisor
with specific reference to his own tax situation and potential changes in the
applicable law as to all federal, state and local tax matters in connection
with the Merger.
ACCOUNTING TREATMENT
The Merger is expected to qualify as a "pooling of interests" for accounting
and financial reporting purposes. Under this method of accounting, the recorded
assets and liabilities of FCFC and Reliable will be carried forward to the
combined corporation at their recorded amounts; income of the combined
corporation will include income of FCFC and Reliable for the entire fiscal year
in which the combination occurs; and the reported income of the separate
corporations for prior periods will be combined and restated as income of the
combined corporation.
The Plan of Reorganization provides that a condition to the consummation of
the Merger is the receipt of an opinion from FCFC's auditors to the effect that
the Merger qualifies for "pooling of interest" accounting treatment. In the
event such condition is not met, the Merger would not be consummated unless the
condition were waived and the approval of those shareholders entitled to vote
on the Merger was resolicited.
12
<PAGE>
RESTRICTIONS ON RESALES OF FCFC COMMON STOCK BY RELIABLE AFFILIATES
The shares of FCFC Common Stock to be issued in the Merger have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
but this registration does not cover resales by shareholders of Reliable who
may be deemed to control or be under common control with Reliable and who
therefore may be deemed "affiliates" of Reliable as that term is used in Rule
145 promulgated under the Securities Act. Such affiliates may not sell their
shares of FCFC Common Stock acquired in the Merger except pursuant to: (i) an
effective registration statement under the Securities Act covering the shares
to be sold; (ii) the conditions contemplated by Rules 144 and 145 promulgated
under the Securities Act; or (iii) another applicable exemption from the
registration requirements of the Securities Act. The management of Reliable
will notify those persons whom it believes may be such affiliates.
The Plan of Reorganization requires as a condition to the obligation of FCFC
to consummate the Merger that each such Reliable affiliate enter into an
agreement with FCFC not to sell, assign, pledge, transfer or otherwise dispose
of any of his Reliable Common Stock or any of the shares of FCFC Common Stock
acquired by such affiliate in the Merger except (i) in accordance with the
requirements of the Securities Act and the regulations promulgated thereunder
and (ii) in order to permit the Merger to be accounted for as a pooling of
interests, during the period 30 days prior to the Effective Date and thereafter
until FCFC has published the financial results of at least 30 days of combined
operations of FCFC and Reliable, at such times and in such quantities as are
prescribed in Section 201.01 of the SEC's Codification of Financial Reporting
Policies and Staff Accounting Bulletin Nos. 65 and 76. See "Conditions to the
Merger."
EXPENSES
Each of FCFC and Reliable shall bear its own expenses incurred in connection
with the Plan of Reorganization and all related transactions, including the
fees of its accountants, regular attorneys and investment advisors. The fees
and expenses of Reed Smith Shaw & McClay, special counsel to FCFC and Reliable,
will be borne equally by FCFC and Reliable, except that such fees and expenses
related to the regulatory approvals referred to above under "Conditions to the
Merger" will be borne by FCFC.
EFFECTIVE DATE OF THE MERGER
It is presently anticipated that if the Plan of Reorganization is approved by
the shareholders of Reliable, the Merger will become effective on or before
September 30, 1994. However, consummation of the Merger is subject to the
receipt of certain required regulatory approvals and to the expiration of the
required 30-day waiting period following the date of the approval by the
Federal Reserve Board, during which period no action to prohibit the Merger
shall have been initiated by the United States. There can be no assurance that
all required regulatory approvals will be received or that, if received, such
approvals will be received in time to permit the Merger to become effective on
the anticipated Effective Date. In addition, as also noted above, the Merger is
subject to the satisfaction of certain other conditions, some of which may not
be waived, and FCFC and Reliable retain the power to abandon the Merger or to
extend the time for performance of conditions or obligations necessary to its
consummation, notwithstanding prior shareholder approval of the Plan of
Reorganization.
UNITED NATIONAL BANCORPORATION MERGER
FCFC has signed an Agreement and Plan of Reorganization, and a related Plan
of Merger (collectively, the "United Plan of Reorganization"), dated as of
March 25, 1994 with United National Bancorporation ("United"), a Pennsylvania
business corporation and a bank holding company for Unitas National Bank, a
national banking association ("Unitas Bank"), with its principal place of
business in Chambersburg, Pennsylvania. The United Plan of Reorganization
provides for the merger of United into FCFC (the "United Merger"). On the
effective date of the United Merger, each share of United Common Stock will be
converted into 2 shares of FCFC Common Stock for an aggregate of 1,538,294
shares of FCFC Common Stock to be issued in the United Merger. In connection
with the United Merger, FCFC will assume the outstanding stock
13
<PAGE>
options covering 49,643 shares of United Common Stock. After the effective date
of the United Merger these options will be exercisable for FCFC Common Stock at
the rate of 2 shares of FCFC Common Stock for each share of United Common Stock
covered by the option, for an aggregate of 99,286 shares of FCFC Common Stock
to be issued by FCFC if all the options are exercised. See the United
Consolidated Financial Statements and the notes thereto appearing elsewhere in
this Proxy Statement/Prospectus.
United's subsidiary, Unitas Bank, conducts its business through 12 community
banking offices in 11 communities in the counties of Adams (1 office), Bedford
(1), Centre (2), Franklin (2) and Huntingdon (6). See "Information Concerning
United." At March 31, 1994, United reported total consolidated assets of
approximately $145,522,000. It is contemplated that the United Merger and the
Reliable Merger will be consummated at the same time if all required regulatory
approvals have been received and all conditions precedent have been satisfied;
however, the United Merger and the Reliable Merger are separate and independent
transactions. The information presented in this Proxy Statement/Prospectus
concerning United is intended only to provide the holders of Reliable Common
Stock an understanding of United and the United Merger. The holders of Reliable
Common Stock have no rights to approve or reject the consummation of the United
Merger. The consummation of the Reliable Merger is not a condition precedent to
the United Merger, and the consummation of the United Merger is not a condition
precedent to the Reliable Merger. It is contemplated that each Merger will be
consummated as soon as its conditions precedent have been satisfied. On June
17, 1994, FCFC filed a registration statement on Form S-4 with the SEC at No.
33-54193, containing a Proxy Statement/Prospectus for the shareholders meeting
to be held by United to consider and act upon the FCFC Merger and for the
shares of FCFC Common Stock to be issued in the United Merger.
14
<PAGE>
COMPARATIVE AND PRO FORMA COMBINED FINANCIAL INFORMATION
Comparative Stock Prices and Dividends
STOCK PRICES
FCFC Common Stock has been listed on the New York Stock Exchange ("NYSE")
since June 10, 1992 under the symbol "FCF". FCFC Common Stock before that time
was not listed on any national securities exchange but was traded to a limited
extent in private trades and in the over-the-counter market. Reliable Common
Stock has been listed on the Nasdaq National Market System since March 30, 1992
under the symbol "RESB". Before that time Reliable was not a stock company. The
following table sets forth, for the periods indicated, the high and low sales
prices per share of the FCFC Common Stock on the NYSE Composite Transactions
Tape, the high and low sales prices per share of transactions known to FCFC
management for FCFC Common Stock before June 10, 1992 and the high and low
sales prices per share of the Reliable Common Stock as reported by the Nasdaq
Stock Market. Prices per share for FCFC Common Stock have been adjusted to
reflect the two-for-one stock split effected in the form of a 100% stock
distribution on the FCFC Common Stock declared on January 18, 1994.
<TABLE>
<CAPTION>
FCFC RELIABLE
COMMON STOCK COMMON STOCK
--------------- ---------------
1992 HIGH LOW HIGH LOW
- ---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
January through March........................... $10.500 $10.000 $14.500 $13.000
April through June.............................. 12.250 10.250 17.500 13.750
July through September.......................... 14.875 12.000 17.750 15.750
October through December........................ 15.688 13.688 20.250 16.750
</TABLE>
<TABLE>
<CAPTION>
1993
- ----
<S> <C> <C> <C> <C>
January through March........................... 14.625 12.375 22.000 19.000
April through June.............................. 14.875 13.250 24.750 20.500
July through September.......................... 16.000 13.313 32.250 23.250
October through December........................ 17.625 14.875 30.000 26.500
</TABLE>
<TABLE>
<CAPTION>
1994
- ----
<S> <C> <C> <C> <C>
January through March........................... 20.250 16.750 29.000 24.000
April through June.............................. 18.500 15.500 27.250 23.000
July through August 5........................... 19.000 16.875 29.000 25.500
</TABLE>
The prices contained in the table for FCFC Common Stock for the periods
before June 10, 1992 are limited to transactions known by FCFC's management,
including inquiries made of local brokers, and are not necessarily indicative
of the actual range of prices at which such stock was traded during the periods
indicated. FCFC's Common Stock (before June 10, 1992) was traded from time to
time by securities brokers, but management is not aware that bid and asked
quotations were reported nationally or in newspapers of local circulation.
The last reported sale price of FCFC Common Stock on the NYSE Composite
Transactions Tape on March 11, 1994, the last trading day before announcement
of the Merger, was $17.75, and the last reported sale price of Reliable Common
Stock by the Nasdaq Stock Market on the same date was $26.50. As of August 5,
1994, the last reported sale price of FCFC Common Stock was $17.58 and the last
reported sale price of Reliable Common Stock was $28.00.
On July 28, 1994, the Securities and Exchange Commission ("SEC") informed
Reliable that it had received a referral from the National Association of
Securities Dealers, Inc., Market Surveillance Department, concerning trading
activity in the Reliable Common Stock during the period surrounding Reliable's
announcement on August 27, 1993 that it had resolved to explore all
opportunities available to
15
<PAGE>
enhance shareholder value, including possible merger and acquisition. Reliable
was first contacted by the National Association of Securities Dealers, Inc.,
Market Surveillance Department, on September 13, 1993 regarding this matter. At
this time Reliable has not been notified by the SEC as to the scope of its
inquiry.
DIVIDENDS
The following table sets forth, for the periods indicated, the quarterly cash
dividends per share declared on FCFC Common Stock and Reliable Common Stock.
During the second quarter of 1992, the Board of Directors of FCFC began the
practice of declaring dividends at the end of the quarter instead of at the
beginning of the quarter. The payable dates continued to be in the period
following the end of the quarter. This resulted in FCFC dividends being
declared twice in the second quarter of 1992, but only one dividend was paid
per quarter. Dividends per share of FCFC Common Stock have been adjusted to
reflect the two-for-one stock split on January 18, 1994.
<TABLE>
<CAPTION>
FCFC RELIABLE
COMMON STOCK COMMON STOCK
------------ ------------
<S> <C> <C>
1992
----
January through March................................. $.105 N/A
April through June.................................... .210 $.150
July through September................................ .105 .200
October through December.............................. .125 .250
1993
----
January through March................................. .125 .250
April through June.................................... .125 .300
July through September................................ .125 .350
October through December.............................. .135 .400
1994
----
January through March................................. .140 .400
April through June.................................... .140 .400
July through August 5................................. -- --
</TABLE>
FCFC and Reliable have agreed in the Plan of Reorganization that, pending
consummation of the Merger, Reliable will not declare, pay or set aside a
dividend or other distribution in respect to its capital stock other than cash
dividends declared prior to the date of the Agreement and regular quarterly
cash dividends declared, each in an amount no greater than $.40 per share and
each having both a record date and payment date the same as the regular
quarterly cash dividend of FCFC.
CERTAIN INFORMATION ABOUT THE PRO FORMA COMBINED FINANCIAL DATA
On March 25, 1994, FCFC announced the proposed merger with United. Under the
terms of the Agreement and Plan of Reorganization with United, the holders of
769,147 shares of United Common Stock will receive 2 shares of FCFC Common
Stock for each share of United Common Stock. On April 21, 1994 the Corporation
entered into a definitive agreement to merge with Reliable. Under the terms of
the Agreement and Plan of Reorganization with Reliable, the holders of
1,410,194 shares of Reliable Common Stock will receive 1.6 shares of FCFC
Common Stock for each share of Reliable Common Stock. The Plan of
Reorganization with United also requires that the number of shares of United,
if any, as to which the holders may exercise their rights as dissenting
shareholders shall not be greater than 9% of the United Common Stock
outstanding. The Reliable shareholders do not have dissenters' rights.
The proposed United Merger is a separate and independent transaction from the
proposed Reliable Merger. The consummation of either Merger is not a condition
precedent to the consummation of the other Merger.
16
<PAGE>
The following pro forma combined financial statements and data assume that
none of the holders of the outstanding Common Stock of United exercise
dissenters' rights. The United Merger and the Reliable Merger will be accounted
for as poolings of interests and, accordingly, all financial statements will be
restated as though the companies had been combined as of the beginning of each
period presented. Per share data for FCFC in the following pro forma combined
financial statements and data has been adjusted to reflect the two-for-one
stock split effected in the form of a 100% stock distribution on the FCFC
Common Stock declared on January 18, 1994. Per share data for United in the
following pro forma combined financial statements and data has been adjusted to
reflect 10% stock dividends declared on November 13, 1991, November 18, 1992
and November 17, 1993.
These pro forma statements are presented for informational purposes only and
should not be construed to be indicative of actual financial position and
results of operations after the Mergers.
17
<PAGE>
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table sets forth certain historical per share financial
information for FCFC Common Stock, United Common Stock and Reliable Common
Stock and pro forma per share financial information for FCFC, United and
Reliable combined and for FCFC and Reliable combined. Net income per share and
dividends per share information combines historical information for the six
months ended June 30, 1994 and each of the five years ended December 31, 1993
for FCFC and United with the six months ended June 30, 1994 and each of the
five years ended September 30, 1993 for Reliable as if the Mergers had been
effective on January 1, 1989. Book values per share combines the historical
book values of FCFC, United and Reliable as if the Mergers had become
effective June 30, 1994. The calculations are based on the average number of
shares outstanding. Net income per common share and pro forma net income per
common share were calculated before the cumulative effect of accounting
changes. The pro forma information is presented for informational purposes
only and should not be construed as being indicative of the actual financial
position, results of operations and dividends subsequent to the Mergers. See
"Certain Information About the Pro Forma Combined Financial Data."
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------- ----------------------------
1994 1993 1993 1992 1991 1990 1989
------- ------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Per Share:
Historical:
Net income per FCFC share...... $ 0.57 $0.62 $ 1.22 $1.14 $0.94 $0.85 $0.76
Net income per Reliable
share (a)...................... 1.10 1.19 2.21 1.61 -- -- --
Pro Forma Combined FCFC and
Reliable per FCFC share (b).... 0.59 0.63 1.24 1.12 0.91 0.80 0.73
Pro Forma Combined FCFC and
Reliable per 1.6 FCFC
shares (b)..................... 0.94 1.01 1.98 1.79 1.46 1.28 1.17
Pro Forma Combined FCFC, United
and Reliable per FCFC
share (b)...................... 0.61 0.63 1.23 1.11 0.89 0.79 0.70
Pro Forma Combined FCFC, United
and Reliable per 1.6 FCFC
shares (b)..................... 0.98 1.01 1.97 1.78 1.42 1.26 1.12
Dividends Per Share:
Historical:
Dividends per FCFC share....... $ 0.28 $0.25 $0.51 $0.55 $0.38 $0.33 $0.30
Pro forma dividends per 1.6
FCFC shares.................... 0.45 0.40 0.82 0.88 0.61 0.53 0.48
Dividends per Reliable
share (a)...................... 0.80 0.55 1.15 0.35 -- -- --
Book Value Per Share:
Historical:
Book value per FCFC share...... $ 9.73 $10.00
Book value per Reliable share.. 21.78 21.31
Pro Forma Combined FCFC and
Reliable per FCFC share (b).... 10.15 10.37
Pro Forma Combined FCFC and
Reliable per 1.6 FCFC
shares (b)..................... 16.24 16.59
Pro Forma Combined FCFC, United
and Reliable per FCFC
share (b)...................... 10.02 10.21
Pro Forma Combined FCFC, United
and Reliable per 1.6 FCFC
shares (b)..................... 16.03 16.34
</TABLE>
- --------
(a) Reliable was not a stock company until March 30, 1992 when it changed from
a mutual association. Reliable began paying quarterly cash dividends
subsequent to the completion of the first full quarter ended June 30,
1992.
(b) Pro Forma data is derived from the Pro Forma combined financial statements
which follow. Pro Forma data include the historical financial information
for FCFC, United and Reliable. For comparison purposes, the number of
shares issued at Reliable's stock conversion date was used as the average
number of shares outstanding for Reliable for periods prior to March 30,
1992.
18
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(FCFC, UNITED AND RELIABLE)
JUNE 30,
1994 (UNAUDITED)
The following unaudited Pro Forma Combined Balance Sheet combines the
historical balance sheets of FCFC, United and Reliable as if the Mergers had
become effective on June 30, 1994. This balance sheet should be read in
conjunction with the First Commonwealth Financial Corporation Consolidated
Financial Statements, the United National Bancorporation Consolidated Financial
Statements and the Reliable Financial Corporation Consolidated Financial
Statements and the notes thereto appearing elsewhere in this Proxy
Statement/Prospectus. See "Certain Information About the Pro Forma Combined
Financial Data."
The proposed Merger between FCFC and United is a separate and independent
transaction from the proposed Merger between FCFC and Reliable. The
consummation of the Reliable Merger is not a condition precedent to the United
Merger, and the consummation of the United Merger is not a condition precedent
to the Reliable Merger.
<TABLE>
<CAPTION>
HISTORICAL
------------------------------
PRO FORMA
FCFC UNITED RELIABLE ADJUSTMENTS COMBINED
---------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks................. $ 50,766 $ 3,937 $ 748 $ 55,451
Investment securities.. 805,925 19,492 45,000 870,417
Money market
investments........... 397 1,454 15,530 17,381
Loans, net............. 1,057,637 118,008 86,718 1,262,363
Premises and
equipment............. 22,248 2,545 2,456 27,249
Other assets........... 44,024 2,538 903 47,465
---------- -------- -------- ----------- ----------
Total assets......... $1,980,997 $147,974 $151,355 $ -0- $2,280,326
========== ======== ======== =========== ==========
LIABILITIES
Deposits............... $1,621,015 $133,069 $116,415 $1,870,499
Short-term borrowings.. 157,020 673 -0- 157,693
Other liabilities...... 13,892 1,639 4,223 19,754
Long-term debt......... 7,639 -0- -0- 7,639
---------- -------- -------- ----------
Total liabilities.... 1,799,566 135,381 120,638 2,055,585
SHAREHOLDERS' EQUITY
Common stock........... 18,642 1,923 15 (a) (1,938) 22,437
(a) 3,795
Additional paid-in
capital............... 74,556 4,115 13,657 (a)(17,772) 90,471
(a) 15,915
Retained earnings...... 101,492 6,780 18,043 (a) (998) 125,317
Treasury stock......... -0- -0- (998) (a) 998 -0-
Unrealized gain (loss)
on securities
available for sale.... (8,527) (225) -0- (8,752)
Deferred compensation.. (4,732) -0- -0- (4,732)
---------- -------- -------- ----------
Total shareholders'
equity.............. 181,431 12,593 30,717 224,741
---------- -------- -------- ----------- ----------
Total liabilities
and shareholders'
equity.............. $1,980,997 $147,974 $151,355 $ -0- $2,280,326
========== ======== ======== =========== ==========
Book value per common
share................. $9.73 $16.37 $21.78 $10.02
</TABLE>
- --------
(a) Reflects issuance of 1,538,294 shares of FCFC Common Stock for 769,147
shares of United Common Stock, and 2,256,310 shares of FCFC Common Stock
for 1,410,194 shares of Reliable Common Stock.
19
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (FCFC, UNITED AND RELIABLE)
(UNAUDITED)
The following unaudited Pro Forma Combined Condensed Statements of Income for
the six months ended June 30, 1994, and the years ended December 31, 1993, 1992
and 1991 for FCFC and United, and the six months ended June 30, 1994 and the
years ended September 30, 1993, 1992 and 1991 for Reliable combine the
historical statements of income of FCFC, United and Reliable as if the Mergers
had become effective on January 1, 1991 as described in "Certain Information
About the Pro Forma Combined Financial Data." Pro forma net income and net
income per share were calculated before the cumulative effect of accounting
changes. These income statements should be read in conjunction with the First
Commonwealth Financial Corporation Consolidated Financial Statements, the
United National Bancorporation Consolidated Financial Statements, the Reliable
Financial Corporation Consolidated Financial Statements and the related notes
thereto appearing elsewhere in this Proxy Statement/Prospectus.
The proposed Merger between FCFC and United is a separate and independent
transaction from the proposed Merger between FCFC and Reliable. The
consummation of the Reliable Merger is not a condition precedent to the United
Merger, and the consummation of the United Merger is not a condition precedent
to the Reliable Merger.
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER 31,
ENDED --------------------------------
JUNE 30, 1994 1993 1992 1991
------------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans..... $51,875 $106,079 $105,971 $103,232
Interest and dividends on
investment securities......... 24,979 48,360 47,164 41,337
Interest on money market
securities.................... 62 761 2,710 5,942
------- -------- -------- --------
Total interest income......... 76,916 155,200 155,845 150,511
------- -------- -------- --------
Interest expense
Interest on deposits........... 29,604 63,192 71,706 80,400
Interest on short-term
borrowings.................... 3,234 3,639 1,753 1,570
Interest on long-term debt..... 236 456 454 456
------- -------- -------- --------
Total interest expense........ 33,074 67,287 73,913 82,426
------- -------- -------- --------
Net interest income........... 43,842 87,913 81,932 68,085
Provision for possible loan
losses........................ 1,410 2,920 3,744 5,401
------- -------- -------- --------
Net interest income after
provision for possible loan
losses....................... 42,432 84,993 78,188 62,684
Net security gains............. 1,800 3,528 955 711
Other income................... 5,484 10,972 9,410 7,497
Other expenses................. 30,302 59,367 54,958 46,050
------- -------- -------- --------
Income before taxes........... 19,414 40,126 33,595 24,842
Applicable income taxes........ 6,412 12,461 9,246 6,243
------- -------- -------- --------
Net income.................... $13,002 $ 27,665 $ 24,349 $ 18,599
======= ======== ======== ========
Average common shares
outstanding.................... 21,410,953 22,461,272 21,978,270 20,899,175
Net income per share............ $0.61 $1.23 $1.11 $0.89
</TABLE>
20
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(FCFC AND RELIABLE)
(UNAUDITED)
The following unaudited Pro Forma Combined Condensed Statements of Income for
the six months ended June 30, 1994, and the years ended December 31, 1993, 1992
and 1991 for FCFC and the six months ended June 30, 1994 and the years ended
September 30, 1993, 1992 and 1991 for Reliable combine the historical
statements of income of FCFC and Reliable as if the Merger had become effective
on January 1, 1991 as described in "Certain Information About the Pro Forma
Combined Financial Data." Pro forma net income and net income per share were
calculated before the cumulative effect of accounting changes. These income
statements should be read in conjunction with the First Commonwealth Financial
Corporation Consolidated Financial Statements, the Reliable Financial
Corporation Consolidated Financial Statements and the related notes thereto
appearing elsewhere in this Proxy Statement/Prospectus.
The proposed Merger between FCFC and Reliable is a separate and independent
transaction from the proposed Merger between FCFC and United. The consummation
of the United Merger is not a condition precedent to the Reliable Merger, and
the consummation of the Reliable Merger is not a condition precedent to the
United Merger.
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER 31,
ENDED --------------------------------
JUNE 30, 1994 1993 1992 1991
------------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans..... $46,629 $ 95,133 $ 95,149 $ 92,607
Interest and dividends on
investment securities......... 24,400 46,759 45,750 40,007
Interest on money market
securities.................... 39 691 2,494 5,600
------- -------- -------- --------
Total interest income......... 71,068 142,583 143,393 138,214
------- -------- -------- --------
Interest expense
Interest on deposits........... 27,614 58,541 66,053 73,396
Interest on short-term
borrowings.................... 3,234 3,496 1,723 1,569
Interest on long-term debt..... 236 456 454 456
------- -------- -------- --------
Total interest expense........ 31,084 62,493 68,230 75,421
------- -------- -------- --------
Net interest income........... 39,984 80,090 75,163 62,793
Provision for possible loan
losses........................ 1,212 2,447 3,419 5,101
------- -------- -------- --------
Net interest income after
provision for possible
loan losses.................. 38,772 77,643 71,744 57,692
Net security gains............. 1,781 3,466 940 677
Other income................... 5,188 10,158 8,897 7,014
Other expenses................. 27,409 53,819 50,045 41,790
------- -------- -------- --------
Income before taxes........... 18,332 37,448 31,536 23,593
Applicable income taxes........ 6,066 11,603 8,605 5,897
------- -------- -------- --------
Net income.................... $12,266 $ 25,845 $ 22,931 $ 17,696
======= ======== ======== ========
Average common shares
outstanding..................... 20,905,478 20,922,978 20,439,976 19,360,881
Net income per share............ $0.59 $1.24 $1.12 $0.91
</TABLE>
21
<PAGE>
INFORMATION CONCERNING FCFC
BUSINESS AND PROPERTIES OF FCFC
FCFC was incorporated as a Pennsylvania business corporation on November 15,
1982 and is registered as a bank holding company under the Bank Holding Company
Act of 1956, as amended. After its incorporation it became affiliated as a
result of statutory mergers with the following banks, all of which are now
wholly-owned subsidiaries of FCFC with their principal places of business in
central western Pennsylvania (the "Subsidiary Banks"). On April 29, 1983, FCFC
became affiliated with National Bank of the Commonwealth ("NBOC"), a national
bank in Indiana, Indiana County; on March 19, 1984, with Deposit Bank
("Deposit"), a Pennsylvania-chartered bank and trust company in DuBois,
Clearfield County; on August 16, 1985, with Dale National Bank, now called
Cenwest National Bank ("Cenwest"), a national bank in Johnstown, Cambria
County; on December 14, 1985 with First National Bank of Leechburg
("Leechburg"), a national bank in Leechburg, Armstrong County; on May 31, 1990
with Peoples Bank and Trust Company ("PBTC"), a Pennsylvania-chartered bank and
trust company in Jennerstown, Somerset County; on April 30, 1992 with Central
Bank ("Central") a Pennsylvania-chartered bank and trust company in
Hollidaysburg, Cambria County; and on December 31, 1993 with Peoples Bank of
Western Pennsylvania ("Peoples"), a Pennsylvania-chartered bank in New Castle,
Lawrence County. On December 31, 1986, FCFC merged with CNB CORP, INC. ("CNB"),
a bank holding company with its principal office in Windber, Somerset County.
CNB had one subsidiary, Citizens National Bank ("Citizens"), which was also
located in Windber. On December 31, 1986, FCFC affiliated with Citizens by
merging it directly into Cenwest. Commonwealth Systems Corporation ("CSC") was
incorporated as a Pennsylvania business corporation in 1984 by FCFC to function
as its data processing subsidiary and has its principal place of business in
Indiana, Pennsylvania. Before August 1984, CSC had operated as the data
processing department of NBOC. First Commonwealth Trust Company ("FCTC") was
incorporated as a Pennsylvania trust company on January 18, 1991 to render
general trust services and has its principal place of business in Indiana,
Pennsylvania. Commonwealth Trust Credit Life Insurance Company ("Commonwealth
Trust") was incorporated as an Arizona insurance corporation on March 27, 1989
to function as a credit life and credit accident and health reinsurer. FCFC and
its subsidiaries currently employ approximately 906 persons (full-time
equivalents).
Through its Subsidiary Banks, FCFC traces its banking origins to 1880. The
Subsidiary Banks conduct their business through 70 banking offices (including
one that is approved and under construction) in 52 Pennsylvania communities in
the counties of Armstrong (3 offices), Beaver (1), Bedford (3), Blair (8),
Cambria (11), Centre (2), Clearfield (6), Elk (3), Huntingdon (1), Indiana (9),
Jefferson (4), Lawrence (7), Somerset (7) and Westmoreland (5).
The Subsidiary Banks engage in a general banking business and offer a full
range of financial services. They offer such general retail banking services as
demand, savings and time deposits; commercial, mortgage and consumer
installment loans; and credit card operations through MasterCard and VISA.
The Subsidiary Banks operate a network of 49 automated teller machines
("ATMs") which permit their customers to conduct routine banking transactions
24 hours a day. Of these ATMs, 29 are located on the premises of the main or
branch offices of the Subsidiary Banks and 20 are in remote locations. All of
the ATMs are part of the MAC network, which consists of over 14,000 ATMs owned
by numerous banks, savings and loan associations and credit unions located in
16 states, of which 14 are east of the Mississippi River. The Subsidiary Banks'
MAC customers may use the HONOR Network, which has 9,800 ATMs located primarily
in the southeastern quadrant of the United States. The ATMs operated by the
Subsidiary Banks are also part of the global MasterCard/Cirrus ATM Network
which is comprised of more than 168,900 ATMs located in the United States,
Canada and 58 other countries and territories, and which services over 365
million cards. Such networks allow the Subsidiary Banks' customers to withdraw
cash and, in certain cases, conduct other banking transactions using ATMs of
all participating financial institutions.
22
<PAGE>
Each of the Subsidiary Banks faces intense competition, both from within and
without its service area, in all aspects of its business. The Subsidiary Banks
compete with numerous other commercial banks and savings banks doing business
within their service areas for deposits, in such forms as checking, savings and
NOW (negotiable order of withdrawal) accounts and certificates of deposit, and
in making consumer loans and loans to smaller businesses. With respect to loans
to larger businesses, the Subsidiary Banks also compete with much larger banks
located outside of their service areas. They also compete, primarily in making
consumer loans and for deposits, with state and federally chartered savings and
loan associations and with credit unions. In recent years the Subsidiary Banks
have encountered significant competition for deposits from money market funds
located throughout the United States. Such funds pay dividends (which are the
equivalent of the interest paid by banks on deposits) to their shareholders and
are able to offer services and conveniences similar to those offered by the
Subsidiary Banks. The effect of such competition has been to increase the cost
to the Subsidiary Banks 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, as well
as with national credit card companies such as MasterCard and VISA, whose
cards, issued through financial institutions, are held by consumers throughout
their service areas. The Subsidiary Banks believe that the principal means by
which they compete for deposits and consumer and smaller commercial loans are
the number and desirability of the locations of their offices and ATMs, the
sophistication and quality of their services and the prices (primarily interest
rates) of their services.
CSC is the data processing subsidiary of FCFC. It provides on-line general
ledger accounting services and bookkeeping services for deposit and loan
accounts to FCFC, the Subsidiary Banks and two other bank customers located in
Pennsylvania. CSC is able to compete, 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 was incorporated on January 18, 1991 to
acquire the trust business formerly conducted by the Subsidiary Banks. It is
headquartered in Indiana, Pennsylvania and has six branch offices in the
service areas of the Subsidiary Banks. It commenced operations on January 28,
1991 and has operated profitably since its formation. First Commonwealth Trust
Company 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.
Commonwealth Trust is 50% owned by FCFC, with the remaining 50% owned by
another bank holding company based in Indiana, Pennsylvania. Commonwealth Trust
provides reinsurance for credit life and credit accident and health insurance
sold by the subsidiary banks of the two holding companies under a joint venture
arrangement whereby the net income derived from such reinsurance inures
proportionally to the benefit of the holding company selling the underlying
insurance to its banks' customers. Commonwealth Trust has been profitable since
its formation.
FCFC does not engage in any significant business activities other than
holding the stock of its subsidiaries. FCFC 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 will consider other
mergers and acquisitions and may actively seek out such mergers and
acquisitions in the event opportunities which management considers advantageous
to the development of FCFC'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.
FCFC'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. FCFC, NBOC and CSC occupy this
grand structure, which provides 32,000 square feet of floor space, under a 25-
year restoration lease agreement with Indiana County, which NBOC entered into
in 1973 and which
23
<PAGE>
contains a 25-year renewal option. Under the lease, NBOC is obligated to pay
all taxes, maintenance and insurance on the building and to restore it in
conformity with historic guidelines. The building is now in excellent condition
and provides space for the operations of FCFC, NBOC and CSC. The Subsidiary
Banks have 70 banking facilities (including one under construction), of which
23 are leased and 47 are owned in fee, free of all liens and encumbrances. All
of the facilities utilized by FCFC 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 FCFC and its
subsidiaries for the immediate future.
24
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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 appearing elsewhere in this
Proxy Statement/Prospectus. All amounts have been restated to reflect the
pooling of interests.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on
loans................. $ 43,312 $ 43,364 $ 86,121 $ 84,612 $ 81,357 $ 83,993 $ 79,422
Interest and dividends
on investment
securities............ 22,678 22,254 44,906 44,311 38,844 32,865 30,322
Interest on money
market investments.... 39 492 691 2,494 5,600 7,906 8,014
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest income.. 66,029 66,110 131,718 131,417 125,801 124,764 117,758
---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest Expense
Interest on deposits... 25,543 27,355 54,041 59,906 65,484 66,060 64,059
Interest on short-term
borrowings............ 3,234 1,547 3,496 1,723 1,569 3,001 3,291
Interest on long-term
debt.................. 236 228 456 454 456 535 621
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest expense. 29,013 29,130 57,993 62,083 67,509 69,596 67,971
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.... 37,016 36,980 73,725 69,334 58,292 55,168 49,787
Provision for possible
loan losses........... 1,112 1,112 2,197 3,219 4,946 3,933 2,310
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
possible loan losses.. 35,904 35,868 71,528 66,115 53,346 51,235 47,477
Net securities gains
(losses).............. 239 1,053 2,333 679 677 (269) (998)
Other operating income. 5,009 4,836 9,792 8,695 6,852 6,650 5,622
Other operating
expenses.............. 25,756 25,594 51,244 47,825 39,866 38,655 36,478
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before taxes and
cumulative effect of
change of accounting
method................ 15,396 16,163 32,409 27,664 21,009 18,961 15,623
Applicable income
taxes................. 4,690 4,652 9,719 7,076 5,025 4,475 2,749
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income before
cumulative effect of
change in accounting
method................ 10,706 11,511 22,690 20,588 15,984 14,486 12,874
Cumulative effect of
change in accounting
method................ -0- 500 500 -0- -0- -0- -0-
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............. $ 10,706 $ 12,011 $ 23,190 $ 20,588 $ 15,984 $ 14,486 $ 12,874
========== ========== ========== ========== ========== ========== ==========
PER SHARE DATA(A)
Net income before
cumulative effect of
change in accounting
method................ $ 0.57 $ 0.62 $ 1.22 $ 1.14 $ 0.94 $ 0.85 $ 0.76
Cumulative effect of
change in accounting
method................ $ 0.00 $ 0.02 $ 0.02 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net income............. $ 0.57 $ 0.64 $ 1.24 $ 1.14 $ 0.94 $ 0.85 $ 0.76
Dividends declared..... $ 0.28 $ 0.25 $ 0.51 $ 0.55 $ 0.38 $ 0.33 $ 0.30
Average shares
outstanding........... 18,642,024 18,642,024 18,642,024 18,107,266 17,024,494 17,024,494 17,024,494
AT END OF PERIOD
Total assets........... $1,980,997 $1,862,628 $1,955,269 $1,787,548 $1,479,592 $1,346,028 $1,267,444
Securities............. 805,925 746,385 847,035 664,046 537,894 419,948 354,564
Loans and leases, net
of unearned income.... 1,072,700 999,519 1,006,176 964,527 801,533 763,250 727,023
Reserve for possible
loan losses........... 15,063 14,485 14,544 14,267 9,426 8,323 7,721
Deposits............... 1,621,015 1,563,430 1,575,624 1,544,823 1,279,988 1,149,863 1,088,910
Long-term debt......... 7,639 7,772 7,363 8,130 6,524 5,718 5,979
Shareholders' equity... 181,431 178,292 186,453 170,403 140,992 130,762 122,957
KEY RATIOS
Return on average
assets................ 1.10% 1.33% 1.25% 1.24% 1.14% 1.12% 1.10%
Return on average
equity................ 11.54 13.75 12.91 12.91 11.75 11.59 10.82
Net loans to deposit
ratio................. 65.25 63.00 62.94 61.51 61.88 65.65 66.06
Dividend payout ratio.. 48.76 36.61 39.30 45.11 38.55 36.88 38.70
Average shareholders'
equity as percentage
of average assets..... 9.51 9.67 9.65 9.60 9.69 9.66 10.17
</TABLE>
- --------
(a) Average number of shares outstanding has been restated to reflect pooling
of interests. Restatements also reflect two-for-one stock split on January
18, 1994 effected in the form of a 100% stock distribution.
25
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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 the Corporation including its subsidiaries for the
years ended December 31, 1993, 1992 and 1991 and are intended to supplement,
and should be read in conjunction with, the consolidated financial statements
and related footnotes.
Effective December 31, 1993, the Corporation acquired all of the outstanding
common stock of Peoples Bank of Western Pennsylvania, a state-chartered bank,
headquartered in New Castle, Pennsylvania. The merger was accounted for as a
pooling of interests and accordingly, all financial statements have been
restated as though the merger had occurred at the beginning of the earliest
period presented.
Effective April 30, 1992, the Corporation acquired all of the outstanding
common stock of Central Bank ("Central"), a state-chartered bank headquartered
in Hollidaysburg, Pennsylvania. The merger was accounted for as a purchase
transaction, whereby the results of operations of Central from the date of
acquisition were included in the financial statements.
RESULTS OF OPERATIONS
Net income in 1993 was $23.2 million, an increase of $2.6 million over the
1992 level of $20.6 million and compared to $16.0 million which was reported in
1991. Earnings per share before the cumulative effect of the change in
accounting method increased $0.08 per share in 1993 to $1.22. This compared to
$1.14 in 1992 and $0.94 in 1991. The cumulative effect of change in the method
of accounting for income taxes added $0.02 per share to result in $1.24
earnings per share for 1993. Per share data has been restated to reflect the
two-for-one stock split effected in the form of a 100% stock dividend declared
on January 18, 1994. Return on average assets was 1.25% during the 1993 period
compared to 1.24% for 1992. Return on average equity was 12.91% for both the
1993 and 1992 periods. During 1991 return on average assets was 1.14% and
return on average equity was 11.75%.
The following is an analysis of the impact of changes in net income on
earnings per share:
<TABLE>
<CAPTION>
1993 VS. 1992 1992 VS. 1991
------------- -------------
<S> <C> <C>
Net income per share, prior year.................... $ 1.14 $ 0.94
Increase (decrease) from changes in:
Net interest income............................... 0.07 0.30
Provision for possible loan losses................ 0.06 0.10
Security transactions............................. 0.09 0.00
Other income...................................... 0.04 0.05
Salaries and employee benefits.................... (0.08) (0.06)
Occupancy and equipment costs..................... (0.03) (0.01)
Settlement of lender liability claim.............. 0.08 (0.08)
Other expenses.................................... (0.03) (0.06)
Provision for Federal income taxes................ (0.13) (0.08)
------ ------
Subtotal............................................ 1.21 1.10
Inclusion of acquisition during year................ 0.01 0.04
Cumulative effect of change in accounting method.... 0.02 0.00
------ ------
Net income per share................................ $ 1.24 $ 1.14
====== ======
</TABLE>
26
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net interest income, the most significant component of earnings, is the
amount by which interest generated from earning assets exceeds interest expense
on liabilities. Net interest income was $73.7 million in 1993 compared to $69.3
million in 1992 and $58.3 million in 1991. The following is an analysis of the
average balance sheets and net interest income for each of the three years in
the period ended December 31, 1993.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS
-----------------------------------------------------------------------------------------
1993 1992 1991
----------------------------- ----------------------------- -----------------------------
AVERAGE INCOME/ YIELD OR AVERAGE INCOME/ YIELD OR AVERAGE INCOME/ YIELD OR
BALANCE EXPENSE RATE(A) BALANCE EXPENSE RATE(A) BALANCE EXPENSE RATE(A)
------- -------- -------- ---------- -------- -------- ---------- -------- --------
ASSETS (DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Time deposits with banks....... $ 10,294 $ 483 4.69% $ 29,902 $ 1,844 6.17% $ 50,100 $ 3,990 7.96%
Investment securities.......... 762,562 44,906 6.10 622,869 44,311 7.45 477,168 38,844 8.59
Federal funds sold............. 6,832 208 3.04 18,265 650 3.56 28,151 1,610 5.72
Loans (b) (c), net of unearned
income........................ 986,596 86,121 8.88 902,486 84,612 9.59 770,795 81,357 10.78
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total interest-earning assets.. 1,766,284 131,718 7.63 1,573,522 131,417 8.61 1,326,214 125,801 9.78
---------- ======== ==== ---------- ======== ==== ---------- ======== =====
Noninterest-earning assets:
Cash........................... 45,496 41,104 36,083
Reserve for loan losses........ (14,683) (13,113) (8,723)
Other assets................... 64,766 59,726 49,554
---------- ---------- ----------
Total noninterest-earning
assets........................ 95,579 87,717 76,914
---------- ---------- ----------
Total Assets.................. $1,861,863 $1,661,239 $1,403,128
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits...................... $ 169,423 3,050 1.80% $ 143,478 3,799 2.65% $ 104,632 4,006 3.83%
Savings deposits............... 421,626 9,681 2.30 396,733 12,150 3.06 317,904 13,312 4.19
Time deposits.................. 816,920 41,310 5.06 763,264 43,957 5.76 681,662 48,166 7.07
Short-term borrowings.......... 95,925 3,496 3.64 38,459 1,723 4.48 25,610 1,569 6.13
Long-term debt................. 7,985 456 5.71 7,803 454 5.82 6,338 456 7.19
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total interest-bearing
liabilities................... 1,511,879 57,993 3.84 1,349,737 62,083 4.60 1,136,146 67,509 5.94
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Noninterest-bearing liabilities
and capital:
Noninterest-bearing demand
deposits...................... 157,653 139,831 119,143
Other liabilities.............. 12,660 12,196 11,832
Shareholders' equity........... 179,671 159,475 136,007
---------- ---------- ----------
Total noninterest-bearing
funding sources............... 349,984 311,502 266,982
---------- ---------- ----------
Total Liabilities and
Shareholders' Equity......... $1,861,863 $1,661,239 $1,403,128
========== ========== ==========
Net Interest Income and Net
Yield On Interest-earning
Assets......................... $ 73,725 4.35% $ 69,334 4.66% $ 58,292 4.69%
======== ==== ======== ==== ======== =====
</TABLE>
- --------
(a) Yields on interest-earning assets have been computed on a tax equivalent
basis using the 35% Federal income tax statutory rate in 1993, and 34% in
1992 and 1991.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan
balances are included in interest-earning assets.
(c) Loan income includes net loan fees.
27
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Both interest income and interest expense increased as volumes increased.
Average interest earning assets increased $192.8 million in 1993 to $1,766,284
which is 94.9% of average total assets. Included in the 1993 growth was $41.8
million in investments, primarily mortgage-backed securities, and these
purchases were funded with borrowings from the Federal Home Loan Bank and other
banks. This leveraging strategy added approximately $1.0 million to net
interest income during 1993. Excluding the earning assets resulting from the
Central acquisition, average earning assets grew $111.2 million in 1992.
Average earning assets were 94.7% of average total assets during 1992, compared
to 94.5% during 1991. Average interest-bearing liabilities increased $162.1
million during 1993, which included $41.8 million related to the previously
mentioned leveraging strategy. The remainder of the increase occurred primarily
through deposit growth. Average interest-bearing liabilities grew $213.6
million during 1992 which included $90.7 million in addition to the Central
acquisition.
Both asset yields and the cost of funds declined in 1993 and 1992 as the
interest rates were generally lower during those periods when compared to
previous years. Asset yields, on a tax-equivalent basis, decreased 98 basis
points (0.98%) during 1993 and 117 basis points (1.17%) during 1992. The cost
of funds declined 76 basis points (0.76%) during 1993 and 134 basis points
(1.34%) during 1992. Earning asset yields declined in 1993 faster than
liability costs primarily because of lower mortgage rates. Mortgage borrowers
have been refinancing loans during the low interest rate environment reducing
loan yields.
Additionally, mortgage loan refinancing on a national scale had accelerated
the repayments of mortgage backed securities in excess of projections.
Reinvestment of the proceeds at the then current rates lowered the investment
portfolio yields. This trend should stabilize if interest rates remain constant
or rise. The primary risk of owning mortgage backed securities ("MBS") relates
to the uncertainty of prepayments of the underlying mortgages. Interest rate
changes have a direct impact on prepayment speeds. As interest rates increase,
prepayment speeds generally decline, resulting in a longer average life of a
MBS. Conversely as interest rates decline, prepayment speeds increase,
resulting in a shorter average life of a MBS. Using computer simulation models,
the Corporation tests the average life and yield volatility of all MBSs under
various interest rate scenarios on a continuing basis to insure 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.
28
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Deposit customers tended to extend maturities which locked in rates as
deposit rates fell, thereby preventing the cost of funds to decline as fast as
asset yields. Net interest margin, on a tax-equivalent basis, was 4.35% during
1993 compared to 4.66% in 1992 and 4.69% during 1991. The Corporation's use of
computer modeling to manage interest rate risk is further described in the
"Interest Sensitivity" section of this discussion herein. The following table
shows the effect of changes in volumes and rates on interest income and
interest expense.
<TABLE>
<CAPTION>
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
-------------------------------------------------------------
1993 CHANGE FROM 1992 1992 CHANGE FROM 1991
------------------------------ ------------------------------
TOTAL CHANGE DUE CHANGE DUE TOTAL CHANGE DUE CHANGE DUE
CHANGE TO VOLUME TO RATE CHANGE TO VOLUME TO RATE
------- ---------- ---------- ------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Time deposits with
banks................ $(1,361) $(1,209) $ (152) $(2,146) $(1,608) $ (538)
Securities............ 595 10,407 (9,812) 5,467 12,516 (7,049)
Federal funds sold.... (442) (407) (35) (960) (565) (395)
Loans................. 1,509 8,066 (6,557) 3,255 14,196 (10,941)
------- ------- -------- ------- ------- --------
Total interest income. 301 16,857 (16,556) 5,616 24,539 (18,923)
------- ------- -------- ------- ------- --------
Interest-bearing
liabilities:
Deposits.............. (5,865) 4,807 (10,672) (5,578) 11,817 (17,395)
Short-term borrowings. 1,773 2,575 (802) 154 787 (633)
Long-term debt........ 2 11 (9) (2) 105 (107)
------- ------- -------- ------- ------- --------
Total interest ex-
pense................ (4,090) 7,393 (11,483) (5,426) 12,709 (18,135)
------- ------- -------- ------- ------- --------
Net interest income... $ 4,391 $ 9,464 $ (5,073) $11,042 $11,830 $ (788)
======= ======= ======== ======= ======= ========
</TABLE>
The provision for possible loan losses is an amount added to the reserve
against which loan losses are charged. The amount of the provision is
determined by management based upon its assessment of the size and quality of
the loan portfolio and the adequacy of the reserve in relation to the risks
inherent within the loan portfolio. The provision for possible loan losses was
$2.2 million in 1993 and $3.2 million and $4.9 million in 1992 and 1991,
respectively. Net charge-offs against the reserve for possible loan losses were
$1.9 million, or 0.19% of average total loans in 1993. This is compared to $2.9
million in 1992. Charge-offs were $510 thousand less during 1993 while
recoveries of previously charged off loans increased $449 thousand. Net charge-
offs were $3.8 million in 1991. Net charge-offs were 0.32% and 0.50% of average
total loans during 1992 and 1991, respectively. For an analysis of credit
quality, see the "Credit Review" section of this discussion.
29
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table presents an analysis of the consolidated reserve for
possible loan losses for the five years ended December 31, 1993:
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
--------------------------------------------------
1993 1992 1991 1990 1989
---------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of
year...................... $1,006,176 $964,527 $801,533 $763,250 $727,023
========== ======== ======== ======== ========
Average loans outstanding.. $ 986,596 $902,486 $770,795 $746,898 $706,858
========== ======== ======== ======== ========
Reserve for possible loan
losses:
Balance, beginning of year. $ 14,267 $ 9,426 $ 8,323 $ 7,721 $ 7,294
Addition as result of ac-
quisition................. 0 4,501 0 0 0
Loans charged off:
Commercial, financial and
agricultural............ 731 816 1,981 1,883 1,226
Loans to individuals..... 1,662 1,840 1,849 2,055 1,006
Real estate--construc-
tion.................... 0 0 0 0 0
Real estate--commercial.. 665 706 447 232 0
Real estate--residential. 346 575 356 135 358
Lease financing receiv-
ables................... 80 57 35 205 9
---------- -------- -------- -------- --------
Total loans charged
off................... 3,484 3,994 4,668 4,510 2,599
Recoveries of loans previ-
ously charged off:
Commercial, financial and
agricultural............ 559 360 153 447 369
Loans to individuals..... 552 388 595 506 124
Real estate--construc-
tion.................... 0 0 0 0 0
Real estate--commercial.. 276 317 27 16 0
Real estate--residential. 177 47 47 132 222
Lease financing receiv-
ables................... 0 3 3 78 1
---------- -------- -------- -------- --------
Total recoveries....... 1,564 1,115 825 1,179 716
---------- -------- -------- -------- --------
Net loans charged off.. 1,920 2,879 3,843 3,331 1,883
---------- -------- -------- -------- --------
Provision charged to ex-
pense..................... 2,197 3,219 4,946 3,933 2,310
---------- -------- -------- -------- --------
Balance, end of year....... $ 14,544 $ 14,267 $ 9,426 $ 8,323 $ 7,721
========== ======== ======== ======== ========
Ratios:
Net charge-offs as a
percentage of average
loans outstanding....... 0.19% 0.32% 0.50% 0.45% 0.27%
Reserve for possible loan
losses as a percentage
of average loans out-
standing................ 1.47% 1.58% 1.22% 1.11% 1.09%
</TABLE>
Total other operating income increased $2.7 million in 1993 to $12.1 million.
Net security gains increased $1.7 million to $2.3 million during 1993 compared
to $679 thousand during 1992 and $677 thousand in 1991. Security transactions
during 1993 and 1992 were primarily the sale of U.S. Treasury securities
maturing within a year. Proceeds were reinvested in U.S. Treasury securities
and U.S. Government agency securities with maturities of 2-3 years to continue
to lock in yields while interest rates were falling. Additionally, during 1993
marketable equity securities with a book value of $1.6 million were sold for a
$1.0 million gain. During 1991 the Corporation also sold low and marginal
quality securities which improved the marketability and liquidity of the
portfolio. Gross gains of $2.3 million and gross losses of $17 thousand were
recognized during
30
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1993. Gross gains of $803 thousand and $1.5 million were recognized during 1992
and 1991, respectively, while gross losses of $124 thousand and $779 thousand
were recognized in the corresponding periods.
Trust income increased $227 thousand during 1993 to $2.2 million as estate
fees decreased $67 thousand, and core revenues increased. Trust income
increased $664 thousand during 1992 as the 1991 restructuring of the subsidiary
banks' trust departments into a single trust company began to produce benefits.
Management of the trust company allows an opportunity to focus on growth, since
the specialized areas and back-office operations were centralized. Service
charges on deposits increased $320 thousand in 1993 and $1.0 million in 1992
primarily as a result of average total deposits increasing. Additionally, new
fee schedules established during the fourth quarter of 1991 provided higher
revenues during 1992.
Total other operating expenses increased $3.4 million to $51.2 million in
1993 and compared to $47.8 million and $39.9 million in 1992 and 1991,
respectively. Results for the 1992 period did not reflect any of Central's
results until the merger date of April 30, 1992. Operating expenses related to
Central in the first four months of 1993 were $2.2 million.
Employee costs experienced an increase of $2.4 million to $25.4 million. Of
this increase $946 thousand was a result of including Central for the full year
of 1993. Total employee costs were $23.0 million and $20.2 million in 1992 and
1991, respectively. Salary levels are generally maintained through attrition
management programs. Employee costs as a percentage of average assets was 1.36%
in 1993, reduced from 1.38% in 1992 and 1.44% in 1991.
Net occupancy expense and furniture and equipment increased over the three
year period primarily as the costs of maintaining branch operations, including
utilities, repairs and depreciation continued to increase. Additionally,
equipment depreciation increased as computer equipment that was previously
being leased was purchased and is being depreciated over a shorter life than
the original lease. Additionally, the process of automating loan documentation
and the branch network increased depreciation costs but is expected to improve
platform productivity and reduce loan documentation risks. The deposit
insurance assessment from the Federal Deposit Insurance Corporation ("FDIC")
increased as a result of deposit increases. This assessment is not scheduled to
increase again in 1994, but the possibility of future increases cannot be
eliminated. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") has established a risk-based assessment system which went into
effect January 1, 1993. This system designates an assessment rate for each
insured institution based on a combination of its capital and supervisory
condition. Because of the Corporation's strong capital position and supervisory
condition, only future rate changes will cause a significant change in the
related expense. A lender liability claim for which a subsidiary of the
Corporation was a defendant, was settled out of court in October 1992 in the
amount of $1.4 million. Other operating expenses increased $1.3 million in 1993
over the 1992 related period to $15.0 million. The inclusion of Central for the
entire period of 1993 increased this category $829 thousand. An increase in the
amortization of core deposit intangibles as a result of the implementation of
FAS No. 109 was $715 thousand. FAS No. 109 requires that a deferred tax
liability or asset to be recognized for differences between assigned values and
the tax bases of the assets (except goodwill) and liabilities recognized in a
purchase combination. For purchase business combinations consummated prior to
the beginning of the year for which FAS No. 109 was first applied, remaining
balances of the differences between the assigned values and the tax bases of
these assets and liabilities must be adjusted from their net-of-tax amounts to
their pretax amounts. This "gross-up" action, in effect, creates a larger
balance of the temporary difference that must be amortized over its expected
life. One of the subsidiary banks agreed to a settlement of a PA shares tax
claim resulting in a refund of $298 thousand. The 1992 increase was primarily a
result of including Central for eight months. Cost increases occurred in the
process of the collection of loans or the disposition of real estate acquired
in lieu of loan repayment but was partially responsible for the increased
recovery of previously charged off loans.
31
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Federal income tax expense was $9.7 million during 1993 representing an
increase of $2.6 million over the 1992 total of $7.1 million. Taxable income
increased nearly $7.0 million during 1993. On August 10, 1993 President Clinton
signed into law the Omnibus Budget Reconciliation Act of 1993 ("the Act"). The
Act made several changes that will affect financial institutions such as the
Corporation and its subsidiaries. While it is difficult to determine the short
and long-range effects of the Act on the Corporation and whether it will be
able to change its operations and make adaptations to maintain net income
levels that would otherwise have prevailed if the Act had not passed, it should
be noted that the primary focus of the Act was to raise taxes. One provision of
the Act increased the tax rate for corporate taxable income in excess of $10
million to 35 percent from 34 percent. This provision was retroactively applied
to taxable income earned after January 1, 1993. The tax rate change increased
the Corporation's Federal income tax expense by $259 thousand.
LIQUIDITY
Liquidity is a measure of the Corporation's ability to efficiently meet
normal cash flow requirements of both borrowers and depositors. In the ordinary
course of business, funds are generated from deposits (primary source) and the
maturity or repayment of earning assets, such as securities and loans. As an
additional secondary source, short-term liquidity needs may be provided through
the use of overnight Federal funds purchased and borrowings from the Federal
Reserve Bank. Additionally, six of the seven banking subsidiaries are members
of the Federal Home Loan Bank and may borrow up to ten percent of their total
assets at any one time. The sale of earning assets may also provide an
additional source of liquidity.
The Corporation's long-term liquidity source is a large core deposit base and
a strong capital position. Core deposits are the most stable source of
liquidity a bank can have due to the long-term relationship with a deposit
customer. Deposits increased $30.8 million in 1993 primarily in core customer
deposit relationships. Non-core deposits, which are time deposits in
denominations of $100 thousand or more represented only 6.1% of total deposits
at December 31, 1993. Time deposits of $100 thousand or more at December 31,
1993, 1992 and 1991 had remaining maturities as follows:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF LARGE CERTIFICATES OF
DEPOSIT
-------------------------------------------------
1993 1992 1991
--------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- ------- -------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Remaining Maturity:
3 months or less............. $19,734 21% $ 25,289 25% $ 53,945 51%
Over 3 months through 6
months...................... 12,543 13 15,906 15 24,726 23
Over 6 months through 12
months...................... 16,542 17 11,140 11 13,196 12
Over 12 months............... 47,006 49 49,731 49 14,784 14
------- --- -------- --- -------- ---
Total...................... $95,825 100% $102,066 100% $106,651 100%
======= === ======== === ======== ===
</TABLE>
Net loans increased $41.4 million during 1993 as consumer loans and real
estate secured loans were the primary categories of increased volume reflecting
a strengthening of loan demand.
An additional source of liquidity are certain marketable securities that the
Corporation holds in its investment portfolio. These securities are classified
as "securities available for sale". While the Corporation does not have
specific intentions to sell these securities, they have been designated as
"available for sale" because they may be sold for the purpose of obtaining
future liquidity, for management of interest rate risk or as part of the
implementation of tax management strategies. As of December 31, 1993,
securities available for sale had an amortized cost of $462.8 million and a
market value of $465.2 million. Gross unrealized gains were $3.7 million and
gross unrealized losses were $1.3 million.
32
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Below is a schedule of loans by classification for the five years ended
December 31, 1993 and a schedule of the maturity distribution of investment
securities at December 31, 1993.
<TABLE>
<CAPTION>
LOANS BY CLASSIFICATION
-------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial,
agricultural and other. $ 153,039 15% $196,979 20% $255,525 31% $221,575 28% $204,933 27%
Real estate--construc-
tion................... 9,718 1 11,676 1 8,780 1 10,081 1 11,717 2
Real estate--commercial. 220,805 21 188,227 19 106,968 13 102,285 13 116,993 16
Real estate--residen-
tial................... 412,798 40 373,173 38 278,254 33 271,981 34 229,290 30
Loans to individuals.... 239,904 23 220,085 22 177,390 21 179,610 23 184,152 24
Net leases.............. 1,411 -0- 4,628 -0- 3,802 1 5,622 1 6,285 1
---------- --- -------- --- -------- --- -------- --- -------- ---
Gross loans and leases. 1,037,675 100% 994,768 100% 830,719 100% 791,154 100% 753,370 100%
=== === === === ===
Unearned income........ (31,499) (30,241) (29,186) (27,904) (26,347)
---------- -------- -------- -------- --------
Total loans and leases,
net of unearned
income................ $1,006,176 $964,527 $801,533 $763,250 $727,023
========== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
---------------------------------------------------------
U.S. TREASURY
AND OTHER
U.S. GOVERNMENT STATES AND TOTAL WEIGHTED
AGENCIES AND POLITICAL OTHER BOOK AVERAGE
CORPORATIONS SUBDIVISIONS SECURITIES VALUE YIELD*
--------------- ------------ ---------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Within 1 year........... $ -0- $14,322 $ 3,289 $ 17,611 7.58%
After 1 but within 5
years.................. 94,612 22,105 9,953 126,670 5.73
After 5 but within 10
years.................. 81,550 27,058 1,566 110,174 5.93
After 10 years.......... 116,758 9,880 718 127,356 5.95
-------- ------- ------- --------
Total................. $292,920 $73,365 $15,526 $381,811 5.95%
======== ======= ======= ========
</TABLE>
- --------
* Yields are calculated on a tax-equivalent basis
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF SECURITIES AVAILABLE FOR SALE
AT AMORTIZED COST
----------------------------------------------------------
U.S. TREASURY
AND OTHER
U.S. GOVERNMENT STATES AND TOTAL WEIGHTED
AGENCIES AND POLITICAL OTHER AMORTIZED AVERAGE
CORPORATIONS SUBDIVISIONS SECURITIES COST YIELD*
--------------- ------------ ---------- --------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Within 1 year........... $ 4,863 $97 $ -0- $ 4,960 6.36%
After 1 but within 5
years.................. 151,079 -0- 2,015 153,094 5.09
After 5 but within 10
years.................. 104,428 -0- 488 104,916 5.61
After 10 years.......... 178,463 -0- 21,353 199,816 5.33
-------- --- ------- --------
Total................. $438,833 $97 $23,856 $462,786 5.32%
======== === ======= ========
</TABLE>
- --------
* Yields are calculated on a tax-equivalent basis
INTEREST SENSITIVITY
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks
associated with maximizing income through interest sensitivity
33
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
imbalances. While no single number can accurately describe the impact of
changes in interest rates on net interest income, interest rate sensitivity
positions, or "gaps" when measured over a variety of time periods may be
helpful.
An asset or liability is considered to be interest-sensitive if the rate it
yields or bears is subject to change within a predetermined time period. If
interest-sensitive assets ("ISA") exceeds interest-sensitive liabilities
("ISL") during a prescribed time period, a positive gap results. Conversely,
when ISL exceeds ISA during a time period, a negative gap results.
A positive gap tends to indicate that earnings will be impacted favorably if
interest rates rise during the period and negatively when interest rates fall
during the period. A negative gap tends to indicate that earnings will be
affected inversely to interest rate changes. In other words, as interest rates
fall, a negative gap should tend to produce a positive effect on earnings and
when interest rates rise, a negative gap should tend to affect earnings
negatively.
The following table lists the amounts and ratios of assets and liabilities
with rates or yields subject to change within the periods indicated as of
December 31, 1993 and 1992 (Dollar Amounts in Thousands):
<TABLE>
<CAPTION>
1993
----------------------------------------------
CUMULATIVE
0-90 DAYS 91-180 DAYS 181-365 DAYS 0-365 DAYS
--------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Loans.......................... $ 384,639 $ 74,328 $134,258 $ 593,225
Investments.................... 162,510 48,313 65,695 276,518
Other interest-earning assets.. 1,974 198 297 2,469
--------- -------- -------- ----------
Total interest-sensitive
assets...................... 549,123 122,839 200,250 872,212
--------- -------- -------- ----------
Certificates of deposit........ 160,487 118,381 125,896 404,764
Other deposits................. 503,288 -0- -0- 503,288
Borrowings..................... 155,518 9,578 3,707 168,803
--------- -------- -------- ----------
Total interest-sensitive
liabilities................. 819,293 127,959 129,603 1,076,855
--------- -------- -------- ----------
Gap.......................... $(270,170) $ (5,120) $ 70,647 $ (204,643)
========= ======== ======== ==========
ISA/ISL........................ 0.67 0.96 1.55 0.81
Gap/Total assets............... 13.82% 0.26% 3.61% 10.47%
</TABLE>
<TABLE>
<CAPTION>
1992
----------------------------------------------
CUMULATIVE
0-90 DAYS 91-180 DAYS 181-365 DAYS 0-365 DAYS
--------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Loans.......................... $ 395,097 $ 68,898 $151,801 $ 615,796
Investments.................... 72,879 41,121 71,784 185,784
Other interest-earning assets.. 34,403 3,289 9,167 46,859
--------- -------- -------- ----------
Total interest-sensitive
assets...................... 502,379 113,308 232,752 848,439
--------- -------- -------- ----------
Certificates of deposit........ 156,655 131,640 101,409 389,704
Other deposits................. 583,307 500 841 584,648
Borrowings..................... 44,801 5,334 1,357 51,492
--------- -------- -------- ----------
Total interest-sensitive
liabilities................. 784,763 137,474 103,607 1,025,844
--------- -------- -------- ----------
Gap.......................... $(282,384) $(24,166) $129,145 $ (177,405)
========= ======== ======== ==========
ISA/ISL........................ 0.64 0.82 2.25 0.83
Gap/Total assets............... 15.80% 1.35% 7.22% 9.92%
</TABLE>
34
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Final loan maturities and rate sensitivity of the loan portfolio excluding
consumer installment and mortgage loans and before unearned income at December
31, 1993 are as follows:
<TABLE>
<CAPTION>
WITHIN ONE ONE TO AFTER
YEAR 5 YEARS 5 YEARS TOTAL
---------- ------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial................. $ 92,566 $19,544 $ 14,403 $126,513
Financial institutions.................... -0- 162 -0- 162
Real estate-construction.................. 7,199 1,147 1,372 9,718
Real estate-commercial.................... 99,684 40,003 81,119 220,806
Other..................................... 9,276 6,050 11,219 26,545
-------- ------- -------- --------
Totals.................................. $208,725 $66,906 $108,113 $383,744
======== ======= ======== ========
Loans at fixed interest rates............. 43,902 49,367
Loans at variable interest rates.......... 23,004 58,746
------- --------
Totals.................................. $66,906 $108,113
======= ========
</TABLE>
The Corporation has not experienced the kind of earnings volatility indicated
from the gap analysis. This is because assets and liabilities with similar
contractual repricing characteristics may not reprice at the same time or to
the same degree.
Therefore, to more precisely measure the impact of interest rate changes on
the Corporation's net interest margin, management simulates the potential
effects of changing interest rates through computer modeling. The Corporation
is then better able to implement strategies which would include an acceleration
of a deposit rate reduction or a lag in a deposit rate increase. The repricing
strategies for loans would be inversely related.
The analysis at December 31, 1993, indicated that a 200 basis point movement
in interest rates in either direction would not have a significant impact on
the Corporation's anticipated net interest income over the next twelve months.
CREDIT REVIEW
Maintaining a high quality loan portfolio is of great importance to the
Corporation. The Corporation manages the risk characteristics of the loan
portfolio through the use of prudent lending policies and procedures and
monitors risk through a periodic review process provided by external auditors,
internal auditors, regulatory authorities and our loan review staff. These
reviews include the analysis of credit quality, diversification of industry,
compliance with policies and procedures, and an analysis of current economic
conditions.
In the management of its credit portfolio, the Corporation emphasizes the
importance of the collectibility of loans and leases as well as asset and
earnings diversification. The Corporation immediately recognizes as a loss all
credits judged to be uncollectible, and has established a reserve for possible
credit losses that may exist in the portfolio at a point in time, but have not
been specifically identified.
The Corporation's written lending policy requires certain underwriting
standards to be met prior to funding any loan, including requirements for
credit analysis, collateral value coverage, documentation, and terms. The
principal factor used to determine potential borrowers' creditworthiness is
business cash flows or consumer income available to service debt payments.
Secondary sources of repayment, including collateral or guarantees, are
frequently obtained. The Corporation's affiliates generally lend within the
market served by the affiliate.
35
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The lending policy provides limits for individual and affiliate committees
lending authorities. In addition to the affiliate loan approval process,
requests for borrowing relationships which will exceed one million dollars must
also be approved by the Corporation's Credit Committee. This Committee consists
of a minimum of three members of the Corporation's board of directors.
Commercial and industrial loans are generally granted to small and middle
market customers for operating, expansion or asset acquisition purposes.
Operating cash flows of the business enterprise are identified as the principal
source of repayment, with business assets held as collateral. Collateral
margins and loan terms are based upon the purpose and structure of the
transaction as set forth in loan policy.
Commercial real estate loans are granted for the acquisition or improvement
of real property. Generally, commercial real estate loans do not exceed 75% of
the appraised value of property pledged to secure the transaction. Repayment of
such loans are expected from the operations of the subject real estate and are
carefully analyzed prior to approval.
Real estate construction loans are granted for the purpose of constructing
improvements to real property, both commercial and residential. On-site
inspections are conducted by qualified individuals prior to periodic
disbursements for completed construction. Repayment of such loans is expected
from the placement of permanent project financing, which is generally committed
prior to the commencement of construction financing.
Real estate loans secured by 1-4 family residential housing properties are
granted subject to statutory limits in effect for each affiliate regarding the
maximum percentage of appraised value of the mortgaged property. Residential
loan terms are normally established in compliance with secondary market
requirements. Residential mortgage portfolio interest rate risk is controlled
by secondary market sales, variable interest rate loans, and balloon
maturities.
Loans to individuals represent financing extended to consumers for personal
or household purposes, including automobile financing, education, home
improvement, and personal expenditures. These loans are granted in the form of
installment, credit card, or revolving credit transactions. Consumer
creditworthiness is evaluated on the basis of ability to repay, stability of
income sources, and past credit history.
Since all identified losses are immediately charged off, no portion of the
reserve is restricted to any individual credit or groups of credits, and the
entire reserve is available to absorb any and all credit losses. However, for
analytical purposes, the following table sets forth an allocation of the
reserve for possible loan losses at December 31 according to the categories
indicated:
<TABLE>
<CAPTION>
ALLOCATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES
----------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, industrial,
financial, agricultural
and other.............. $ 2,177 $ 5,109 $ 4,226 $ 2,074 $ 2,536
Real estate--construc-
tion................... 72 69 65 68 70
Real estate--commercial. 3,269 1,615 1,273 1,217 825
Real estate--residen-
tial................... 3,835 2,943 1,259 1,440 1,390
Loans to individuals.... 1,879 1,806 1,182 1,765 1,672
Lease financing receiv-
ables.................. 32 39 21 28 25
Unallocated............. 3,280 2,686 1,400 1,731 1,203
---------- ---------- ---------- ---------- ----------
Total................. $ 14,544 $ 14,267 $ 9,426 $ 8,323 $ 7,721
========== ========== ========== ========== ==========
Reserve as percentage of
average total loans.... 1.47% 1.58% 1.22% 1.11% 1.09%
========== ========== ========== ========== ==========
</TABLE>
36
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Other than those described below, there are no material credits that
management has serious doubts as to the borrower's ability to comply with the
present loan repayment terms. The following table identifies nonperforming
loans at December 31. A loan is placed in a nonaccrual status at the time when
ultimate collectibility of principal or interest, wholly or partially, is in
doubt. Past due loans are those which were contractually past due 90 days or
more as to interest or principal payments but are well secured and in the
process of collection. Renegotiated loans are those which terms have been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the deteriorating financial position of the borrower.
<TABLE>
<CAPTION>
NONPERFORMING LOANS AND EFFECT ON INTEREST INCOME DUE TO NONACCRUAL
-------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------- ------------- ------------- ------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual ba-
sis.................... $ 8,166 $ 8,223 $ 5,458 $ 5,392 $ 6,281
Past due loans.......... 6,011 4,881 4,561 3,065 4,536
Renegotiated loans...... 1,186 1,002 1,086 3,185 221
------------- ------------- ------------- ------------- -------------
Total nonperforming
loans................ $ 15,363 $ 14,106 $ 11,105 $ 11,642 $ 11,038
============= ============= ============= ============= =============
Nonperforming loans as a
percentage of total
loans.................. 1.53% 1.46% 1.38% 1.53% 1.52%
============= ============= ============= ============= =============
Reserve as percentage of
nonperforming loans.... 94.67% 101.14% 84.88% 71.49% 69.95%
============= ============= ============= ============= =============
Other real estate owned. $ 4,929 $ 4,044 $ 2,218 $ 1,041 $ 913
============= ============= ============= ============= =============
Gross income that would
have been recorded at
original rates......... $ 706 $ 936 $ 521 $ 687 $ 425
Interest that was re-
flected in income...... 76 106 41 166 57
------------- ------------- ------------- ------------- -------------
Net reduction to
interest income due to
nonaccrual............. $ 630 $ 830 $ 480 $ 521 $ 368
============= ============= ============= ============= =============
</TABLE>
The reduction of income due to renegotiated loans was less than $50 thousand
in any year presented.
The level of nonperforming loans has increased in recent years, principally
as nonaccrual loans increased. These loans are primarily secured by residential
and commercial real estate and no significant loss is expected. Although the
ratio of the reserve for possible loan losses as a percentage of nonperforming
loans is lower than the Corporation's peers, other factors should be considered
such as historical loan losses and nonperforming loan levels. These were
favorable when compared to peer group levels over the past five years.
Management believes that the reserve for possible loan losses and nonperforming
loans remained safely within acceptable levels during 1993.
CAPITAL RESOURCES
Equity capital increased $16.0 million in 1993. Dividends declared decreased
equity by $8.9 million. The retained net income remains in permanent capital to
fund future growth and expansion. Payments by the Corporation's Employee Stock
Ownership Plan ("ESOP") to reduce debt it incurred to acquire the Corporation's
common stock for future distribution as employee compensation, net of
additional advances, increased equity capital by $464 thousand. The market
value adjustment to securities available for sale added $1.6 million to capital
while the tax benefit of dividends paid to the ESOP increased equity by $84
thousand and amounts paid to fund the discount on reinvested dividends and
optional cash payments reduced equity by $159 thousand.
37
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
A capital base can be considered adequate when it enables the Corporation to
intermediate funds responsibly and provide related services while protecting
against future uncertainties. The evaluation of capital adequacy depends on a
variety of factors, including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In consideration of these
factors, management's primary emphasis with respect to the Corporation's
capital position is to maintain an adequate and stable ratio of equity to
assets.
The Federal Reserve Board has issued risk-based capital adequacy guidelines
which went into effect in stages through 1992. The risk-based capital standard
is designed principally as a measure of credit risk. These guidelines require:
(1) at least 50% of a banking organization's total capital be common and
certain other "core" equity capital ("Tier I Capital"); (2) assets and off-
balance sheet items must be weighted according to risk; (3) the total capital
to risk-weighted assets ratio be at least 8%; and (4) a minimum leverage ratio
of Tier I capital to total assets. The minimum leverage ratio is not
specifically defined, but is generally expected to be 4-5 percent for all but
the most highly rated banks, as determined by a regulatory rating system.
The table below presents the Corporation's capital position at December 31,
1993:
<TABLE>
<CAPTION>
PERCENT
AMOUNT OF ADJUSTED
(IN THOUSANDS) ASSETS
-------------- -----------
<S> <C> <C>
Tier I Capital.................................. $169,546 16.29
Risk-Based Requirement.......................... 41,642 4.00
Total Capital................................... 182,989 17.58
Risk-Based Requirement.......................... 83,285 8.00
Minimum Leverage Capital........................ 169,546 8.88
Minimum Leverage Requirement.................... 76,384 4.00
</TABLE>
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.
38
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY SUMMARY OF FINANCIAL DATA--UNAUDITED
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The unaudited quarterly results of operations for the years ended December
31, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1993
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income................................ $33,014 $33,098 $32,623 $32,983
Interest expense............................... 14,572 14,562 14,351 14,508
------- ------- ------- -------
Net interest income.......................... 18,442 18,536 18,272 18,475
Provision for possible loan losses............. 593 519 484 601
------- ------- ------- -------
Net interest income after provision for possi-
ble
loan losses................................... 17,849 18,017 17,788 17,874
Other operating income......................... 2,999 2,914 2,578 3,633
Other operating expenses....................... 12,649 12,967 12,676 12,952
------- ------- ------- -------
Income before taxes and cumulative effect
of change in accounting method.............. 8,199 7,964 7,690 8,555
Applicable income taxes........................ 2,360 2,292 2,474 2,592
------- ------- ------- -------
Net income................................... $ 5,839 $ 5,672 $ 5,216 $ 5,963
======= ======= ======= =======
Earnings per share(a).......................... $ 0.31 $ 0.30 $ 0.28 $ 0.32
<CAPTION>
1992
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income................................ $30,733 $33,188 $33,937 $33,559
Interest expense............................... 15,275 16,042 15,741 15,030
------- ------- ------- -------
Net interest income.......................... 15,458 17,146 18,196 18,529
Provision for possible loan losses............. 977 847 601 794
------- ------- ------- -------
Net interest income after provision for possi-
ble
loan losses................................... 14,481 16,299 17,595 17,735
Other operating income......................... 2,267 2,684 2,213 2,213
Other operating expenses....................... 10,701 11,578 13,106 12,438
------- ------- ------- -------
Income before taxes and cumulative effect
of change in accounting method.............. 6,047 7,405 6,702 7,510
Applicable income taxes........................ 1,458 1,837 1,801 1,980
------- ------- ------- -------
Net income................................... $ 4,589 $ 5,568 $ 4,901 $ 5,530
======= ======= ======= =======
Earnings per share(a).......................... $ 0.27 $ 0.31 $ 0.26 $ 0.30
</TABLE>
- --------
(a) Average number of shares outstanding have been restated to reflect two-for-
one stock split effected in the form of a 100% stock distribution declared
January 18, 1994.
39
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Effective December 31, 1993, the Corporation acquired Peoples Bank of Western
Pennsylvania ("PBWPA"), a Pennsylvania-chartered bank. 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.
Average number of shares has been restated for the 1993 periods to reflect
the two-for-one stock split effected in the form of a 100% stock dividend
declared on January 18, 1994.
First Six Months of 1994 as Compared to the First Six Months of 1993
Net income in the six months of 1994 was $10.7 million, a decrease of $805
thousand from the 1993 period before the change in the method of accounting for
income taxes which added $500 thousand to the 1993 amount. Earnings per share
was $0.57 during the six months of 1994 compared to $0.64 during the 1993
period. Earnings per share during the 1993 period was $0.62 before the effect
of change in the method of accounting for income taxes. Return on average
assets was 1.10% and return on average equity was 11.54% during the 1994
period, compared to 1.33% and 13.75%, respectively during the same period of
1993. The change in accounting method during 1993 added 6 basis points (0.06%)
to the return on average assets and 57 basis points (0.57%) to the return on
average equity for the 1993 period.
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 $37.0 million for both the 1994 time
period and the related 1993 period. Interest income, on a tax-equivalent basis,
decreased 64 basis points (0.64%) as a percentage of average earning assets to
7.28% in 1994, from 7.92% in the 1993 period. Although yields have improved
since the first quarter of 1994, they have declined when compared to the six
months of 1993, reflecting interest rates rising during 1994 following declines
throughout 1993. Mortgage borrowers refinanced loans during the lower rate
environment during the year in 1993 resulting in a decline in yields that
carried forward into 1994. Mortgage loan refinancings on a national scale had
accelerated the repayments of mortgage backed securities. As proceeds were
reinvested in securities yielding lower rates, portfolio yields declined. The
recent rise in interest rates has stabilized prepayments of the portfolio and
portfolio yields. The cost of funds was 3.65% and 3.97% in the six months of
1994 and 1993, respectively, as deposit costs, the predominant category,
decreased only 33 basis points (0.33%) to 3.24%. This was expected as deposit
customers tended to extend maturities over the previous two years as interest
rates declined, thereby preventing the cost of funds from declining as fast as
asset yields. Although interest yields and costs of funds were lower during the
first six months of 1994 when compared to the first six months of 1993, the
cost of funds has remained stable during the 1994 period. Net interest margin
(net interest income, on a tax-equivalent basis as a percentage of average
earning assets) was 4.15% of earning assets during 1994, compared to 4.52% in
the 1993 related period.
Average earning assets were 95.0% of average total assets in the 1994 period
and 94.8% during the 1993 time frame. Average interest-bearing liabilities
increased as a percentage of average total assets to 81.5% in the six months of
1994 and 81.3% during the 1993 period.
40
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Provision for possible loan losses was $1.1 million for the six month periods
of 1994 and 1993. Net charge-offs against the reserve for possible loan losses
were $593 thousand in the 1994 period and can be compared to $894 thousand
during the 1993 period. Below is an analysis of the consolidated reserve for
possible loan losses for the six month periods ended June 30, 1994.
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Balance January 1,.............................................. $14,544 $14,267
Loans charged off:
Commercial, financial and agricultural........................ 362 204
Real estate--construction..................................... -0- -0-
Real estate--commercial....................................... 19 349
Real estate--residential...................................... 81 209
Loans to individuals.......................................... 760 826
Lease financing receivables................................... 3 79
------- -------
Total loans charged off..................................... 1,225 1,667
------- -------
Recoveries of previously charged off loans:
Commercial, financial and agricultural........................ 101 311
Real estate--construction..................................... -0- -0-
Real estate--commercial....................................... 233 224
Real estate--residential...................................... 24 6
Loans to individuals.......................................... 265 232
Lease financing receivables................................... 9 -0-
------- -------
Total recoveries............................................ 632 773
------- -------
Net charge offs............................................. 593 894
------- -------
Provision charged to operations................................. 1,112 1,112
------- -------
Balance June 30,................................................ $15,063 $14,485
======= =======
</TABLE>
Other operating income decreased $641 thousand in 1994 to $5.2 million. Net
security gains decreased $814 thousand. U.S. Treasury securities and U.S.
Government agency securities totaling $43.3 million with maturities within one
year were sold and reinvested in similar securities with maturities of 3-5
years. Of these securities $7.0 million were classified as "securities held to
maturity" but were called and sold within three months of the call date in
accordance with Financial Accounting Standards Board Statement No. 115 and
$36.1 million were classified as "securities available for sale". Other income
increased $147 thousand in the 1994 period primarily as the gain on the sale of
loans increased and income from club account service charges increased. Fees
related to club accounts should tend to level out since customer promotions
began during the fourth quarter of 1993.
Noninterest expense was $25.8 million in the six months of 1994 which
reflected an increase of $162 thousand over the 1993 period. Employee costs
were $13.0 million in 1994, an increase of $356 thousand over the 1993 related
period. Employee costs (annualized) as a percentage of average assets was 1.33%
in the 1994 period, reduced from 1.40% (annualized) in the 1993 period.
Furniture and equipment expense increased primarily as a result of increased
depreciation on computer equipment acquired to automate new customer loan and
deposit processes. Other operating expenses decreased $310 thousand to $7.3
million in the six months of 1994 when compared to the 1993 related period as
loan collection costs and professional fees decreased. The amortization of core
deposit intangibles decreased $164 thousand during the 1994 period
41
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
as the intangibles related to the Deposit Bank merger that occurred in 1984
became fully amortized and will result in a $51 thousand savings per month for
the remainder of 1994. Loan collection costs should continue to be favorable
throughout the remainder of the year. Professional fees are expected to
increase as pending acquisitions progress.
Federal income tax expense was $4.7 million during the six months of 1994 and
1993. Income before taxes decreased $767 thousand in the 1994 period as
compared to the same time period of 1993. Taxable income decreased only $134
thousand as tax-free income reduced $633 thousand.
Three Months ended June 30, 1994 as Compared to the Three Months Ended June 30,
1993
Net income was $5.6 million for the second quarter of 1994, which compared to
$5.7 million in the same quarter of 1993. Earnings per share was $0.30 during
both the 1994 quarter and the related quarter of 1993. Net interest income
increased $506 thousand to $19.0 million in the second quarter of 1994 when
compared to the related 1993 quarter.
Interest income increased $574 thousand as average earning assets increased
$117 million but yields declined 40 basis points (0.40%). Yields on variable
rate loans and investments improved as interest rates began to rise in 1994.
Refinancings of the fixed rate instruments declined to normal levels during the
1994 quarter as a result of the recent rise in interest rates. The yield on
average interest earning assets was 7.36% in the 1994 quarter, and compared to
7.76% in the related 1993 quarter. Interest expense increased $68 thousand in
the 1994 quarter as average interest-bearing liabilities increased $102 million
and the cost of these funds decreased 23 basis points (0.23%). The cost of
funds decreased from 3.88% in the 1993 quarter to 3.65% in the second quarter
of 1994. The decline in deposit rates were across the board.
Provision for possible loan losses was $573 thousand in the 1993 quarter or
$54 thousand more than the 1993 period. Net loans charged off in the second
quarter of 1994 were $396 thousand and can be compared to $436 thousand in the
related 1993 quarter.
Noninterest income decreased $474 thousand in the second quarter of 1994 to
$2.4 million. Net security gains decreased $370 thousand while other income
decreased $141 thousand in the 1994 quarter when compared to the second quarter
of 1993. The 1993 period included a $90 thousand gain on the termination of the
Central Bank pension plan.
Noninterest expense was $12.8 million in the three month period ended June
30, 1994 compared to $13.0 million in the 1993 related period, reflecting a
decrease of $133 thousand. Salaries and employee benefits increased only $29
thousand to $6.4 million in the second quarter of 1994. Net occupancy expense
and furniture and equipment expense remained stable in the 1994 quarter when
compared to the 1993 related period. Other operating expenses decreased $157
thousand which primarily reflects the reduction of core deposit amortization by
$144 thousand in the 1994 period. Loan collection costs and professional fees
also decreased during the 1994 quarter. Various expense items increased during
the quarter but none appeared significant.
Federal income taxes increased $207 thousand primarily as a result of higher
taxable income. Income before taxes increased $111 thousand in the second
quarter of 1994 compared to the same period of 1993 while income exempt from
federal income taxes decreased $247 thousand.
42
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY
Liquidity is a measure of the Corporation's ability to meet normal cash flow
requirements of both borrowers and depositors efficiently. In the ordinary
course of business, funds are generated from deposits (primary source) and
maturity or repayment of earning assets, such as securities and loans. As an
additional secondary source, short-term liquidity needs may be provided through
the use of overnight federal funds purchased and borrowings from the Federal
Reserve Bank. Additionally, each of the subsidiary banks are members of the
Federal Home Loan Bank and may borrow up to ten percent of their total assets
at any one time.
Net loans increased $66.0 million in the first six months of 1994 as all
major categories of loans increased. Consumer demand resulted in $50.3 million
of growth in consumer mortgages and loans to individuals for personal and
household purposes. Total deposits grew $45.4 million as all deposits
increased. Time deposits in denominations of $100 thousand or more increased
only $4.9 million indicating that the growth is primarily from core customer
relationships. Investment securities held to maturity declined $18.1 million
while interest-bearing bank deposits declined $2.2 million and short-term
borrowings decreased $14.5 million since December 31, 1993.
An additional source of liquidity is certain marketable securities that the
Corporation holds in its investment portfolio. These securities are classified
as "securities available for sale". While the Corporation does not have
specific intentions to sell these securities, they 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 June 30, 1994
securities available for sale had an amortized cost of $455.4 million and an
approximate market value of $442.2 million. As interest rates rose since the
end of 1994, the market value of securities available for sale declined $10.1
million. This is not of major concern to management since the average life of
the entire portfolio is just over five years.
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 rates 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.
43
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 June
30, 1994 and December 31, 1993.
<TABLE>
<CAPTION>
JUNE 30, 1994
-----------------------------------------
0-90 91-180 181-365 CUMULATIVE
DAYS DAYS DAYS 0-365 DAYS
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
Loans............................... $ 394,162 $ 76,524 $147,259 $ 617,945
Investments......................... 118,083 38,290 48,804 205,177
Other interest-earning assets....... -0- 198 99 297
--------- -------- -------- ----------
Total interest-sensitive assets... 512,245 115,012 196,162 823,419
--------- -------- -------- ----------
Certificates of deposits............ 122,411 98,008 108,182 328,601
Other deposits...................... 619,481 -0- -0- 619,481
Borrowings.......................... 132,927 7,592 9,667 150,186
--------- -------- -------- ----------
Total interest-sensitive
liabilities......................... 874,819 105,600 117,849 1,098,268
--------- -------- -------- ----------
GAP............................... (362,574) 9,412 78,313 (274,849)
========= ======== ======== ==========
ISA/ISL............................. 0.59 1.09 1.66 0.75
Gap/Total assets.................... 18.30% 0.48% 3.95% 13.87%
<CAPTION>
DECEMBER 31, 1993
-----------------------------------------
0-90 91-180 181-365 CUMULATIVE
DAYS DAYS DAYS 0-365 DAYS
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
Loans............................... $ 384,639 $ 74,328 $134,258 $ 593,225
Investments......................... 162,510 48,313 65,695 276,518
Other interest-earning assets....... 1,974 198 297 2,469
--------- -------- -------- ----------
Total interest-sensitive assets... 549,123 122,839 200,250 872,212
--------- -------- -------- ----------
Certificates of deposits............ 160,487 118,381 125,896 404,764
Other deposits...................... 503,288 -0- -0- 503,288
Borrowings.......................... 155,518 9,578 3,707 168,803
--------- -------- -------- ----------
Total interest-sensitive
liabilities......................... 819,293 127,959 129,603 1,076,855
--------- -------- -------- ----------
GAP............................... (270,170) (5,120) 70,647 (204,643)
========= ======== ======== ==========
ISA/ISL............................. 0.67 0.96 1.55 0.81
Gap/Total assets.................... 13.82% 0.26% 3.61% 10.47%
</TABLE>
The Corporation has not experienced the kind of earnings volatility indicated
from the gap analysis. This is because assets and liabilities with similar
contractual repricing characteristics may not reprice at the same time or to
the same degree.
Therefore, to more precisely measure the impact of interest rate changes on
the Corporation's net interest income, management simulates the potential
effects of changing interest rates through computer modeling. The Corporation
is then better able to implement strategies which would include an acceleration
of a deposit rate reduction or a lag in a deposit rate increase. The repricing
strategies for loans would be inversely related.
The analysis at June 30, 1994, indicated that a 200 basis point (2.00%)
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 frame.
44
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CREDIT QUALITY RISK
The following table identifies amounts of loan losses and nonperforming
loans. Past due loans are those which were contractually past due 90 days or
more as to interest or principal payments but were well secured and in the
process of collection. Renegotiated loans are those which terms had been
renegotiated to provide a reduction or deferral of principal or interest as a
result of the deteriorating financial position of the borrower and are in
compliance with the restructured terms.
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------
1994 1993
------------ -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Nonperforming Loans:
Loans in nonaccrual basis.......................... $ 8,370 $ 7,138
Past due loans..................................... 6,187 5,741
Renegotiated loans................................. 598 1,503
------------ ----------
Total nonperforming loans........................ $ 15,155 $ 14,382
============ ==========
Other real estate owned (including in-substance
foreclosures)........................................ $ 2,319 $ 3,890
Loans outstanding at end of period................... $ 1,072,700 $ 982,640
Average loans outstanding (year-to-date)............. $ 1,034,981 $ 983,231
Nonperforming loans as percent of total loans........ 1.41% 1.46%
Provision for possible loan losses................... $ 1,112 $ 1,112
Net charge-offs...................................... $ 593 $ 894
Net charge-offs as percent of average loans.......... 0.06% 0.09%
Provision for possible loan losses as percent of net
charge-offs.......................................... 187.52% 124.38%
Reserve for possible loan losses as percent of
average loans outstanding............................ 1.46% 1.47%
Reserve for possible loan losses as percent of
nonperforming loans.................................. 99.39% 100.72%
</TABLE>
Other than those described above, there are no material credits that
management has serious doubts as to the borrower's ability to comply with the
present loan repayment terms. Additionally, the portfolio is well diversified
and as of June 30, 1994, there were no significant concentrations of credit.
Although the ratio of the reserve for possible loan losses as a percentage of
nonperforming loans is lower than the Corporation's peers, other factors should
be considered such as historical loan losses and nonperforming loan levels.
These were favorable when compared to peer group levels over the past five
years. Management believes that the reserve for possible loan losses and
nonperforming loans remain safely within acceptable levels during 1994.
The Corporation will be required to adopt Financial Accounting Standards
Board Statement No. 114 "Accounting by Creditors for Impairment of a Loan",
effective January 1, 1995. This statement addresses the accounting by
creditors, such as banks, for the impairment of certain loans. It requires that
impaired loans that are within the scope of this statement be measured based on
the present value of expected cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loans' observable market
price or the fair value of the collateral if the loan is collateral dependent.
The adoption of this statement is not anticipated to have a material effect on
the Corporation's financial position, liquidity or results of operations.
45
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL RESOURCES
Equity capital decreased $5.0 million in 1994. Earnings retention was $5.5
million, representing an earnings retention rate of 51.2%. The retained net
income remains in permanent capital to fund future growth and expansion. Stock
purchased by the Employee Stock Ownership Plan (the "ESOP"), subject to the
debt of the Corporation, reduced equity by $730 thousand while the loan
repayment by the ESOP of debt guaranteed by the Corporation increased equity by
$447 thousand while amounts paid to fund the discount on reinvested dividends
reduced equity by $114 thousand. The market value adjustment to securities
available for sale reduced equity by $10.1 million resulting from market values
declining as interest rates increased.
A capital base can be considered adequate when it enables the Corporation to
intermediate funds responsibly and provide related services, while protecting
against future uncertainties. The evaluation of capital adequacy depends on a
variety of factors, including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In consideration of these
factors, management's primary emphasis with respect to the Corporation's
capital position is to maintain an adequate and stable ratio of equity to
assets.
The Federal Reserve Board has issued risk-based capital adequacy guidelines
which are designed principally as a measure of credit risk. These guidelines
require: (1) at least 50% of a banking organization's total capital be common
and other "core" equity capital ("Tier I Capital"); (2) assets and off-balance-
sheet items be weighted according to risk; (3) the total capital to risk-
weighted assets ratio be at least 8%; and (4) a minimum leverage ratio of Tier
I capital to average total assets. The minimum leverage ratio is not
specifically defined, but is generally expected to be 4-5 percent for all but
the most highly rated banks, as determined by a regulatory rating system. As of
June 30, 1994, the Corporation had a Tier I Capital to risk- weighted assets
ratio and total capital to risk-weighted assets ratio of 15.95% and 17.24%,
respectively and a minimum leverage ratio of 8.89%.
PENDING ACQUISITIONS
On March 25, 1994 the Corporation entered into a definitive agreement to
merge with United National Bancorporation ("United"), a bank holding company
headquartered in Chambersburg, Pennsylvania. On April 21, 1994 the Corporation
entered into a definitive agreement to merge with Reliable Financial
Corporation ("Reliable"), a savings and loan holding company headquartered in
Bridgeville, Pennsylvania. Terms and conditions of the agreements are found
elsewhere in this Proxy Statement/Prospectus. The proposed merger with United
is a separate and independent transaction from the proposed Reliable merger.
The consummation of either merger is not a condition precedent to the
consummation of the other merger.
While the future impact on the Corporation's financial condition, results of
operations and liquidity are not certain, and except for the acquisition costs,
the transactions are not expected to be dilutive to earnings, nor have a
significant impact on the financial condition of the Corporation. The proposed
mergers are not expected to have a material impact on the liquidity or capital
position of the Corporation.
Pro Forma results are described in the "Comparative and Pro Forma Combined
Financial Information" section of this Proxy Statement/Prospectus. The pro
forma information is provided for informational purposes only and should not be
construed as being indicative of the actual financial condition, results of
operations and dividends subsequent to the mergers.
46
<PAGE>
MANAGEMENT OF FCFC
BOARD OF DIRECTORS
The table below provides information concerning the present Board of
Directors of FCFC and named executive officers who are not directors. The By-
Laws of FCFC provide that the Board of Directors may fix the number of
directors, and such number is currently fixed at 20. The Board of Directors of
FCFC is divided into three classes, with one class elected at each Annual
Meeting of Shareholders and each class serving a term of three years. Each of
the directors of FCFC named below will serve until the Annual Meeting of FCFC
held in the year indicated in the table or until his successor is elected and
has been qualified. Following the United Merger, the number of directors of
FCFC will be increased by one and Robert C. Williams, who is currently Vice
Chairman of the Board, President and Chief Executive Officer of United, will
fill such vacancy, becoming a director of FCFC until the annual meeting of FCFC
shareholders in 1997. Mr. Williams is age 51, has been a director of United
since 1989 and is the beneficial owner of 21,170 shares of United Common Stock.
Upon consummation of the United Merger, these shares will be converted into
42,340 shares of FCFC Common Stock, which is less than 1% of the outstanding
FCFC Common Stock. Share ownership information contained in the table reflects
beneficial ownership (see note (1) to the table) of FCFC Common Stock as of
August 5, 1994, and is based upon information furnished by or on behalf of the
persons named in the table.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
NAME, PRINCIPAL OCCUPATION DIRECTOR OWNERSHIP OF OUTSTANDING
DURING THE PAST FIVE OF FCFC FCFC COMMON FCFC COMMON
YEARS, OTHER DIRECTORSHIPS AGE SINCE STOCK(1) STOCK
-------------------------- --- -------- ------------ -------------
<S> <C> <C> <C> <C>
Term Ending in 1997:
E. H. Brubaker........................ 64 1984 10,078(2) *
Chairman of the Board and Director of
Deposit
A. B. Hallstrom....................... 65 1986 10,811(3) *
Chairman, Hallstrom Construction Inc.
(real estate development); Director
of Deposit
Thomas J. Hanford..................... 55 1984 48,258 *
Investor; formerly President, Coca-
Cola Bottling Co. of DuBois, Inc.;
Director of 1st United BANCORP, Boca
Raton, FL ("BANCORP") (bank holding
company)
H. H. Heilman, Jr..................... 77 1985 21,500 *
Partner, Heilman & McClister
(attorneys-at-law); Chairman of the
Board and Director of Leechburg;
previously President and Chief
Executive Officer of Leechburg
Charles J. Szewczyk................... 66 1990 269,755 1.45%
(pronounced and sometimes known as
Charles J. Sheftic) Chairman of the
Board of PBTC; Managing Partner of
County Amusement Co. (motion picture
theatres and real estate holdings);
Director of Westview, Inc. (motion
picture theatre service company)
John I. Whalley, Jr................... 48 1986 52,360(4) *
President, Whalley Group, Inc.
(various business enterprises)
Term Ending in 1996:
Sumner E. Brumbaugh................... 65 1992 145,990(2)(3) *
Chairman of the Board and Chief
Executive Officer of Central;
President, Brumbaugh Insurance Group;
Board Member, Pennsylvania National
Mutual Casualty Insurance Co., and
Central Pennsylvania Health Systems
("CPHS"); Advisory Board, Penn State
University (Altoona Campus):
President, Lexington One and
Lexington Two (subsidiaries of CPHS)
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
NAME, PRINCIPAL OCCUPATION DIRECTOR OWNERSHIP OF OUTSTANDING
DURING THE PAST FIVE OF FCFC FCFC COMMON FCFC COMMON
YEARS, OTHER DIRECTORSHIPS AGE SINCE STOCK(1) STOCK
-------------------------- --- -------- ------------------ -------------
<S> <C> <C> <C> <C>
Edward T. Cote.................. 57 1984 100,400(5) *
Associate, The Wakefield Group
(Investment Banking);
previously President, Benefits
and Services Company (insurance
holding company); Director of
NBOC and New Mexico Banquest
Investors Corp. ("NMB") (bank
holding Company)
Clayton C. Dovey, Jr............ 70 1985 23,134 *
Chairman of the Board of
Cenwest
Johnston A. Glass............... 45 1986 19,587(3) *
President and Director of NBOC
Dale P. Latimer................. 63 1984 615,431(3)(5)(8) 3.30%
President, R & L Development
Co. (heavy construction);
Director of FCTC, NMB and NBOC
David R. Tomb, Jr............... 62 1983 295,420(2)(3)(5)(6) 1.58%
Partner, Tomb and Tomb
(attorneys-at-law); Vice
President, Secretary and
Treasurer of FCFC; Director of
NBOC, Peoples, FCTC, CSC and
Commonwealth Trust
Term Ending in 1995:
Thomas L. Delaney............... 63 1984 41,604(2) *
Private Investor; formerly
Chairman, Petrolec, Inc.
(petroleum wholesaler);
Director of Deposit,
BANCORP and Horizon Cellular
Telephone Company (cellular
telephone service)
Ronald C. Geiser................ 65 1985 18,544(3) *
Retired; formerly President of
Cenwest; Director of Cenwest
David F. Irvin.................. 76 1984 63,204 *
Sole Owner, The Irvin-McKelvy
Company (sales and engineering
for mining and industrial
services); Director of NBOC
David L. Johnson................ 64 1984 7,193(2) *
Retired; formerly Vice
President and Corporate
Secretary, Pennsylvania
Manufacturers' Corporation
(insurance holding company);
Director of NBOC
Robert F. Koslow................ 58 1993 15,420(3)(9) *
Chairman of the Board,
President and Chief Executive
Officer of Peoples; Director,
Pennsylvania Bankers
Association, Pennsylvania
Independent Bank and Wheeling
Jesuit College; Member of the
Advisory Board to the President
of the Federal Reserve Bank of
Cleveland
Joseph W. Proske................ 57 1984 10,787(2) *
Vice President-Engineering,
Stackpole Magnet Division
(manufacturer of magnetic
components); Director of
Deposit and CSC
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
NAME, PRINCIPAL OCCUPATION DIRECTOR OWNERSHIP OF OUTSTANDING
DURING THE PAST FIVE OF FCFC FCFC COMMON FCFC COMMON
YEARS, OTHER DIRECTORSHIPS AGE SINCE STOCK(1) STOCK
-------------------------- --- -------- --------------------- -------------
<S> <C> <C> <C> <C>
E. James Trimarchi........... 72 1982 325,612(2)(3)(5)(6)(7) 1.75%
Chairman of the Board,
President and Chief
Executive Officer of FCFC;
Director of NBOC, Peoples,
FCTC, NMB, CSC and
Commonwealth Trust
Executive Officers Who Are
Not Directors:
William Miksich.............. 58 -- 21,755 *
President, Chief Executive
Officer and Director of
Deposit
Joseph E. O'Dell............. 48 -- 9,415(2) *
Senior Executive Vice
President and Chief
Operating Officer of FCFC;
Director of Cenwest, FCTC,
CSC and Delaware National
Bancshares, Inc.
Gerard M. Thomchick.......... 38 -- 6,313(2)(3) *
Executive Vice President of
FCFC; President, Chief
Executive Officer and
Director of Commonwealth
Trust; Director of Central,
Deposit and FCTC
John J. Dolan................ 38 -- 4,666(3) *
Senior Vice President,
Comptroller and Chief
Financial Officer of FCFC;
Chief Financial
Officer/Comptroller of
Commonwealth Trust;
Treasurer and Assistant
Secretary, FCTC; Director of
PBTC
George E. Dash............... 44 -- 3,451 *
Senior Vice President/Sales
and Marketing of FCFC;
Director of Central
All directors and executive
officers of FCFC as a group
(24 persons)................ -- -- 1,681,370(2-10) 9.02%
</TABLE>
- --------
* Less than one percent.
(1) Under regulations of the Securities and Exchange Commission, a person who
has or shares voting or investment power with respect to a security is
considered a beneficial owner of the security. Voting power is the power
to vote or direct the voting of shares, and investment power is the power
to dispose of or direct the disposition of shares. Unless otherwise
indicated in the other footnotes below, each director has sole voting
power and sole investment power with respect to the shares indicated
opposite his name in the table, and each member of a group has sole voting
power and sole investment power with respect to the number of the shares
indicated for the group.
(2) Does not include the following shares held by spouses, either individually
or jointly with other persons, as to which voting and investment power is
disclaimed by the director or officer: Mr. Brubaker, 29,498; Mr.
Brumbaugh, 132; Mr. Delaney, 8,616; Mr. Johnson, 816; Mr. O'Dell, 1,658;
Mr. Proske, 31,530; Mr. Thomchick, 1,733; Mr. Tomb, 264; Mr. Trimarchi,
20,000; and all directors and officers as a group, 94,247.
(3) Includes the following shares held jointly with spouses, as to which
voting and investment power is shared with the spouse: Mr. Brumbaugh,
15,400; Mr. Geiser, 14,364; Mr. Glass, 11,466; Mr. Hallstrom, 9,468; Mr.
Koslow, 9,400; Mr. Latimer, 12,165; Mr. Proske, 1,600; Mr. Thomchick,
2,547; Mr. Tomb, 31,846; Mr. Trimarchi, 8,482; and all directors and
officers as a group, 115,138.
49
<PAGE>
(4) Includes 51,860 shares held by the J. Irving Whalley Testamentary Trust, of
which John I. Whalley, Jr. is co-trustee.
(5) Includes 100,000 shares owned by Berkshire Securities Corporation.
Berkshire is a Pennsylvania corporation organized in 1976 for the purpose
of acquiring and holding the securities of Pennsylvania banks. The
officers, directors or shareholders of Berkshire include Messrs. Cote,
Latimer, Tomb and Trimarchi, each of whom is an officer or director of
FCFC, among others. The shares were acquired by Berkshire when its shares
of Dale National Bank (now Cenwest) were converted into shares of FCFC
Common Stock as a result of the Dale merger in 1985. Each of the foregoing
persons may be deemed to share voting and investment power with respect to
these shares.
(6) Includes 159,338 shares held by County Wide Real Estate, Inc., of which
Messrs. Tomb and Trimarchi are each 50% owners and as to which shares they
share voting and investment power.
(7) Includes 29,652 shares held by family interests with respect to which
shares Mr. Trimarchi exercises sole voting and investment power.
(8) Includes 91,958 shares held by the R&L Development Company Pension & Profit
Sharing Plan of which Mr. Latimer is Trustee.
(9) Mr. Koslow became a member of the Board of Directors on the occasion of the
merger of Peoples into FCFC on December 31, 1993.
Each of the persons listed above has held the position described above or
other executive positions with the same entity (or a subsidiary thereof) for at
least the past five years.
THE BOARD AND ITS COMMITTEES
During 1993 there were four meetings of the Board of Directors of FCFC. All
directors attended at least 75% of the total number of meetings of the Board of
Directors of FCFC and all committees of such Board of which they were members.
The Board of Directors of FCFC has established four standing committees:
Executive, Audit, Personnel and Compensation, and Executive Compensation. The
Board has no standing Nominating Committee.
When the Board of Directors is not in session, the Executive Committee, which
is comprised of Messrs. Trimarchi (Chairman), Tomb (Secretary), Brubaker,
Brumbaugh, Delaney, Geiser, Glass, Heilman, Latimer and Szewczyk, possesses and
exercises all the powers of the Board, except for matters which are required by
law to be acted upon by the full Board. The Executive Committee considers major
policy matters and makes reports and recommendations to the Board. The
Executive Committee met four times in 1993.
The Audit Committee is comprised of Messrs. Latimer (Chairman), Hallstrom,
Irvin, Cote and Proske and reviews the internal auditing procedures and
controls of FCFC and its subsidiaries. The Audit Committee also reviews reports
of examinations of the Subsidiary Banks received from state and federal
regulators, as well as reports from internal and external auditors. The Audit
Committee formally reports to the full Board of Directors its evaluations,
conclusions and recommendations with respect to the condition of FCFC and its
subsidiaries and the effectiveness of their policies, practices and controls.
The Audit Committee met four times in 1993.
The Personnel and Compensation Committee is comprised of Messrs. Cote, Dovey
and Glass. Roy R. Fairman, deceased director, was chairman of this committee. A
new chairman has not been appointed at this time. The Personnel and
Compensation Committee reviews the general salary administration and employee
benefit programs of FCFC and its subsidiaries and makes recommendations
relating thereto to the Board of Directors. The Personnel and Compensation
Committee met one time in 1993.
50
<PAGE>
The Executive Compensation Committee is comprised of Messrs. Johnson
(Chairman), Cote, Irvin and Latimer. The Executive Compensation Committee
maintains on an on-going basis a comprehensive executive compensation program
which seeks to maintain a position of "equity" with respect to balancing the
interests of the shareholders with those of the executive officers. The minutes
of Executive Compensation Committee meetings are submitted to the FCFC Board of
Directors on a timely basis, and a report of the committee is included in the
proxy statement delivered to all FCFC shareholders prior to the annual meeting.
The Executive Compensation Committee met four times in 1993.
The By-Laws of FCFC require that any shareholder who intends to nominate or
cause to have nominated any candidate for election to the Board of Directors of
FCFC (other than a candidate proposed by FCFC's then-existing Board of
Directors) must notify the Secretary of FCFC in writing not less than 120 days
prior to the date of FCFC's proxy statement released to its shareholders in
connection with the previous year's annual shareholders' meeting called for the
election of directors. Such notification must contain (to the extent known by
the notifying shareholder) the name, address, age, principal occupation and
number of shares of FCFC Common Stock owned by each proposed nominee; the name,
residence address and number of shares of FCFC Common Stock owned by the
notifying shareholder; the total number of shares of FCFC Common Stock that, to
the knowledge of the notifying shareholder, will be voted for each proposed
nominee; a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons pursuant to which
the nomination or nominations are to be made by the shareholder; such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy roles
of the Securities and Exchange Commission had the nominee been nominated by the
Board of Directors; and the written consent of each nominee, signed by such
nominee, to serve as a director of FCFC if so elected. The Board of Directors
of FCFC as a whole considers nominations submitted by shareholders only if
submitted in accordance with the By-Laws and otherwise in time for such
consideration.
COMPENSATION OF DIRECTORS
Directors are compensated at the rate of $1,000 for each quarterly Board
meeting attended for Board members presently serving in a management or Board
capacity at any FCFC affiliate and $1,500 for each quarterly Board meeting
attended for all other Board Members. Committee members receive $200 for
attendance at each committee meeting. A Committee Chairman or Secretary is
compensated $250 per meeting attended.
EXECUTIVE OFFICERS
The table below provides information concerning the present executive
officers of FCFC.
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD DURING THE PAST FIVE YEARS
---- --- -----------------------------------------
<S> <C> <C>
E. James Trimarchi...... 72 Chairman of the Board, President and Chief Executive Officer of FCFC
Joseph E. O'Dell........ 48 Senior Executive Vice President and Chief Operating Officer of FCFC
Gerard M. Thomchick..... 38 Executive Vice President of FCFC
David R. Tomb, Jr....... 62 Vice President, Secretary and Treasurer of FCFC
John J. Dolan........... 38 Senior Vice President, Comptroller and Chief Financial Officer of FCFC
George E. Dash.......... 44 Senior Vice President/Sales and Marketing of FCFC
</TABLE>
Each of the officers identified above has held the position indicated above
or other executive positions with the same entity (or a subsidiary thereof) for
at least the past five years.
Executive officers of FCFC serve at the pleasure of the Board of Directors of
FCFC and for a term of office extending through the election and qualification
of their successors.
51
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding compensation
received by the Chief Executive Officer and the remaining executive officers of
FCFC whose annual compensation, including bonus, exceeded $100,000 for the
period indicated.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION/1/
<TABLE>
<CAPTION>
NAME AND ALL OTHER/2/
PRINCIPAL POSITION YEAR SALARY/3/ BONUS COMPENSATION
------------------ ---- --------- ------- ------------
<S> <C> <C> <C> <C>
E. James Trimarchi......................... 1993 $311,800 $ 0 $21,006
Chairman of the Board, 1992 282,000 32,500 28,122
President and Chief Executive Officer 1991 262,750 0
Joseph E. O'Dell........................... 1993 185,400 0 21,190
Senior Executive Vice President 1992 150,700 30,000 19,737
and Chief Operating Officer 1991 135,000 0
Johnston A. Glass.......................... 1993 162,500 0 19,120
President and Chief Executive 1992 149,150 0 18,693
Officer of NBOC 1991 135,000 0
Gerard M. Thomchick........................ 1993 161,200 0 17,800
Executive Vice President 1992 125,000 25,000 18,800
1991 100,000 0
William Miksich............................ 1993 135,200 0 16,339
President and Chief Executive 1992 128,320 0 16,253
Officer of Deposit 1991 105,600 0
</TABLE>
- --------
(1) In accordance with the transitional provisions applicable to the revised
rules on executive officer and director compensation disclosure adopted by
the Securities and Exchange Commission (the "Commission"), as informally
interpreted by the Commission's Staff, amounts of Other Annual Compensation
and All Other Compensation are excluded for FCFC's 1991 year.
(2) Includes the matching and automatic contribution by FCFC to the
individual's account in FCFC's 401(k) Plan as well as the allocation of
shares to the individual's account in the Employee Stock Ownership Plan
("ESOP").
(3) Includes compensation for services on boards and committees of FCFC and
various subsidiaries.
EXECUTIVE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1993, FCFC's Executive Compensation Committee was comprised of Messrs.
Johnson, Cote, Irvin and Latimer. No member of the Executive Compensation
Committee was an officer or employee of FCFC during 1993, has ever been a
former officer of FCFC or a subsidiary or has a transaction or relationship
required to be disclosed under Item 404 of Regulation S-K of the Commission.
During 1993, no executive officer served on a compensation committee (or other
board committee performing equivalent functions) or Board of Directors of any
entity related to the above named Committee members.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
AGREEMENTS
Mr. Geiser served as President of Cenwest pursuant to an employment agreement
providing that he shall continue to serve in that position until December 31,
1994. Mr. Geiser retired on May 31, 1994 as President of Cenwest but continues
as a director of Cenwest and FCFC. The agreement provided that his salary shall
not be less than $69,363 and was reviewed annually in accordance with Cenwest's
past practices. Mr. Geiser has agreed that during the term of his employment
and for a period of 10 years thereafter, he will not engage in any competing
business within 10 miles of any of the banking facilities of FCFC or its
subsidiaries or solicit any of their then existing customers.
52
<PAGE>
Mr. Brumbaugh serves as Chairman of the Board and Chief Executive Officer of
Central pursuant to an employment agreement for a period of 7 years, commencing
May 1, 1992 and ending April 30, 1999. The agreement provides that Mr.
Brumbaugh shall serve in an executive capacity and shall be the Chairman of the
Board of Directors and Chief Executive Officer of Central and shall also
perform such services for FCFC as from time to time are requested. As
compensation to Mr. Brumbaugh for all services rendered to Central and FCFC as
an officer, director or member of any committee of Central or any of FCFC's
subsidiaries or affiliates, FCFC has agreed, in addition to director's fees and
committee meeting fees, to pay or cause Central to pay to Mr. Brumbaugh a
salary at an annual rate of $100,000, which sum shall be adjusted upward at the
annual rate of 5%. Should Mr. Brumbaugh retire after at least one year of
continuous service under the agreement, thereafter he shall be paid his
retirement compensation for the remaining term of the agreement at an annual
rate of $50,000, adjusted upwards annually for cost of living at the rate of
5%. Should Mr. Brumbaugh die at any time during the agreement, in lieu of the
foregoing payments, FCFC shall pay his wife the sum of $25,000 per year if she
is living at the time each payment is made. As a part of the agreement and for
a period of 10 years thereafter, Mr. Brumbaugh will not engage in any competing
business within 10 miles of any of the banking facilities of Central or its
subsidiaries or solicit any of its then existing customers.
Mr. Koslow serves as Chairman of the Board, President and Chief Executive
Officer of Peoples under an employment agreement extending to July 19, 1998.
The agreement provides that Mr. Koslow will serve in such executive capacity as
may be designated from time to time by the Board of Directors. As compensation
to Mr. Koslow, Peoples agrees to pay him a minimum annual salary equal to the
annual salary in effect on July 20, 1988, such annual salary to be subject to
annual review for possible increase. If Mr. Koslow's employment is terminated
other than for cause, he is entitled to be paid annually in equal monthly
amounts, for the greater of two years or the remaining term of the agreement,
the annual salary and bonus paid to him for the full calendar year immediately
preceding the year in which such termination occurs, plus the insurance
premiums provided in a split dollar life insurance agreement between Peoples
and Mr. Koslow. If there is a change in control of Peoples, such minimum annual
salary shall be increased on January 1 of each year thereafter by an amount
equal to the percentage increase in the Consumer Price Index for the preceding
calendar year. If there is a change of control of Peoples and thereafter Mr.
Koslow's responsibilities are changed without his consent, Mr. Koslow is
entitled to resign within twelve months of such change of control, in which
case he is entitled to receive annually in equal monthly amounts, for the
greater of three years or the remaining term of the agreement, but not beyond
his reaching age 65, the annual salary and bonus paid to him for the full
calendar year immediately preceding such resignation, plus the split dollar
life insurance premiums. As part of the agreement, Mr. Koslow has agreed that
during the term of his employment and for a period of 10 years thereafter, he
will not engage in any business in competition with Peoples or any of its
subsidiaries within 20 miles of any of their banking facilities or solicit any
of their then existing customers.
INTERESTS OF NOMINEES, DIRECTORS AND OFFICERS IN CERTAIN TRANSACTIONS
During 1993, David R. Tomb, Jr., attorney-at-law, and the law firm of Tomb
and Tomb of which Mr. Tomb is a partner performed legal services for FCFC, NBOC
and CSC. Mr. Tomb is a director and executive officer of FCFC. The fees paid
for services during 1993 were $65,000. See "Legal Opinions."
One or more of the Subsidiary Banks (the "Lending Bank" or "Lending Banks")
have extended credit to several directors and executive officers of FCFC, to
members of their families and to corporations or organizations in which such
persons have a beneficial interest or with which such persons are associated as
officers, partners, directors or trustees. In all cases, except as described in
the following paragraphs, these transactions were made in the ordinary course
of business and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of collectibility or
present other unfavorable features. As of December 31, 1993, total loans to
FCFC's and its subsidiaries' directors, executive officers, principal
shareholders and their related interests whose loan balances exceeded $60,000
during 1993 were $25,245,000.
Mr. John I. Whalley, Jr. became an FCFC director in December 1986 and was
reelected a director in 1990 and 1994. Since January 1, 1993 there has been
outstanding from the Lending Banks to Mr. Whalley
53
<PAGE>
and his related interests four loans having an aggregate original principal
balance of $2,223,631, which bear interest rates from the prime rate (currently
7%) to 11.5% and are partially collateralized with marketable securities and
motor vehicles. These loans were incurred principally to consolidate
outstanding loans from the Lending Banks and other financial institutions and
to strengthen the Lending Banks' collateral position.
In his examination of the Lending Bank on September 30, 1992, the Comptroller
of the Currency classified $621,092 of these loans as Substandard and $209,147
as Doubtful, leaving an aggregate unclassified balance of $554,164 secured by
the marketable securities. At the Comptroller's instruction $1,138,291 of these
loans were placed in nonaccrual status by the Lending Bank. Subsequent
reexamination by the Comptroller of the Currency in 1993 resulted in $1,101,182
being classified substandard and with the balance remaining in nonaccrual. It
is the opinion of the Lending Bank's management that the Comptroller has
classified this indebtedness as Substandard and Doubtful due to the cessation
of operations of Mr. Whalley's related business and the fact that loan
collateral is being sold by the borrower to repay the indebtedness. The largest
aggregate amount of indebtedness outstanding at any time from Mr. Whalley and
his related interests since January 1, 1993 was $1,469,895, and the aggregate
amount outstanding was $1,116,283 as of August 5, 1994.
In June 1986 the Lending Bank granted credit of $600,000 to the purchasers of
commercial real estate, the proceeds of which were paid to David F. Irvin, a
director of FCFC. To facilitate the granting of this credit, Mr. Irvin gave a
mortgage to the Lending Bank on a property and building adjacent to the subject
real estate. In his September 30, 1992 examination, the Comptroller classified
as Substandard $486,279 of the $518,279 balance of this loan. This loan was
rewritten on August 31, 1993 at an interest rate of 8%. The loan balance was
$488,169 as of August 5, 1994. It is the opinion of the Lending Bank's
management that the Comptroller has classified this credit as Substandard as a
result of difficulties experienced in the business operations of the purchaser.
CERTAIN BENEFICIAL OWNERS OF FCFC COMMON STOCK
FCFC is not aware of any person who, as of August 5, 1994, was the beneficial
owner of more than 5% of the FCFC Common Stock, except that as of such date,
FCTC, acting in a fiduciary capacity for various trusts and estates, including
the FCFC ESOP and the FCFC 401(k) Plan, held an aggregate of 1,868,861 shares
of FCFC Common Stock (10.3% of the outstanding shares). Of these shares, FCTC
had sole voting power with respect to 594,462 shares, shared voting power with
respect to 1,274,391 shares, had sole investment power with respect to 755,876
shares and shared investment power with respect to 1,112,985 shares. FCTC votes
the shares over which it, acting in its fiduciary capacity, has voting power
and, where voting power is shared, shares are voted by FCTC in consultation
with the other persons having voting power. As of August 5, 1994, the FCFC ESOP
held 879,337 shares (4.72%) of FCFC's Common Stock of which 461,984 shares were
allocated to the accounts of participants and 417,353 shares were unallocated.
Allocated shares are voted by the participants; unallocated shares, by the ESOP
trustee in its discretion.
54
<PAGE>
INFORMATION CONCERNING RELIABLE
BUSINESS AND PROPERTIES OF RELIABLE
Reliable was organized as a Delaware business corporation on November 7,
1991 at the direction of the Board of Directors of Reliable Savings Bank for
the purpose of acquiring the Savings Bank and creating a savings and loan
holding company. On March 30, 1992, the Savings Bank converted from the mutual
to the stock form and became a wholly-owned subsidiary of Reliable. Reliable
functions primarily as the holder of all of the outstanding stock of the
Savings Bank. As used herein, "Reliable" refers collectively to Reliable and
the Savings Bank. Reliable is registered as a savings and loan holding company
under the Savings and Loan Holding Company Act, as amended, and it currently
employs 28 employees (full-time equivalents).
Through Reliable Savings Bank, Reliable traces its origins to a building and
loan association incorporated on July 18, 1925 under the laws of Pennsylvania
with the name Reliable Building and Loan Association of Bridgeville, Pa. The
Saving Bank adopted its present name on July 21, 1989. Reliable presently
conducts its business through three community banking offices in three
communities, of which two are in Allegheny County and one is in Washington
County, which is adjacent to Allegheny County.
Reliable engages in a full-service savings association business within the
vicinity of its service area. It offers various loan services, including
secured and unsecured, commercial and consumer loans, construction and
mortgage loans, lease financing, all types of deposit services, including
passbook, interest bearing demand or NOW accounts and savings and time deposit
accounts. As of June 30, 1994, approximately 90% of its loan portfolio
consisted of loans secured by mortgages on 1-to-4 family residences. Reliable
invests in U.S. Government and agency obligations, state and municipal
obligations, Federal Home Loan Mortgage Corporation common stock and Federal
Home Loan Bank of Pittsburgh capital stock. Reliable's principal sources of
income are mortgage loans, investment securities and interest bearing
deposits. Reliable does not have a trust department, and its business is not
seasonal in nature.
Reliable operates two ATMs which permit its customers to conduct routine
banking transactions 24 hours a day, and these ATMs are located on the
premises of its banking offices. All of the ATMs are part of the MAC Network,
which consists of over 14,000 ATMs owned by numerous banks, savings and loan
associations and credit unions located in 16 states, of which 14 are east of
the Mississippi River. Reliable's MAC customers may use the HONOR Network,
which has 9,800 ATMs located primarily in the southeastern quadrant of the
United States.
As a state chartered, federally insured savings association that is a member
of the Federal Home Loan Bank System, Reliable is subject to supervision and
regular examination by the Pennsylvania Department of Banking and the Office
of Thrift Supervision. Various federal and state laws and regulations govern
many aspects of its savings association business. See "Regulation and
Supervision--Subsidiary Banks and Reliable Savings Bank."
Reliable competes actively with commercial banks, savings banks and savings
and loan associations in its area, many of which are larger than Reliable, as
well as with major regional banking and financial institutions headquartered
in Pittsburgh. The management of Reliable believes that it is generally
competitive with all competing financial institutions in its service area with
respect to interest rates paid on time and savings deposits, service charges
on deposit accounts and interest rates charged on loans.
The headquarters of Reliable is located at 428 Station Street, Bridgeville,
Allegheny County, Pennsylvania. The one-story granite headquarters building
has approximately 4,200 square feet of floor space and contains a full-service
banking facility and the central administrative offices of Reliable. Of
Reliable's banking offices, two branches are leased and the headquarters is
owned in fee, free of all liens and encumbrances. Management believes all such
facilities to be in good repair and well suited to their current uses.
55
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
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 appearing elsewhere in the
Proxy Statement/Prospectus. The results for the nine month periods ended June
30, 1994 and 1993 are not necessarily indicative of the results to be expected
for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30, YEARS ENDED SEPTEMBER 30,
---------------------- ---------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income......... $ 7,616 $ 8,276 $ 10,865 $ 11,976 $ 12,413 $ 11,453 $ 10,639
Interest expense........ 3,124 3,420 4,500 6,147 7,912 7,817 7,112
---------- ---------- ---------- ---------- --------- --------- ---------
Net interest income.... 4,492 4,856 6,365 5,829 4,501 3,636 3,527
Provision for possible
loan losses........... 150 150 250 200 155 67 0
---------- ---------- ---------- ---------- --------- --------- ---------
Net interest income
after provision for
possible loan losses.. 4,342 4,706 6,115 5,629 4,346 3,569 3,527
Gain (loss) on sales of
investment securities. 1,542 698 1,133 261 0 (54) 0
Gain (loss) on sales of
real estate owned..... 0 37 49 11 0 67 0
Non-interest income.... 266 231 317 191 162 141 106
Non-interest expense... 2,304 1,877 2,575 2,220 1,924 1,682 1,377
---------- ---------- ---------- ---------- --------- --------- ---------
Income before taxes and
cumulative effect of
change in tax
accounting method..... 3,846 3,795 5,039 3,872 2,584 2,041 2,256
Applicable income
taxes................. 1,723 1,431 1,884 1,529 872 995 953
---------- ---------- ---------- ---------- --------- --------- ---------
Net income before
cumulative effect of
change in tax
accounting method..... 2,123 2,364 3,155 2,343 1,712 1,046 1,303
Cumulative effect of
change in tax
accounting method..... 365 0 0 0 0 0 0
---------- ---------- ---------- ---------- --------- --------- ---------
Net income............. $ 2,488 $ 2,364 $ 3,155 $ 2,343 $ 1,712 $ 1,046 $ 1,303
========== ========== ========== ========== ========= ========= =========
PER SHARE DATA
Net income before
cumulative effect of
change in tax
accounting method..... $ 1.50 $ 1.65 $ 2.21 $ 1.61 N/A N/A N/A
Cumulative effect of
change in tax
accounting method..... 0.26 0 0 0 N/A N/A N/A
---------- ---------- ---------- ---------- --------- --------- ---------
Net income............. $ 1.76 $ 1.65 $ 2.21 $ 1.61 N/A N/A N/A
========== ========== ========== ========== ========= ========= =========
Cash dividends
declared.............. $ 1.20 $ 0.80 $ 1.15 $ 0.35 N/A N/A N/A
Average shares
outstanding........... 1,414,268 1,428,712 1,425,596 1,457,944 N/A N/A N/A
AT END OF PERIOD
Total assets........... $ 151,355 $ 148,822 $ 146,783 $ 145,803 $ 135,505 $ 126,148 $ 115,026
Investment securities.. 39,951 25,721 31,640 8,913 3,165 4,025 5,353
Interest-bearing
deposits.............. 15,530 28,372 20,587 33,763 18,201 6,993 10,736
Loans and leases, net
of unearned income(1). 92,617 91,316 91,185 99,683 110,967 111,451 95,587
Allowance for possible
loan losses........... 850 600 700 495 295 155 90
Deposits............... 116,415 115,866 114,619 114,099 119,431 111,649 101,666
Long-term debt......... 0 0 0 0 0 0 0
Total liabilities...... 120,638 119,319 116,979 116,226 121,432 113,787 103,711
Stockholders'
equity(2)............. 30,717 29,503 29,804 29,577 14,073 12,361 11,315
KEY RATIOS
Return on average
assets................ 2.22% 2.13% 2.14% 1.61% 1.31% 0.87% 1.17%
Return on average
equity................ 11.02 10.73 10.70 9.16 12.95 8.83 12.22
Net loans to deposit
ratio................. 78.82 78.29 78.94 86.93 92.66 99.68 93.93
Dividend payout ratio.. 68.18 48.48 52.03 43.47(3) N/A N/A N/A
Average stockholders'
equity as percentage
of average assets..... 20.15 19.85 20.02 17.61 10.10 9.82 9.56
</TABLE>
- --------
(1)Includes mortgage-backed securities.
(2) Stockholders' equity consists of common stock, additional paid-in capital,
treasury stock and retained earnings effective for periods ending
subsequent to completion of the Conversion on March 30, 1992.
(3)Dividend payout ratio annualized for comparative purposes.
56
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Liquidity and Sources of Capital
During the fiscal year ended September 30, 1993, the total consolidated
assets of Reliable Financial Corporation increased by only 0.67% to
$146,783,000 from $145,803,000 for the fiscal year ended September 30, 1992.
Changes in the composition of the balance sheet resulted primarily from loan
repayments continuing to exceed new loans granted throughout the year which
represents an additional source of liquidity for the Corporation. With net
loans repaid by borrowers during fiscal 1993 totaling $13,742,000, these monies
were reinvested among a variety of intermediate term investment securities
including U.S. Government Treasury notes and agency obligations, tax-qualified
municipal general obligation bonds and mortgage-backed securities. Together
with cash and cash equivalents of approximately $21,616,000, mostly held in
readily-liquid interest-bearing deposits in the FHLB of Pittsburgh, the
Corporation maintains a liquidity ratio, as defined by federal regulations, of
over 41% as of September 30, 1993.
What balance sheet diversification has achieved for Reliable over the course
of the last twelve months and for the past two years in general is to
significantly change the interest-rate sensitivity position, or "gap" of the
Corporation. As of September 30, 1993, the Savings Bank's cumulative one-year
maturity gap as a percentage of total assets was a positive 3.9% as compared to
a positive 4.5% gap position at September 30, 1992. Translated, a positive gap
means that total interest-bearing assets maturing or repricing within one year
exceed total interest-bearing liabilities maturing or repricing within the same
period. For fiscal 1993, the overall ratio of average interest-earnings assets
to average interest-costing liabilities for 1.29-to-1, which in management's
opinion, is a safe and sound position and serves as a protective measure in a
low-rate environment against when rates eventually turn less favorable and
begin to trend upward.
The overall strength and quality of the asset side of Reliable's balance
sheet is evident through a review of the three major components. Cash and
interest-bearing deposits in other institutions has provided the liquidity
necessary to remain efficient and flexible in an everchanging economic
environment. Investment securities, in addition to providing currently higher
level yields; have, without sacrificing marketability, positioned the portfolio
for growth in capital appreciation as the market value exceeds the carrying
amount of the investment portfolio by over $5.1 million as of September 30,
1993. And finally, loans, making up over 61% of the assets composition,
continue to represent the mainstay of Reliable's business. Broken down even
further, 94% of the loans included in portfolio at fiscal year end 1993 were
collateralized by one-to-four family residences.
The largest portion of the Savings Bank's loans are made for the purpose of
enabling borrowers to purchase residential real property secured primarily by
first liens on such property. The Savings Bank does not sell its loans into the
secondary market but rather originates them exclusively for retention in its
portfolio. The Savings Bank does not generally purchase loans.
In addition to its primary activity of making permanent residential mortgage
loans, the Savings Bank has occasionally made short-term loans to developers to
finance the construction of one-to-four family homes. Construction financing is
generally considered to involve a higher degree of risk of loss than
traditional lending on owner-occupied real estate. Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost (including interest) of construction. During the
construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Savings Bank may be required to advance funds beyond the amount originally
committed to permit completion of
57
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
the development. If the estimate of value proves to be inaccurate, the Savings
Bank may be confronted at or prior to the maturity of the loan, with a project
having a value which is insufficient to assure full repayment.
Substantially all of the Savings Bank's mortgages include "due on sale"
clauses, which are provisions giving the Savings Bank the right to declare a
loan immediately due and payable in the event that the borrower sells or
otherwise transfers to a third party the real property securing the loan, or an
interest in such property. The Savings Bank enforces the due on sale clause to
enable it to dispose of long-term mortgages fixed at rates below the current
market rate prior to the expiration of the original loan term.
The Savings Bank's President and Chief Executive Officer sets rates on fixed
rate loans and all rate schedules are ratified by the members of the Loan
Committee of the Board of Directors. Adjustable rate mortgage loans yield
interest at a rate indexed to the weekly average yield on U.S. Treasury
securities and are adjusted annually. The Savings Bank's underwriting standards
are intended to ensure that borrowers are sufficiently creditworthy, and all of
the Savings Bank's lending is subject to written underwriting guidelines
approved by the Savings Bank's Board of Directors. Detailed loan applications
are designed to determine the borrower's ability to repay the loan and certain
information solicited in these applications is verified through the use of
credit reports, financial statements and other confirmations.
It is the Savings Bank's policy to require independent on-site fee appraisals
to be made of all real estate to be used as security for mortgage loans, with
the exception of smaller denomination home equity loans. All appraisers serving
the Savings Bank are required to be state certified and must be pre-approved by
the Board of Directors on an annual basis.
The Savings Bank requires title insurance for all mortgage loans except home
equity loans. In these exceptions it requires a review of the public records to
determine equity and lien priority status. Borrowers also must obtain hazard
insurance prior to closing, with the Savings Bank as the primary loss payee
and, when required, obtain flood insurance.
The types, amounts, terms of and security for conventional loans (those not
insured or guaranteed by a U.S. government or state housing agency) originated
by the Savings Bank are prescribed by Pennsylvania or federal regulation. OTS
regulations limit the amount which the Savings Bank can lend up to specified
percentages of the value of the real property securing the loan, as determined
by an appraisal at the time the loan is originated (referred to as "loan-to-
value ratios"). The Savings Bank makes one-to-four family home loans and other
residential real estate loans with loan-to-value ratios of up to 80% of the
appraised value of the security property. All single family mortgage loans of
up to $400,000 may be approved by the President and Chief Executive Officer, or
by the Chief Loan Officer. All loans approved under authority delegated to
officers must be presented at the next regular meeting of the Board of
Directors for review and ratification. The full Board of Directors must
approve, by a majority vote, loans which exceed the above guidelines.
In addition to the Savings Bank's primary lending activity of one-to-four
family residential mortgages, it makes other mortgage and non-mortgage loans on
a limited basis. These loans include commercial business, commercial real
estate, lease finance, developed lot, land development, deposit account and
home equity. Home equity loans are secured by property on which the Savings
Bank holds the first mortgage. The Board of Directors must approve, by majority
vote, all commercial business, commercial real estate, lease finance, developed
lot and land development loans before commitment and generally these loans do
not exceed 75% of the appraised value of the property pledged to secure the
transaction.
In the area of non-performing assets, Reliable has not been immune to the
effects of the sluggish economy. As of September 30, 1993, the ratio of non-
performing assets to total consolidated assets was 1.80% as compared to a ratio
of 1.79% as of a year earlier. This increase is a direct result of management
attempting
58
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
to identify potential problem loans by taking a scrutinizing look at its loan
portfolio. These regular evaluations are supported by the continued aggressive
position taken with respect to providing for possible loan losses monthly, even
if the actual loan loss experience would not alone indicate an addition. In
view of the uncertain economic environment and growing regulatory pressure for
higher allowance levels, the Corporation's established business plan for the
Savings Bank includes the intention to add to the general valuation allowance
at an annual rate of $200,000 through fiscal year end 1994.
At September 30, 1993, Reliable had a total of $2,638,000 in loans that were
past due 90 days or more considered non-performing loans that have been
determined by management to be placed on non-accrual status. As of fiscal year
end 1993, the Savings Bank's general allowance for loan losses was $700,000
which represented 0.78% of total loans and 26.54% of total non-performing
loans, compared to the coverage as of September 30, 1992 of 0.48% and 18.91%,
respectively.
Despite the recent trend of increased delinquencies affecting the Savings
Bank's loan portfolio, management does not expect to experience a material loss
on any of the currently non-performing loans as, in the opinion of management,
adequate allowances have been established as of September 30, 1993 and will
continue to be evaluated for adequacy on at least a quarterly basis. However,
the Savings Bank is prepared, if required, to take the necessary foreclosure
steps in order to protect its interest and to minimize any unforeseen future
losses.
On the liability side of the balance sheet, overall deposits accounts showed
a slight increase of 0.46% during fiscal year 1993. The majority of this
movement was out of the area of long-term certificates of deposit as interest
rates declined throughout the year. Offsetting balance increases were noticed
in passbook savings accounts and NOW and money market checking accounts as
funds liquidity appeared to be a customer concern in light of the falling rate
environment. Although the Savings Bank has the ability to borrow over $18
million in advances from the FHLB of Pittsburgh to meet its current liquidity
requirements if necessary, there continues to be no outstanding debt or
borrowings as of September 30, 1993 and as of that date the amount of
outstanding loan commitments and loans in process totaled $6,964,000.
Consolidated stockholders' equity of the Corporation remained relatively
constant between the fiscal years ended September 30, 1993 and 1992, increasing
only by 0.77% to a level of $29,804,000. The level amount of equity resulted
primarily from the declaration of over $1.6 million in quarterly cash dividends
and the repurchase of approximately $1.4 million in treasury stock during the
fiscal year. The ratio of average equity to average assets during fiscal year
1993 was 20.02% compared to 17.61% for fiscal 1992. Current net earnings
represents a return on average equity for fiscal 1993 of 10.7% compared to
prior year's return on average equity of 9.16%. The Savings Bank continues to
be well capitalized as of September 30, 1993, with tangible and core capital
levels of 18.19% and an adjusted risk-based capital level of 42.71%, each of
which continues to be well in excess of the current regulatory capital
requirements.
59
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Net Income
Net income for the fiscal year ended September 30, 1993 was $3,155,000
compared to net income for fiscal years 1992 and 1991 of $2,343,000 and
$1,712,000, respectively. This represents annual net earnings growth at a rate
of 35% during fiscal 1993 and 37% for fiscal 1992. The operating results of
Reliable are largely dependent upon the net interest income generated by the
Savings Bank. The most significant factor contributing to this steady growth
pattern has been the impact of the continued declining interest rate
environment throughout the financial services industry. The effect can be noted
in the Savings Bank's interest rate spread or the difference between the yield
earned on interest-earning assets and the rate paid on interest-bearing
liabilities. The average interest rate spread for fiscal 1993 was 3.54% versus
3.05% and 2.75% for fiscal years 1992 and 1991, respectively.
The Savings Bank has also benefited from its interest-rate sensitivity
position during these years. Interest-rate sensitivity provides a measure as to
the effect changes in rates will have on net interest income. During the fiscal
years 1993, 1992 and 1991, the Savings Bank's cumulative one-year interest rate
repricing "gap" was a positive 3.9%, 4.5% and a negative 11.6% of total assets,
respectively. The favorable impact of the changing rate environment during
these periods can be seen in Reliable's bottom line as the return on average
assets has increased from 1.31% for fiscal 1991, to 1.61% during fiscal 1992,
and to 2.14% for fiscal year end 1993.
It has, however, been Reliable's strategy to attempt to balance its interest-
rate sensitivity position by achieving a more favorable match between the
maturity and repricing of its interest-earning assets and its interest-bearing
liabilities. It is apparent from the related discussion of Reliable's financial
condition that continued success in this area has been achieved. In the face of
reduced loan demand, Reliable has increased its short and intermediate term
liquidity positions; thereby, improving the interest rate sensitivity of its
earning assets. At the end of fiscal year 1993, the Savings Bank with a
positive gap of 3.9% has well positioned the Corporation for a period when
interest rates may again be on the rise.
Interest Income
Interest income experienced an overall decrease of 9.3% for the fiscal year
ended 1993 as compared to a decrease of 3.5% between the fiscal years ended
1992 and 1991. The current year decline is largely a result of a 14.6% decrease
in the amount of total loans outstanding caused primarily by an increased
number of prepayments and the overall reduced loan demand experienced
attributable to general economic uncertainty. An offsetting increase occurred
as interest on investments increased by $438,000 or 36% as an additional $23.5
million was used to purchase investment securities during the fiscal year 1993.
The net interest margin, a measure which reflects the net yield on interest-
earning assets, has continued to reflect Reliable's overall strength and
earnings capacity. The net interest margin for fiscal year 1993 was 4.45%
compared to 4.12% and 3.54% for the respective fiscal years ended 1992 and
1991.
Interest Expense
Interest expense during fiscal 1993 declined by 27% or $1,647,000 from a
total of just over $6.15 million in fiscal 1992 to the current year end level
of $4.5 million. The major impact on the Savings Bank's interest expense paid
on deposits resulted from the general decrease in market interest rates. The
average cost of funds for the fiscal year 1993 was 4.05% compared to 5.41% for
fiscal 1992, representing a 136 basis point decline
60
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
for the current year. A comparison of interest expense between fiscal 1992 and
fiscal 1991 reflected a 22% decrease resulting from a 4.5% decrease in
outstanding deposit balances coupled with a significant decline in the average
cost of funds.
Provision for Loan Losses
The provision for loan losses is based upon management's assessment of the
inherent risk of loss in the loan portfolio. This evaluation process takes into
consideration the growth and composition of the portfolio, historical loan loss
experience and delinquency trends, overall credit risk exposure related to
general economic conditions and the identification of problem loans based on
the current ability of borrowers to repay and the adequacy of the underlying
collateral securitizing the loans. The provision for loan losses during fiscal
year 1993 increased $50,000 or 25% to $250,000 compared to $200,000 for fiscal
1992. For fiscal year ended September 30, 1991 the provision for loan losses
was $155,000. Reliable will continually monitor its loan portfolio in an effort
to maintain an adequate allowance for loan losses to absorb unforeseen future
losses. Although no specific losses are anticipated and management believes the
allowance for loan losses to be adequate at September 30, 1993, in view of the
expected normal loan growth, management's plans include, at a minimum, an
addition of $200,000 to the provision for loan losses during the upcoming
fiscal year ending September 30, 1994.
Historically, the Corporation has experienced an insignificant level of
charge-offs. Maintaining a high quality loan portfolio is of great importance
to the Corporation. The Corporation manages the risk characteristics of the
loan portfolio through the use of prudent lending policies and procedures and
monitors risk through a periodic review process provided by external auditors,
regulatory authorities and a credit advisory service group associated with the
Federal Home Loan Bank of Pittsburgh. Based on these reviews, management's
stringent lending practices and the traditional composition of the loan
portfolio represented by greater than 90% of loans secured by one-to-four
family residences, the Corporation is able to maintain a loan loss allowance
relatively smaller than its peers. However, in the ongoing management of the
credit portfolio, as lending diversification continues, the constant importance
of collectibility will be emphasized by the Corporation in an effort to
maintain a safe level of non-performing loans and an adequate reserve for
possible loan losses to absorb unforeseen future losses.
Non-Interest Income
During the fiscal years ended September 30, 1993 and 1992, the Corporation
recognized gains of $1,182,000 and $272,000, respectively, on the sales of
marketable equity securities and real estate owned. The
gains on such sales were primarily attributable to the sale of 25,000 shares in
1993 and 10,000 shares in 1992 of Federal Home Loan Mortgage Corporation
(FHLMC) common stock. The approximate amount of unrealized gain on the
remaining FHLMC stock at September 30, 1993 and 1992 was $4,852,000 and
$4,848,000, respectively. Due to the increased operating overhead and tax cost
burdens of being a publicly-traded company, the Corporation's management has
begun to explore and utilize various revenue generating areas to the extent
determined appropriate in order to maintain the projected level of earnings and
expected rate of return to our stockholders.
Other non-interest income increased $126,000 or 66% during fiscal year 1993
and increased by $29,000 or 18% in fiscal 1992 when compared to respective
prior fiscal years. Included in other non-interest income are fees generated
out of normal operating activities, such as transaction account service fees
and late payment charges.
Non-Interest Expense
For fiscal 1993, total non-interest expenses increased by $355,000 or 16% to
$2.6 million up from the prior year's total of $2.2 million. Fiscal 1992
reflected a 15.4% or $296,000 increase over fiscal year end 1991.
61
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In addition to the normal recurring increases in the general cost of
operations; including compensation and employee benefits, occupancy expense,
deposit insurance and data processing, the primary increase in overhead costs
occurred in the area of outside service and professional fees. A further review
of this area explains the increase as a result of the costs incurred by the
Corporation to retain professional services and advice as Reliable continues to
expand and is faced with the costs of keeping pace with the demands of the
complex and regulated financial services industry.
For the fiscal years ended September 30, 1993, 1992 and 1991, the Corporation
continues to maintain relatively low operating expenses with ratios of net
interest income to non-interest expenses of 2.47x, 2.63x and 2.34-to-1,
respectively; and, respective percentages of non-interest expenses to average
assets of 1.75%, 1.53% and 1.47% for the same periods.
Provision for Income Taxes
The Corporation incurred provisions for income taxes of $1,884,000,
$1,529,000 and $872,000 during the fiscal years ended 1993, 1992 and 1991,
respectively. The provision for Federal income taxes varied between the fiscal
years due to the tax effects of changes in the Corporation's operating results
and resultant levels of taxable income generated. Effective Federal tax rates
for fiscal years 1993, 1992 and 1991 were 31.5%, 31.3% and 26.6%, respectively.
In addition to the higher level of taxable income generated during fiscal years
ended September 30, 1993 and 1992, the increase in the effective tax rate over
fiscal 1991 was most significantly impacted by the limitations imposed on the
deductibility of the tax bad debt calculation. Changes in the state statutory
tax rates during the comparative fiscal years provides an additional
explanation regarding the difference in effective tax rates between those
years. The provision for the state income taxes assessed on the net earning of
the Savings Bank was determined based on the statutory rates of 11.5%, 12.5%
and 20% for the fiscal years ended 1993, 1992 and 1991, respectively.
Additional state tax liabilities are incurred by the Corporation as a separate
entity in both Delaware as the state of incorporation and Pennsylvania where
business operations are conducted.
62
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
STATISTICAL PROFILE
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Composition--The following
table sets forth information summarizing the composition of the Savings Bank's
loan and mortgage-backed securities portfolio by type of loan.
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------
1993 1992 1991
--------------- ---------------- ----------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential mortgage......... $78,782 87.54% $ 93,049 90.50% $104,706 91.05%
Real estate construction.... 5,765 6.41 5,450 5.30 5,483 4.77
Commercial real estate...... 1,838 2.04 456 0.44 422 0.37
Non-residential and land.... 1,942 2.16 2,391 2.33 3,055 2.66
------- ------ -------- ------ -------- ------
Total real estate loans...... 88,327 98.15 101,346 98.57 113,666 98.85
------- ------ -------- ------ -------- ------
Other loans:
Deposit accounts............ 1,047 1.16 1,021 0.99 1,052 0.91
Home improvement............ 54 .06 64 0.06 90 0.08
Consumer.................... 571 .63 391 0.38 188 9.16
------- ------ -------- ------ -------- ------
Total other loans........... 1,672 1.85 1,476 1.43 1,330 1.15
------- ------ -------- ------ -------- ------
Total loans.................. 89,999 100.00% 102,822 100.00% 114,996 100.00%
------- ------ -------- ------ -------- ------
Less:
Undisbursed portion of
loans........................ 3,556 1,749 2,631
Unamortized loan fees....... 1,188 1,615 1,688
Allowance for loan losses... 700 495 295
------- -------- --------
5,444 3,859 4,614
------- -------- --------
Total loans, net............. $84,555 $ 98,963 $110,382
======= ======== ========
Mortgage-backed securities... $ 5,930 100.00% $ 224 100.00% $ 290 100.00%
======= ====== ======== ====== ======== ======
</TABLE>
63
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table indicates the amount and percentage of fixed-rate and
floating- or adjustable-rate loans at September 30, 1993 due after September
30, 1994.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
---------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Residential mortgage (1)........................... $55,204 $13,366 $68,570
Real estate construction (2)....................... -0- -0- -0-
Commercial real estate............................. 813 -0- 813
Non-residential and land........................... 1,193 -0- 1,193
Deposit accounts (3)............................... -0- -0- -0-
Home improvement................................... 54 -0- 54
Consumer........................................... 199 -0- 199
------- ------- -------
Total............................................ $57,463 $13,366 $70,829
======= ======= =======
Percent of total................................. 81.13% 18.87% 100.00%
======= ======= =======
</TABLE>
- --------
(1) Includes mortgage-backed securities secured by residential mortgages.
(2) Real estate construction loans are generally extended for a period not to
exceed twelve months. As of September 30, 1993, there were $5,765,000 real
estate construction loans which were due prior to September 30, 1994.
(3) Loans on deposit accounts are considered demand loans and are assumed to be
due prior to September 30, 1994.
The following table shows the maturity or period to repricing of the Savings
Bank's loan and mortgage-backed securities portfolios at September 30, 1993.
Loans that have adjustable rates are shown as being due in the period in which
the interest rates are next subject to change. The table includes historical
prepayment assumptions used to represent scheduled principal amortization.
Prepayments and scheduled principal amortization on loans totaled $37,677,000,
$31,715,000 and $16,948,000 for the years ended September 30, 1993, 1992 and
1991, respectively. Loans having no stated maturity and no schedule of
repayments (including delinquent loans), and demand loans are reported as due
in 1994.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
-----------------------------------------------------
1995- 1997- 1999- 2004- 2014-
1994 1996 1998 2003 2013 AFTER TOTAL
------- ------- ------- ------- ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage..... $26,598 $23,068 $11,223 $12,131 $3,261 $2,501 $78,782
Real estate construction. 5,765 -0- -0- -0- -0- -0- 5,765
Commercial real estate... 1,025 37 776 -0- -0- -0- 1,838
Non-residential and land. 749 680 264 231 18 -0- 1,942
Deposit accounts......... 1,047 -0- -0- -0- -0- -0- 1,047
Home improvement......... -0- -0- 54 -0- -0- -0- 54
Consumer................. 372 199 -0- -0- -0- -0- 571
Mortgage-backed
securities............... 2,910 -0- 1,899 1,098 23 -0- 5,930
------- ------- ------- ------- ------ ------ -------
Total.................. $38,466 $23,984 $14,216 $13,460 $3,302 $2,501 $95,929
======= ======= ======= ======= ====== ====== =======
</TABLE>
64
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Other than those loans included in the table 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. Management believes that the loan
portfolio as of September 30, 1993 is well diversified and that there are no
significant concentrations of credit. Reliable however continues to maintain a
significant portion of its loan portfolio in qualifying residential mortgages.
At September 30, 1993, 1992 and 1991, non-performing assets in the Savings
Bank's portfolio were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1993 1992 1991
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans (1)............................... $ 2,638 $ 1,223 $ -0-
Real estate owned (2)............................... -0- -0- 29
Accruing loans contractually past due 90 days and
over................................................ -0- 1,394 1,273
------- ------- -------
Total............................................. $ 2,638 $ 2,617 $ 1,302
======= ======= =======
Percent of total assets........................... 1.80% 1.79% 0.96%
</TABLE>
- --------
(1) Loans are placed in the non-accrual category when, in the opinion of
management, the collection of interest due on the loan is no longer
reasonably assured. Subsequent to September 30, 1992, management began
placing all loans past due 90 days and over on non-accrual status.
Approximately $182,000 of interest income on these loans was included in
net income for the year and approximately $237,000 of interest income would
have been paid if the loans had been current throughout the year.
(2) The Savings Bank has customarily not held real estate owned for a period
greater than one year. The real estate owned at September 30, 1991 was
subsequently sold.
The following table sets forth an analysis of the Savings Bank's allowance
for loan losses at the dates indicated.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year..................... $ 495 $ 295 $ 155
Loans charged-off................................ (45) -0- (15)
Recoveries....................................... -0- -0- -0-
-------- -------- --------
Net loans charged-off............................ (45) -0- (15)
Balance before provision for possible loan
losses........................................... 450 295 140
Provision for possible loan losses............... 250 200 155
-------- -------- --------
Balance at end of year........................... $ 700 $ 495 $ 295
======== ======== ========
Allowance for loan losses to total loans......... .78% .48% .26%
======== ======== ========
Allowance for loan losses to total non-performing
assets........................................... 26.54% 18.91% 22.66%
======== ======== ========
Net charge-offs to average loans outstanding
during the year.................................. .047% 0% .014%
======== ======== ========
</TABLE>
65
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table shows the Savings Bank's total allowance for loan losses
at the dates indicated and the allocation to the various loan categories:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------
1993 1992 1991
--------------- --------------- ---------------
PERCENT PERCENT PERCENT
OF OF OF
TOTAL TOTAL TOTAL
LOANS LOANS LOANS
BY BY BY
AMOUNT CATEGORY AMOUNT CATEGORY AMOUNT CATEGORY
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage............ $295 87.54% $207 90.50% $158 91.05%
Real estate construction........ 41 6.41 63 5.30 69 4.77
Commercial real estate.......... 46 2.04 5 0.44 3 0.37
Non-residential and land........ 91 2.16 72 2.33 63 2.66
Deposit accounts................ -0- 1.16 -0- 0.99 -0- 0.91
Home improvement................ 1 0.06 -0- 0.06 1 0.08
Consumer........................ 4 0.63 3 0.38 1 0.16
Unallocated..................... 222 N/A 145 N/A -0- N/A
---- ------ ---- ------ ---- ------
$700 100.00% $495 100.00% $295 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investment Activities
The carrying value and estimated market value of the Savings Bank's portfolio
of investment securities for the reported periods is incorporated by reference
to Note B on page 16 of the 1993 Annual Report to Stockholders.
The table below presents the contractual maturities and weighted average
yields of investment securities at September 30, 1993, excluding the FHLB
stock:
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION
---------------------------------------------------------------------
WITHIN OVER ONE OVER FIVE OVER
ONE YEAR TO FIVE YEARS TO TEN YEARS TEN YEARS TOTAL
------------ ------------- ------------ ------------ -------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------- ----- ------ ----- ------ ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Book Value:
U.S. Treasury notes..... $1,999 4.63% $ 6,986 4.16% $ -0- -- $-0- -- $ 8,985 4.26%
U.S. Agency obligations. -0- -- 15,750 4.43% 1,500 6.26% -0- -- 17,250 4.59%
State and municipal
obligations............ 145 3.40% 2,459 4.18% 410 5.41% -0- -- 3,014 4.31%
Corporate debt.......... -0- -- 499 4.88% -0- -- -0- -- 499 4.88%
Marketable equity
security............... -0- -- -0- -- 970 10.43% -0- -- 970 10.43%
------ ------- ------ ---- -------
Total Investment
Securities............. $2,144 4.54% $25,694 4.34% $2,880 7.55% $-0- -- $30,718 4.66%
====== ======= ====== ==== =======
</TABLE>
66
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Sources of Funds
The following table sets forth the distribution of the Savings Bank's deposit
accounts at the dates indicated and the weighted average interest rates on each
category of deposits presented. Management does not believe that the use of
year-end balances instead of average balances produces any material difference
in the information presented:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------------------------
1993 1992 1991
-------------------------- -------------------------- --------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF AVERAGE OF AVERAGE OF AVERAGE
AMOUNT TOTAL RATE AMOUNT TOTAL RATE AMOUNT TOTAL RATE
-------- ------- -------- -------- ------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook savings....... $ 31,249 27.26% 3.00% $ 30,499 26.73% 3.35% $ 24,287 20.34% 5.53%
NOW accounts
Interest bearing..... 6,296 5.49 2.47% 5,634 4.94 2.78% 4,964 4.16 3.39%
Noninterest-bearing.... 4,156 3.63 0.00% 3,464 3.03 0.00% 2,635 2.20 0.00%
Money market accounts... 14,772 12.89 2.99% 14,035 12.30 3.15% 12,090 10.12 5.25%
Certificates of deposit. 58,146 50.73 5.15% 60,467 53.00 5.54% 75,455 63.18 7.04%
-------- ------ -------- ------ -------- ------
Total................... $114,619 100.00% $114,099 100.00% $119,431 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
At September 30, 1993, the Savings Bank had certificates of deposit in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
AMOUNT
MATURITY PERIOD (IN THOUSANDS)
---------------- --------------
<S> <C>
3 months or less................... $ 939
Over 3 to 6 months................. 677
Over 6 to 12 months................ 200
Over 12 months..................... 1,219
------
Total.............................. $3,035
======
</TABLE>
Interest Sensitivity
Interest rate-sensitivity is the result of differences in the amount of an
institution's rate-sensitive assets minus its rate-sensitive liabilities. This
difference, or interest rate repricing "gap", provides an indication of the
extent to which an institution's net interest income will be affected by future
changes in interest rates. The following table sets forth Reliable's
consolidated interest rate-sensitive asset and liability balances and its
maturing fixed-rate and repricing asset and liability balances within the
periods indicated.
67
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
INTEREST SENSITIVITY GAP ANALYSIS
SEPTEMBER 30, 1993
-------------------------------------------------
(DOLLARS IN THOUSANDS)
OVER ONE OVER FIVE
WITHIN YEAR TO YEARS TO OVER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1)........... $31,717 $36,190 $13,229 $ 5,785 $ 86,921
Other loans.................. 3,193 2,010 231 18 5,452
Investment securities........ 22,731 25,694 2,880 0 51,305
------- ------- ------- ------- --------
Total interest-sensitive
assets........................ 57,641 63,894 16,340 5,803 143,678
------- ------- ------- ------- --------
Interest-bearing liabilities:
Passbook accounts............ 5,326 13,329 6,676 5,918 31,249
NOW and Money market
accounts...................... 14,003 5,100 1,359 606 21,068
Certificate accounts......... 37,988 17,959 2,199 0 58,146
------- ------- ------- ------- --------
Total interest-sensitive
liabilities................... 57,317 36,388 10,234 6,524 110,463
------- ------- ------- ------- --------
Interest sensitivity gap...... $ 324 $27,506 $ 6,106 $ (721) $ 33,215
======= ======= ======= ======= ========
Cumulative interest
sensitivity gap............... $ 324 $27,830 $33,936 $33,215
======= ======= ======= =======
Cumulative interest
sensitivity gap as a percent
of total assets.............. 0.22% 18.96% 23.12% 22.63%
Cumulative rate-sensitive
assets to rate-sensitive
liabilities.................. 1.01 1.30 1.33 1.30
</TABLE>
- --------
(1) Includes mortgage-backed securities
Analysis of Net Interest Income
The Savings Bank's earnings have historically depended primarily upon the
Savings Bank's net interest income, which is the difference between interest
income earned on its loans and investments ("interest-bearing assets") and
interest paid on its deposits and any borrowed funds ("interest-bearing
liabilities"). Net interest income is affected by (i) the difference between
rates of interest earned on the Savings Bank's interest-earning assets and
rates paid on its interest-bearing liabilities ("interest rate spread") and
(ii) the relative amounts of its interest-earning assets and interest-bearing
liabilities.
----------------
The following tables present an analysis of certain aspects of the Savings
Bank's operations during the years ended September 30, 1993, 1992 and 1991. The
first table presents the average balances of, and the interest and dividends
earned or paid on, each major class of interest-earning assets and interest-
bearing liabilities and the weighted average yields and rates for those
categories for the periods indicated. No tax equivalent adjustments were made.
Average balances were based on quarter-end balances, which management believes
do not represent material differences from daily average balances. The yields
and costs include fees which are considered adjustments to yields.
68
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1993 1992 1991
-------------------------- -------------------------- --------------------------
INTEREST INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE
-------- --------- ------ -------- --------- ------ -------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans, net (1)......... $ 94,739 $9,012 9.51% $104,755 $10,537 10.06% $110,984 $11,250 10.14%
Investment securities
(2)..................... 18,362 935 5.09 5,027 325 6.46 3,595 320 8.90
Interest-bearing
deposits (3).......... 29,925 918 3.07 31,794 1,114 3.50 12,597 844 6.70
-------- ------ ---- -------- ------- ----- -------- ------- -----
Total interest-bearing
assets.............. 143,026 10,865 7.59% 141,576 11,976 8.46% 127,176 12,414 9.76%
---- ----- -----
Non-interest earning
assets.................. 4,193 3,746 3,650
-------- -------- --------
Total assets.......... $147,219 $145,322 $130,826
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Savings and NOW
accounts.............. $ 50,497 $1,458 2.89% $ 46,078 $ 1,891 4.10% $ 38,030 $ 1,976 5.20%
Time deposit accounts.. 60,502 3,042 5.03 67,649 4,256 6.29 74,915 5,936 7.92
-------- ------ ---- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities......... 110,999 4,500 4.05% 113,727 6,147 5.41% 112,945 7,912 7.01%
---- ----- -----
Non-Interest-Bearing
Liabilities............ 6,746 6,004 4,664
-------- -------- --------
Total liabilities..... 117,745 119,731 117,609
Stockholders' Equity.... $ 29,474 $ 25,591 $ 13,217
-------- -------- --------
Total liabilities and
stockholders'
equity.............. $147,219 $145,322 $130,826
======== ======== ========
Net interest
income/interest rate
spread (4)............. $6,365 3.54% $ 5,829 3.05% $ 4,502 2.75%
====== ==== ======= ===== ======= =====
Net interest-earning
assets/net interest
margin (5)............. $ 32,027 4.45% $ 27,849 4.12% $ 14,231 3.54%
======== ==== ======== ===== ======== =====
Interest-bearing assets
to interest-bearing
liabilities
(x times).............. 1.29x 1.24x 1.13x
======== ======== ========
</TABLE>
- --------
(1) Includes mortgage-backed securities secured by residential mortgages and
non-accruing loans due to the historically low levels, collectibility and
the relative immaterial impact for purposes of the analysis.
(2) Includes U.S. government and agency obligations, state and municipal
obligations, FHLMC common stock and FHLB of Pittsburgh capital stock.
(3) Includes interest-bearing deposits in the FHLB of Pittsburgh and
certificates of deposit in other institutions.
(4) Interest rate spread represents the difference between the average yield
earned on interest-earning assets and the average rate paid on interest-
bearing liabilities.
(5) Net interest margin represents net interest income before the provision
for loan losses divided by average interest-earning assets.
69
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Rate/Volume Analysis
The relationship between the volume and rates of the Savings Bank's interest-
earning assets and interest-bearing liabilities influences the Savings Bank's
net interest income. The following table reflects the sensitivity of the
Savings Bank's interest income and interest expense to changes in volume and in
prevailing interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on effects attributable
to: (1) changes in volume (change in volume multiplied by old rate); (2)
changes in rate (change in rate multiplied by old volume); and (3) net change.
Changes attributable to the combined impact of volume and rates have been
allocated proportionately to changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
SEPTEMBER 30,
INCREASE (DECREASE)
--------------------------------------------------
1993 VS. 1992 1992 VS. 1991
------------------------ ------------------------
DUE TO DUE TO
--------------- ---------------
VOLUME RATE NET VOLUME RATE NET
------ ------- ------- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans, net (1)............... $(969) $ (556) $(1,525) $(625) $ (88) $ (713)
Investment securities........ 692 (82) 610 15 (10) 5
Interest-bearing deposits.... (64) (132) (196) 820 (550) 270
----- ------- ------- ----- ------- -------
Total interest income....... (341) (770) (1,111) 210 (648) (438)
----- ------- ------- ----- ------- -------
Interest Expense:
Savings and NOW accounts..... 168 (601) (433) 378 (463) (85)
Time deposit accounts........ (421) (793) (1,214) (682) (998) (1,680)
----- ------- ------- ----- ------- -------
Total interest expense...... (253) (1,394) (1,647) (304) (1,461) (1,765)
----- ------- ------- ----- ------- -------
Net Interest Income........... $ (88) $ 624 $ 536 $ 514 $ 813 $ 1,327
===== ======= ======= ===== ======= =======
</TABLE>
- --------
(1) Includes mortgage-backed securities secured by residential mortgages.
SELECTED QUARTERLY DATA (UNAUDITED)
- -----------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------------------------------
FISCAL 1993 FISCAL 1992
---------------------------- ---------------------------
SEPT. JUNE MARCH DEC. SEPT. JUNE MARCH DEC.
30 30 31 31 30 30 31 31
------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income... $2,589 $2,809 $2,625 $2,842 $2,839 $2,965 $3,092 $3,080
Total interest expense.. 1,080 1,110 1,133 1,177 1,301 1,423 1,627 1,796
------ ------ ------ ------ ------ ------ ------ ------
Net interest income..... 1,509 1,699 1,492 1,665 1,538 1,542 1,465 1,284
Provision for loan loss-
es..................... 100 50 50 50 50 50 50 50
------ ------ ------ ------ ------ ------ ------ ------
Net interest income af-
ter provision
for loan losses........ 1,409 1,649 1,442 1,615 1,488 1,492 1,415 1,234
Gain on sales of invest-
ment securities........ 435 215 483 -0- 261 -0- -0- -0-
Gain on sales of real
estate owned........... 12 42 (5) -0- -0- -0- -0- 11
Non-interest income..... 86 86 76 69 52 55 49 35
Non-interest expense.... 698 625 641 611 593 552 532 543
------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 1,244 1,367 1,355 1,073 1,208 995 932 737
Provision for income
taxes.................. 453 479 564 388 627 415 250 237
------ ------ ------ ------ ------ ------ ------ ------
Net income.............. $ 791 $ 888 $ 791 $ 685 $ 581 $ 580 $ 682 $ 500
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share...... $0.57 $0.63 $0.56 $0.47 $0.40 $0.40 $0.47 NA*
</TABLE>
- --------
*Not applicable
70
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Liquidity and Sources of Capital
For the nine months ended June 30, 1994, the total consolidated assets of
Reliable Financial Corporation increased by $4,572,000 from $146,783,000 to
$151,355,000 or 3.11%. The Corporation maintains a strategy of balance sheet
diversification and continues to hold a favorable mix of interest-earning
assets consisting of interest-bearing deposits and investments representing 37%
of assets and loans and mortgage-backed securities representing 61% of assets.
During the nine-month period ended June 30, 1994, net cash flows were negative
$5.3 million versus negative cash flows of $5.6 million for the comparable
period of fiscal 1993. The use of these funds during the nine months ended June
30, 1994 was seen primarily in the area of investing activities as evidenced by
a 25% increase in investment securities since the end of the preceding fiscal
year. Total loans outstanding grew by $2.3 million or 2.7% during the same
period compared to a net reduction of $14.7 million for the nine months ended
June 30, 1993.
The diversity and strength of the asset side of Reliable's balance sheet
provides a solid basis for earnings potential as the ratio of average interest-
earning assets to average interest-bearing liabilities has been maintained at a
level of 1.30-to-1 compared to a 1.29-to-1 ratio existing at the end of the
fiscal year ended September 30, 1993. The Corporation retains as a source of
liquidity cash and cash equivalents of $16.3 million which contributes to an
overall liquidity ratio, as defined by federal regulations, of 45% as of June
30, 1994. In addition, the Corporation retains the FHLMC stock available for
sale as a secondary source of liquidity. The effect of recent increases in
short term interest rates has resulted in downward pressure on the market value
of Reliable's investment portfolio at June 30, 1994. Despite the negative
impact that a sharp rise in interest rates has on the value of investments due
to the increased volatility and corresponding price erosion, management
anticipates that rates will continue to rise only moderately, if at all, over
the next twelve months.
Interest rate-sensitivity is the result of differences in the amount of an
institution's rate-sensitive assets minus its rate-sensitive liabilities. This
difference, or interest rate repricing "gap", provides an indication of the
extent to which an institution's net interest income will be affected by future
changes in interest rates. The following table sets forth Reliable's
consolidated interest rate-sensitive asset and liability balances and its
maturing fixed-rate and repricing asset and liability balances within the
periods indicated.
71
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
INTEREST SENSITIVITY GAP ANALYSIS
JUNE 30, 1994
-------------------------------------------------
(DOLLARS IN THOUSANDS)
OVER ONE OVER FIVE
WITHIN YEAR TO YEARS TO OVER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
-------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1)........... $23,643 $30,989 $18,153 $11,579 $ 84,364
Other loans.................. 3,420 4,258 1,353 265 9,296
Investment securities........ 25,041 28,465 1,127 0 54,633
------- ------- ------- ------- --------
Total interest-sensitive
assets........................ 52,104 63,712 20,633 11,844 148,293
------- ------- ------- ------- --------
Interest-bearing liabilities:
Passbook accounts............ 5,385 13,471 6,747 5,980 31,583
NOW and Money market
accounts...................... 14,296 5,460 1,460 673 21,889
Certificate accounts......... 35,459 19,936 2,679 0 58,074
------- ------- ------- ------- --------
Total interest-sensitive
liabilities................... 55,140 38,867 10,886 6,653 111,546
------- ------- ------- ------- --------
Interest sensitivity gap...... $(3,036) $24,845 $ 9,747 $ 5,191 $ 36,747
======= ======= ======= ======= ========
Cumulative interest
sensitivity gap............... $(3,036) $21,809 $31,556 $36,747
======= ======= ======= =======
Cumulative interest
sensitivity gap as a percent
of total assets.............. -2.01% 14.41% 20.85% 24.28%
Cumulative rate-sensitive
assets to rate-sensitive
liabilities.................. 0.94 1.23 1.30 1.33
</TABLE>
- --------
(1) Includes mortgage-backed securities
As of June 30, 1994, the ratio of non-performing assets to total consolidated
assets was 2.04% as compared to a ratio of 1.80% as of the end of the preceding
fiscal year. Despite this slight increase, Reliable considers this a relatively
low level of non-performing assets and continues to monitor these assets on a
regular basis. At June 30, 1994, Reliable had a total of $3,087,000 in non-
performing loans that were past due 90 days or more and have been placed on
non-accrual status. For the quarter ended June 30, 1994, a provision for
possible loan losses of $50,000 was recorded which increased the allowance for
possible loan losses to $850,000 at June 30, 1994. This level of allowance for
possible loan losses represents 0.91% of total loans and 27.53% of total non-
performing loans, compared to the coverage as of September 30, 1993 of 0.78%
and 26.54%, respectively.
72
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Other than those loans included in the table 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. Management believes that the loan
portfolio as of June 30, 1994 is well diversified and that there are no
significant concentrations of credit. Reliable however continues to maintain a
significant portion of its loan portfolio in qualifying residential mortgages.
At June 30, 1994 and 1993, non-performing assets in the Savings Bank's
portfolio were as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans (1)................................ $3,087 $2,670
Real estate owned (2)................................ -0- 321
Accruing loans contractually past due 90 days and
over................................................. -0- -0-
----------- -----------
Total................................................ $3,087 $2,991
=========== ===========
Percent of total assets............................ 2.04% 2.01%
</TABLE>
- --------
(1) Loans are placed in the non-accrual category when, in the opinion of
management, the collection of interest due on the loan is no longer
reasonably assured and it is management's current policy to place all loans
past due 90 days and over on non-accrual status.
(2) The Savings Bank has customarily not held real estate owned for a period
greater than one year. The real estate owned at June 30, 1993 was
subsequently sold.
The following table sets forth an analysis of the Savings Bank's allowance
for loan losses at the dates indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30,
------------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period....................... $700 $495
Loans charged-off.................................... -0- (45)
Recoveries........................................... -0- -0-
----------- -----------
Net loans charged-off................................ -0- (45)
Balance before provision for possible loan losses.... 700 450
Provision for possible loan losses................... 150 150
----------- -----------
Balance at end of period............................. $850 $600
=========== ===========
Allowance for loan losses to total loans............. .91% .63%
=========== ===========
Allowance for loan losses to total non-performing
loans................................................ 27.53% 22.47%
=========== ===========
Net charge-offs to average loans outstanding during
the period........................................... .000% .049%
=========== ===========
</TABLE>
On the liability side of the balance sheet, growth in the overall deposit
account balances showed an increase of $1.8 million or 1.6% since the fiscal
year ended September 30, 1993. The other significant increase in liabilities as
of June 30, 1994 was the collection of $1.5 million in advances from borrowers
for taxes and insurance. The Corporation continues to maintain no outstanding
debt or borrowings as of June 30, 1994 and as of that date the total amount of
outstanding investment and loan commitments and loans in process was
$10,665,000.
73
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Consolidated stockholders' equity of the Corporation was $30,717,000 which
represents a stated book value of $21.78 per share at June 30, 1994. Annualized
return on average equity for the three- and nine-month periods ended June 30,
1994 was 12.03% and 11.02%, respectively, compared to the return on average
equity for the 1993 fiscal year of 10.70%. Reliable Savings Bank remains well
capitalized at June 30, 1994 as tangible, core and risk-based capital levels
continue to be well in excess of the current regulatory capital requirements.
RESULTS OF OPERATIONS
Net Income
Net income for the three months ended June 30, 1994 was $906,000 or $0.64 per
share, an increase of 2% from the $888,000 and $0.63 per share earned during
the third quarter of fiscal 1993. Nine month year-to-date income for fiscal
1994 was $2,488,000 or $1.76 per share, including the cumulative effect of a
change in an accounting principle totaling $365,000 or $0.26 per share. Nine-
month income before the cumulative effect adjustment was $2,123,000 or $1.50
per share, a decrease of 10% over the comparative nine-month results of
operations of $2,364,000 and $1.65 per share for fiscal 1993. For the
comparative three- and nine-month periods ended June 30, 1994 and June 30, 1993
the annualized return on average assets was 2.42% and 2.22%, respectively, for
fiscal 1994 compared to 2.40% and 2.13%, respectively, for fiscal 1993.
The operating results of Reliable are largely dependent upon the net interest
income generated by the Savings Bank. Net interest income represents the amount
by which interest income on earning assets, including FHLMC stock available for
sale, investment securities and loans, exceeds interest paid on interest-
bearing liabilities, mainly deposits. Interest rate fluctuations, as well as
changes in the amount and type of earning assets and interest-bearing
liabilities combine to affect net interest income. In addition to contributing
to growth in earnings for the Corporation in fiscal 1993, the low interest rate
environment has also had its effect on the more recent decrease in interest
earning yields. The narrowing of the rates can be seen in the Savings Bank's
interest rate spread or the difference between the yield earned on interest-
earning assets and the rate paid on interest-bearing liabilities. The average
interest rate spread during the comparative three- and nine-month periods ended
June 30, 1994 and 1993 was 3.21% compared to 3.83% and 3.26% versus 3.59%,
respectively.
Net Interest Income
Net interest income reflected a decrease of $364,000 or 7.5% for the nine-
month period ended June 30, 1994 compared to the nine-month period ended June
30, 1993. A comparison of the quarterly figures showed a decrease of $223,000
or 13% between the third quarter of fiscal 1994 and the respective quarter of
fiscal 1993. The net interest margin, a measure which reflects the net yield on
interest-earning assets; however, continued to reflect Reliable's earnings
ability. The net interest margin for the third quarter of fiscal year 1994 was
4.06% compared to 4.73% for the same quarter in the prior fiscal year. Nine-
month comparative periods reflect a net interest margin of 4.12% for fiscal
1994 versus 4.50% for fiscal 1993.
During the nine months ended June 30, 1994, interest income declined by
$660,000 or 8% when compared to the same period ended one year earlier. This
decrease can be attributed to continued repricing of the loan portfolio in a
lower interest rate environment along with the origination of new loans and the
purchase of investment securities at yields lower than the previously existing
portfolio. The low interest rate environment also accelerated prepayments on
loans and mortgage-backed securities, as residential mortgage borrowers
refinanced their loans. The cost of funds also declined due to the maturing and
repricing downward of deposits reflected by an offsetting 8.65% or $296,000
decrease in interest expense incurred between the comparative nine-month
periods.
74
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The impact of the repricing of interest earning assets faster than the cost
of interest bearing liabilities resulting in the downward trend during fiscal
1994 in net interest income which should stabilize if interest rates remain
constant or begin to rise. In addition to interest rate fluctuations; however,
net interest income is affected by the mix of assets and liabilities maintained
and the potential repricing characteristics of each. Although the Corporation
has experienced a shift in earning assets from higher yielding loans through
reinvestment in lower yielding investment securities and mortgage-backed
securities, the changes in the volume and types of deposit accounts maintained
did not vary significantly, thereby preventing the cost of funds to decline as
rapidly as asset yields. Based on the Corporation's asset and liability
management analysis, it is expected that a 200 basis point movement in interest
rates in either direction would not have a significant impact on the
Corporation's anticipated net interest income over the next twelve months.
Provision for Possible Loan Losses
The provision for possible loan losses is based upon management's assessment
of the inherent risk of loss in the loan portfolio. This evaluation process
takes into consideration the growth and composition of the portfolio,
historical loan loss experience and delinquency trends, overall credit risk
exposure related to general economic conditions and the identification of
problem loans based on the current ability of borrowers to repay and the
adequacy of the underlying collateral securitizing the loans. The provision for
possible loan losses for the nine months ended June 30, 1994 and 1993 was
$150,000, respectively. As Reliable's management continues to monitor the loan
portfolio the necessary measures will be taken in order to maintain an adequate
allowance for possible loan losses to absorb unforeseen future losses. Although
no specific losses are anticipated and management believes the allowance for
loan losses to be adequate at June 30, 1994, in view of the expected normal
loan growth, management's plans include recording at least $200,000 in
provision for possible loan losses during the fiscal year ending September 30,
1994.
Historically, the Corporation has experienced an insignificant level of
charge-offs. Maintaining a high quality loan portfolio is of great importance
to the Corporation. The Corporation manages the risk characteristics of the
loan portfolio through the use of prudent lending policies and procedures and
monitors risk through a periodic review process provided by external auditors,
regulatory authorities and a credit advisory service group associated with the
Federal Home Loan Bank of Pittsburgh. Based on these reviews, management's
stringent lending practices and the traditional composition of the loan
portfolio represented by greater than 90% of loans secured by one-to-four
family residences, the Corporation is able to maintain a loan loss allowance
relatively smaller than its peers. However, in the ongoing management of the
credit portfolio, as lending diversification continues, the constant importance
of collectibility will be emphasized by the Corporation in an effort to
maintain a safe level of non-performing loans and an adequate reserve for
possible loan losses to absorb unforeseen future losses.
Non-Interest Income
Non-interest income increased $842,000 or 87% during the nine-month period
ended June 30, 1994 versus the same nine-month period ended a year ago. For the
nine months ended June 30, 1994 compared to the nine months ended June 30,
1993, the Corporation recognized net gains of $1,542,000 and $735,000,
respectively, on the sales of investment securities and real estate owned. The
gains on such sales were primarily attributable to the sale of shares of
Federal Home Loan Mortgage Corporation (FHLMC) stock. The approximate amount of
unrealized gain on the remaining FHLMC stock at June 30, 1994 was $4,426,000.
Offsetting the gains during fiscal 1993 were the non-operating costs incurred
to hold the REO properties.
75
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Other non-interest income increased by $35,000 or 15% during the nine-month
period ended June 30, 1994 versus the same nine-month period one year ago, but
showed a decrease of $9,000 or 10.5% for the comparative fiscal three-month
periods. Included in other non-interest income are fees generated out of normal
operating activities, such as transaction account service fees and late payment
charges. Service fee income based on the levels of customer activity is one
area in which revenues may be generated by the Savings Bank that are largely
unaffected by the prevailing economic conditions and interest rate environment.
Non-Interest Expense
Total non-interest expense increased by $374,000 or 60% for the quarter ended
June 30, 1994 when compared to the prior fiscal year's third quarter. During
the comparative nine months ended June 30, 1994 and 1993, non-interest expense
was $2,304,000 and $1,877,000, respectively, an increase of 22.75%. The major
components of non-interest expense represent the normal recurring costs of
operations including compensation and employee benefits, occupancy expense,
deposit insurance, data processing and outside service and professional fees.
In addition to these regular operating costs, during the quarter ended June 30,
1994 Reliable incurred approximately $300,000 in non-recurring costs that
relate to the proposed merger transaction discussed in Note 7. The management
of Reliable estimates that upon completion of the pending transaction that the
total amount of these one-time merger costs to be incurred will approximate
$725,000.
The Corporation continues to focus on overall cost maintenance which
translates into a relatively low overhead burden with ratios of net interest
income to non-interest expense of 1.48 and 2.72-to-1 and percentages of non-
interest expense to average assets of 2.67% and 1.69% for the fiscal quarters
ended June 30, 1994 and 1993, respectively. The same ratios for the respective
nine-month periods ended on the same dates were 1.95 and 2.59-to-1 for net
interest income to non-interest expense and percentages of 2.06% and 1.69% for
non-interest expense to average assets.
Provision for Income Taxes
The Corporation incurred provisions for income taxes of $906,000 and
$1,723,000 for the three- and nine-month periods ended June 30, 1994,
respectively. These figures compare to provisions for income taxes of $479,000
and $1,431,000 for the same respective periods ended June 30, 1993. The
increased level of provision for income taxes varied between the comparative
fiscal periods primarily due to the tax effects of changes in the Corporation's
operating results and the resultant levels of taxable income generated. Income
before income taxes for the Corporation increased by 33% between the
comparative fiscal quarters ended June 30, 1994 and 1993. The provision for
state income taxes assessed on the net earnings of the Savings Bank is
determined based on a current statutory rate of 11.5%. Additional state tax
liabilities are incurred by the Corporation as a separate entity in both
Delaware as the state of incorporation and Pennsylvania where business
operations are conducted.
76
<PAGE>
MANAGEMENT OF RELIABLE
BOARD OF DIRECTORS
The table below provides information concerning the Board of Directors of
Reliable. Share ownership information contained in the table reflects
beneficial ownership (see note (1) to the table) of Reliable Common Stock as of
August 5, and is based upon information furnished by or on behalf of the
persons referred to in the table.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE OF
DIRECTOR OWNERSHIP OUTSTANDING
NAME, PRINCIPAL OCCUPATION DURING OF RELIABLE OF RELIABLE RELIABLE COMMON
THE PAST FIVE YEARS, OTHER DIRECTORSHIPS AGE SINCE COMMON STOCK (1) STOCK
---------------------------------------- --- ----------- ---------------- ---------------
<S> <C> <C> <C> <C>
Term Ending in 1997:
George W. Keith................................. 67 1976 19,213(2)(4) 1.36%
President, KLH Engineering (environmental
consulting firm)
Eugene Povero................................... 66 1979 20,580(2)(3)(4) 1.46
Owner, Gene Povero Enterprises; President,
McDonald Land Company, Inc. and McDonald
Enterprise, Inc.; Partner, Povero and Brunner
(all four entities are in the real estate
leasing and development business)
Term Ending in 1996:
Peter Calabro................................... 71 1974 18,213(2)(4) 1.29
President, Calabro Tire Service, Inc. (sales
and servicing of auto and truck tires)
S.A. Russo...................................... 61 1986 18,606(2)(4) 1.31
President, Norwood Food Services, Inc.
(industrial catering and food services)
Term Ending in 1995:
Stephen Grippi.................................. 69 1978 29,000(5) 2.06
President, Reliable Savings Bank
All directors and executive officers of Reliable
as a group (9 persons)................ -- -- 114,394(1-6) 8.11
</TABLE>
- --------
*Less than one percent.
(1) Under regulations of the Securities and Exchange Commission, a person who
has or shares voting or investment power with respect to a security is
considered a beneficial owner of the security. Voting power is the power to
vote or direct the voting of shares, and investment power is the power to
dispose of or direct the disposition of shares. Unless otherwise indicated
in the other footnotes below, each director has sole voting power and sole
investment power with respect to the shares indicated opposite his name in
the table, and each member of a group has sole voting power and sole
investment power with respect to the number of the shares indicated for the
group.
(2) Includes the following shares held jointly with spouses and children: Mr.
Keith, 17,017 shares; Mr. Povero, 15,298; Mr. Calabro, 10,733; Mr. Russo,
13,353; and all directors and executive officers as a group, 56,401.
(3) Includes 1,000 shares held by McDonald Land Company, Inc., of which Mr.
Povero is President.
77
<PAGE>
(4) Includes 1,098 shares owned by Mr. Keith's spouse, Lois H. Keith; 1,126
owned by Mr. Povero's spouse, Darlene Povero; 2,480 owned by Mr. Calabro's
spouse, Elvera Calabro; and 2,203 owned by Mr. Russo's spouse, Carol K.
Russo.
(5) Does not include 2,000 restricted shares awarded to Mr. Grippi under the
Reliable Savings Bank, PaSA Recognition and Retention Plan and Trust
Agreement over which Mr. Grippi does not yet have voting or investment
power.
Each of the persons listed above has held the position described above or
other executive positions with the same entity (or a subsidiary thereof) for at
least the past five years.
THE BOARD AND ITS COMMITTEES
During fiscal 1993 there were 24 meetings of the Board of Directors of
Reliable. Each director attended at least 75% of the Board and committee
meetings during the period he was a director and committee member.
The Board of Directors of Reliable has established certain standing
committees, three of which are discussed below: Audit Committee, Compensation
Committee and Pension Committee. Reliable does not have a nominating committee.
The Audit Committee is comprised of Messrs. Povero (Chairman), Calabro, Keith
and Russo, all of whom are outside directors. The Audit Committee meets with
Reliable's independent auditors to review and discuss the preparation, conduct
and results of the annual audit and to review other matters related to
Reliable's operations and internal control structure. Additional matters, such
as regulatory compliance and tax matters, may also be addressed from time to
time. The Audit Committee met five times in fiscal 1993.
The Compensation Committee is comprised of Messrs. Calabro (Chairman), Keith,
Povero and Russo. The Compensation Committee reviews employee performance and
prepares recommendations for annual salary adjustments and bonuses. In
addition, Board of Directors and committee fees are reviewed and recommended.
The Compensation Committee met four times in fiscal 1993.
The Pension Committee is comprised of Messrs. Russo (Chairman), Calabro,
Keith and Povero. The Pension Committee administers the Reliable Savings Bank,
PaSA Recognition and Retention Plan and Trust Agreement, the 401(k) Plan
(defined below), the Incentive Stock Option Plan and the Non-Employee
Directors' Plan and monitors participation and involvement therein. The Pension
Committee met three times in fiscal 1993.
The other standing committees of the Reliable Board are the Loan, Investment,
Asset and Liability, Budget and Forward Planning Committees.
Reliable's By-Laws describe in full the procedures to be followed by a
shareholder in recommending nominees for director. Nominations for election to
the Board of Directors may be made by the Board of Directors or by any
shareholder of any outstanding class of capital stock of Reliable entitled to
vote for the election of directors. Nominations, other than those made by or on
behalf of the existing management of Reliable, shall be made in writing and
shall be delivered or mailed to the Secretary of Reliable, not less than 90
days prior to the anniversary date of the next preceding annual meeting of
shareholders and not more than seven days following the date of notice of the
meeting in the case of a special meeting, provided such nomination shall be
delivered to the Secretary of Reliable. Such notification shall contain the
following information to the extent known to the notifying shareholder: (a) the
name, age and business and home address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the number of shares of
capital stock of Reliable beneficially owned by each proposed nominee; (d) a
statement that each proposed nominee is willing to be nominated; (e) a
representation that the notifying shareholder is a holder of record of capital
stock of Reliable entitled to vote at such meeting and intends to appear in
person or by
78
<PAGE>
proxy at such meeting to nominate the proposed nominees; (f) a description of
all arrangements or understandings between the shareholder and each nominee and
any other person pursuant to which the nomination(s) are to be made; and (g)
such other information concerning each such nominee as required under the rules
of the Securities and Exchange Commission. Nominations not made in accordance
herewith may, in his or her discretion, be disregarded by the chairman of the
meeting.
COMPENSATION OF DIRECTORS
Directors receive an annual fee of $20,000, and each director receives an
annual fee of $4,000 for service on the standing committees of the Reliable
Board. No director of Reliable who is an officer or employee of Reliable
Savings Bank receives any compensation (in addition to his or her regular
salary) for service on the Board or any of its committees. As additional
compensation for serving as a director, on March 30, 1992 Reliable granted to
each nonemployee director an option to purchase 5,500 shares of Reliable Common
Stock at a price of $10 per share. The options have a term of 10 years and one
day, and may terminate earlier upon the occurrence of certain events.
EXECUTIVE OFFICERS
The table below provides information concerning the present executive
officers of Reliable.
<TABLE>
<CAPTION>
AGE POSITIONS HELD DURING THE PAST FIVE YEARS
NAME --- -----------------------------------------
<S> <C> <C>
Stephen Grippi............................. 69 President, Reliable Savings Bank
Edward H. Eiter, Jr........................ 41 Vice President and Chief Operating
Officer, Reliable Savings Bank
Gregory B. Swango.......................... 34 Treasurer and Chief Financial Officer,
Reliable Savings Bank; previously Audit
Senior, Edwards Leap & Sauer (accounting
firm)
Jean L. David.............................. 66 Senior Vice President and Secretary,
Reliable Savings Bank
Charles E. Kindig, Jr...................... 38 Vice President and Chief Loan Officer,
Reliable Savings Bank; previously Senior
Examiner, Office of Thrift Supervision
</TABLE>
Each of the officers identified above has held the position indicated above
or other executive positions with the same entity (or a subsidiary thereof) for
at least the past five years.
Executive officers of Reliable serve at the pleasure of the Board of
Directors of Reliable.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding compensation
received by the Chief Executive Officer. No other executive officers of
Reliable or Reliable Savings Bank received annual compensation, including
bonus, in excess of $100,000 for the period indicated.
79
<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
DOLLAR
ANNUAL VALUE OF NO. OF SECURITIES
COMPENSATION RESTRICTED UNDERLYING
NAME AND ---------------- STOCK OPTIONS/SARS ALL
PRINCIPAL POSITION YEAR(1) SALARY BONUS AWARDS GRANTED OTHER(3)
- ------------------- ------- -------- ------- ---------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C>
Stephen Grippi.......... 1993 $128,281 $15,000 $ -- -- 11,909
President and Chief 1992 120,750 15,000 60,000(2) 12,000 6,221
Executive Officer 1991 104,445 15,000 -- --
</TABLE>
- --------
(1) Reliable's fiscal year ends September 30.
(2) On March 30, 1992 the Pension Committee granted Mr. Grippi an award of
6,000 shares of Reliable Common Stock pursuant to the Reliable Savings
Bank, PaSA Recognition and Retention Plan and Trust Agreement (the
"Recognition and Retention Plan"). One third of this award vests on each of
the first three anniversary dates of the award. The value of these 6,000
shares was $162,000, using the market value of Reliable Common Stock at the
end of its last completed fiscal year. Dividends are paid with respect to
the shares awarded Mr. Grippi.
(3) In accordance with the transitional provisions applicable to the revised
rules on executive officer and director compensation disclosure adopted by
the Securities and Exchange Commission, as informally interpreted by the
Commission's Staff, amounts of All Other compensation are excluded for
Reliable's 1991 fiscal year.
Represents matching contributions by Reliable Savings Bank to Mr. Grippi's
account in the Reliable Savings Bank 401(k) Profit Sharing Plan, an
automobile provided by Reliable for Mr. Grippi's use and, for fiscal 1993,
accrued dividends paid from the 2,000 shares in which Mr. Grippi is vested
pursuant to the Recognition and Retention Plan.
The following table sets forth the number of shares of Reliable Common Stock
acquired on the exercise of stock options and the aggregate gains realized on
the exercise during fiscal 1993 by Mr. Grippi. The table also sets forth the
number of shares covered by exercisable and unexercisable options held by Mr.
Grippi on September 30, 1993 and the aggregate gains that would have been
realized had these options been exercised on September 30, 1993 even though
these options were not exercised, and the unexercised options could not have
been exercised, on September 30, 1993.
AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
DOLLAR
NUMBER OF SHARES VALUE OF UNEXERCISED
SHARES ACQUIRED COVERED BY UNEXERCISED IN-THE-MONEY
ON EXERCISE OPTIONS ON 9/30/93 OPTIONS ON 9/30/93
DURING FISCAL VALUE ------------------------- -------------------------
NAME AND PRINCIPAL POSITION 1993 REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Grippi.......... 4,000 $46,000 0 8,000 0 $136,000
President and Chief
Executive Officer
</TABLE>
- --------
(1) Market value on the date of exercise of shares covered by options
exercised, less option exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1993, Reliable's Compensation Committee was comprised of
Messrs. Calabro, Keith, Povero and Russo. No member of the Compensation
Committee has ever been an officer or employee of Reliable or Reliable Savings
Bank or has a transaction or relationship required to be disclosed under Item
404 of Regulation S-K. During fiscal 1993, no executive officer served on a
compensation committee (or other board committee performing equivalent
functions) or Board of Directors of any entity related to the above named
Committee members.
80
<PAGE>
401(K) PROFIT SHARING PLAN
Reliable Savings Bank established in June of 1991 the Reliable Savings Bank
401(k) Profit Sharing Plan (the "401(k) Plan"). Under the 401(k) Plan,
employees 21 or more years old with one year of service may make pre-tax
contributions through salary deductions of up to 10% of their annual
compensation. Reliable Savings Bank may match these contributions up to 5% of
the employee's annual compensation. Reliable Savings Bank may also make
additional contributions. Participants become vested in Reliable Savings Bank's
contributions 20% per year after the first year of service.
Benefits will normally be paid at age 65. However, participants aged 59 1/2
years may receive distributions of amounts 100% vested without terminating
their participation in the 401(k) Plan. Distributions are made in lump-sum
payments. The 401(k) Plan also permits participants access to their accounts,
in accordance with uniform guidelines, for financial necessity or hardship.
Participants may direct the investment of their accounts among five investment
options. The Reliable Common Stock is not currently an investment option, and
Reliable Savings Bank has no present plans to include it as an investment
option.
EMPLOYMENT CONTRACT
Reliable Savings Bank has entered into a three-year employment agreement with
Mr. Grippi which expires December 31, 1994. In addition to Mr. Grippi's salary
the agreement provides for reimbursement of reasonable business expenses and
for participation in the employee benefit programs of Reliable Savings Bank. In
the event Reliable Savings Bank terminates his employment without cause, Mr.
Grippi will receive a severance payment equal to six months salary and benefits
increased by one week for each year of his employment, not to exceed one year
in the aggregate. He will continue to participate in all benefit programs for
one year, and all his stock options not otherwise exercisable would become
immediately exercisable.
INTERESTS OF NOMINEES, DIRECTORS AND OFFICERS IN CERTAIN TRANSACTIONS
Reliable Savings Bank has extended credit to directors and officers of
Reliable Savings Bank and Reliable, to members of their families and to
corporations or organizations in which such persons have a beneficial interest
or with which such persons are associated as officers, partners, directors or
trustees. In all cases these transactions were made in the ordinary course of
business and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of collectibility or
present other unfavorable features. As of December 31, 1993 total loans to such
directors, executive officers, principal stockholders and their related
interests whose loan balances exceeded $60,000 during fiscal 1993 were
$668,261.50.
81
<PAGE>
INFORMATION CONCERNING UNITED
THE UNITED MERGER
FCFC and United have entered into the United Plan of Reorganization, which
provides for the United Merger. Although it is contemplated that the United
Merger and the Reliable Merger will be consummated at the same time if all
required regulatory approvals have been received and all conditions precedent
have been satisfied, the United Merger and the Reliable Merger are separate and
independent transactions. The information presented in this Proxy
Statement/Prospectus concerning United is intended only to provide the holders
of Reliable Common Stock an understanding of United and the United Merger. The
holders of Reliable Common Stock have no rights to approve or reject the
consummation of the United Merger. The consummation of the Reliable Merger is
not a condition precedent to the United Merger, and the consummation of the
United Merger is not a condition precedent to the Reliable Merger.
BUSINESS AND PROPERTIES OF UNITED
United was organized as a Pennsylvania business corporation on July 24, 1981
at the direction of the Board of Directors of Unitas National Bank for the
purpose of acquiring Unitas Bank and creating a bank holding company. On
January 4, 1982, Unitas Bank ("Unitas Bank") became a wholly-owned subsidiary
of United and the shareholders of Unitas Bank became the shareholders of
United. Unitas Bank and Unitas Mortgage Corporation ("Unitas Mortgage") are
United's only active subsidiaries and United functions primarily as the holder
of all of the outstanding stock of these two subsidiaries. As used herein,
"United" refers collectively to United and its two subsidiaries. United is
registered as a bank holding company under the Bank Holding Company Act of
1956, as amended, and United currently employs 110 employees (full-time
equivalents).
Through Unitas Bank, United traces its origins to John Bare & Co., a private
bank established in Huntingdon, Pennsylvania on October 17, 1866. On May 15,
1894 the bank was organized as a national banking association under the name
The Union National Bank of Huntingdon. Unitas Bank adopted its present name on
October 1, 1983. Since January 1, 1989, Unitas Bank has established three new
branches--one inside a supermarket in Gettysburg, Pennsylvania on April 1,
1991; another inside a supermarket in State College, Pennsylvania on March 23,
1992; and a free-standing branch in Guilford Township (just outside
Chambersburg), Pennsylvania on March 20, 1993. Unitas Bank presently conducts
its business through 12 community banking offices in 11 communities in the
counties of Adams (1 office), Bedford (1), Centre (2), Franklin (2) and
Huntingdon (6).
Unitas Bank engages in a full-service commercial banking business within the
vicinity of its service area. It offers various loan services, including
secured and unsecured commercial and consumer loans, construction and mortgage
loans, lease financing, all types of deposit services, including checking
services and interest bearing demand, savings and other time deposit accounts,
and trust and personal financial services. Trust services include investment
custodianship, investment management, estate administration, executorships,
trusteeships, guardian of property, employee benefits and corporate trusts.
Unitas Mortgage engages in the origination of mortgages for resale in the
secondary mortgage market from three community offices located in Adams, Centre
and Cumberland Counties. United's business is not seasonal in nature.
United operates six ATMs which permit its customers to conduct routine
banking transactions 24 hours a day, and these ATMs are located on the premises
of its banking offices. All of the ATMs are part of the MAC Network, which
consists of over 14,000 ATMs owned by numerous banks, savings and loan
associations and credit unions located in 16 states, of which 14 are east of
the Mississippi River. United's MAC customers may use the HONOR Network, which
has 9,800 ATMs located primarily in the southeastern quadrant of the United
States. The ATMs operated by United are also part of the national Plus Network
which is comprised of more than 170,000 ATMs located in the United States,
Canada and 45 other countries and territories, and which services over 161
million cards. Such networks allow United's customers to withdraw cash and, in
certain cases, conduct other banking transactions using ATMs of all
participating financial institutions.
82
<PAGE>
As a nationally chartered, federally insured commercial bank that is a member
of the Federal Reserve System, United is subject to supervision and regular
examination by the Office of the Comptroller of the Currency ("OCC"). Various
federal and state laws and regulations govern many aspects of its banking
business. See "Regulation and Supervision."
United competes actively with other commercial banks and savings and loan
associations in its area, many of which are larger than United, as well as with
major regional banking and financial institutions headquartered in Harrisburg,
Altoona, State College, Johnstown and Pittsburgh. The management of United
believes that it is generally competitive with all competing financial
institutions in its service area with respect to interest rates paid on savings
and other time deposits, service charges on deposit accounts and interest rates
charged on loans.
The headquarters of United is located at 15 South Main Street, Chambersburg,
Franklin County, Pennsylvania. The two-story brick veneer headquarters building
has approximately 9,200 square feet of floor space and contains a full-service
banking facility and the central administrative offices of United. Of United's
banking offices, the headquarters and three branches are leased and the
remaining facilities are owned in fee, free of all liens and encumbrances.
Management believes all such facilities to be in good repair and well suited to
their current uses.
83
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES 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 appearing elsewhere in this
Proxy Statement/Prospectus. The results for the six month periods ended June
30, 1994 and 1993 are not necessarily indicative of the results to be expected
for the entire year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------ ------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on
loans................. $ 5,246 $ 5,541 $ 10,946 $ 10,822 $ 10,625 $ 10,485 $ 9,971
Interest and dividends
on investment
securities............ 579 862 1,601 1,414 1,330 1,224 1,248
Interest on money mar-
ket investments....... 23 44 70 216 342 735 1,053
-------- -------- -------- -------- -------- -------- --------
Total interest income.. 5,848 6,447 12,617 12,452 12,297 12,444 12,272
-------- -------- -------- -------- -------- -------- --------
Interest Expense
Interest on deposits... 1,934 2,463 4,651 5,653 7,004 7,601 7,808
Interest on short-term
borrowings............ 56 63 143 30 1 7 21
Interest on long-term
debt.................. 0 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
Total interest expense. 1,990 2,526 4,794 5,683 7,005 7,608 7,829
-------- -------- -------- -------- -------- -------- --------
Net interest income.... 3,858 3,921 7,823 6,769 5,292 4,836 4,443
Provision for possible
loan losses........... 198 150 473 325 300 300 420
-------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
possible loan losses.. 3,660 3,771 7,350 6,444 4,992 4,536 4,023
Other operating income. 315 504 876 528 517 439 402
Other operating ex-
penses................ 2,893 2,709 5,548 4,913 4,260 3,716 3,794
-------- -------- -------- -------- -------- -------- --------
Income before taxes.... 1,082 1,566 2,678 2,059 1,249 1,259 631
Applicable income tax-
es.................... 346 507 858 641 346 350 110
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 736 $ 1,059 $ 1,820 $ 1,418 $ 903 $ 909 $ 521
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA
Net income............. $ 0.96 $ 1.38 $ 2.37 $ 1.84 $ 1.17 $ 1.18 $ .68
Cash dividends de-
clared................ $ 0.26 $ 0.24 $ .47 $ .43 $ .39 $ .39 $ .39
Average shares out-
standing (a).......... 769,147 769,147 769,147 769,147 769,147 769,147 769,147
AT END OF PERIOD
Total assets........... $147,974 $147,603 $147,603 $143,261 $128,644 $124,974 $121,098
Investment Securities.. 19,492 20,008 20,041 25,426 18,567 20,270 23,532
Loans and leases, net
of unearned income.... 118,008 117,287 117,287 101,719 97,385 96,632 90,292
Allowance for possible
loan losses........... 1,326 1,189 1,189 1,061 910 802 652
Deposits............... 133,069 129,319 129,319 127,862 117,437 114,344 110,372
Long-term debt......... 0 0 0 0 0 0 0
Shareholders' equity... 12,593 12,282 12,282 10,831 9,748 9,149 8,541
KEY RATIOS
Return on average as-
sets.................. 1.00% 1.36% 1.22% 1.05% 0.72% 0.75% 0.42%
Return on average equi-
ty.................... 11.81 17.63 15.36% 13.62% 9.60% 10.26% 6.22%
Net loans to deposit
ratio................. 88.68 90.70 90.70% 79.55% 82.93% 84.51% 81.81%
Dividend payout ratio.. 27.17 17.43 20.00% 23.34% 33.33% 33.11% 57.58%
Average shareholders'
equity as percentage
of average assets..... 9.34 8.80 9.05% 8.75% 8.49% 8.05% 7.55%
</TABLE>
- --------
(a) Average number of shares outstanding has been adjusted to reflect 10% stock
dividends declared on November 13, 1991, November 18, 1992 and November 17,
1993.
84
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
PROFITABILITY--Interest rates continued to fall during 1993, affording the
banking industry another window of opportunity to enhance net interest margins
and, likewise, profitability. UNB's net income for fiscal year ended December
31, 1993 reached a record $1.8 million, comparing vigorously with net income of
$1.4 million in 1992 and $903 thousand in 1991. Return on assets for the three
years ended December 31, 1993 equalled 1.22 percent, 1.05 percent, and .72
percent, respectively. Return on shareholders' equity equalled 15.4 percent, a
healthy increase over 13.6 percent in 1992 and 9.6 percent in 1991.
Net interest income grew $1 million in 1993, representing the underlying
strength of the earning power of the Corporation. The following analysis of
average balances and interest rates illustrates the components of net interest
margin. While interest rates continued to fall, UNB managed the net interest
margin conservatively and achieved a net increase of 23 basis points. The three
year trend in declining interest rates and achievable yields is evident in each
category of funding sources and earning assets. The overall decline of 78 basis
points on earning assets from 1992 to 1993 was more than offset by a 101 basis
point decline in break even cost of carrying earning assets. The resultant net
interest margin equalled 5.67 percent in 1993, as compared with 5.44 percent in
1992 and 4.62 percent in 1991.
AVERAGE BALANCES AND INTEREST RATES--Tax Equivalent Basis (In Thousands)
<TABLE>
<CAPTION>
1993 1992 1991
------------------------- ------------------------- -------------------------
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/
BALANCE REV/EXP RATE BALANCE REV/EXP RATE BALANCE REV/EXP RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Investment Securities... $ 25,545 $ 1,619 6.34% $ 19,233 $ 1,580 8.22% $ 16,355 $ 1,519 9.29%
Loans, Net of Reserve... 111,451 11,016 9.88 103,115 10,822 10.50 96,570 10,625 11.00
Funds Sold.............. 2,033 60 2.95 3,923 145 3.70 3,111 163 5.24
Short-Term Investments.. 459 10 2.18 1,344 71 5.28 2,653 179 6.75
-------- ------- -------- ------- -------- -------
Total Earning Assets.... $139,488 $12,705 9.11% $127,615 $12,618 9.89% $118,689 $12,486 10.52%
======== ======== ========
SOURCE OF FUNDS
Interest-Bearing Demand. $ 38,653 $ 1,199 3.10% $ 36,583 $ 1,462 4.00% $ 24,770 $ 1,400 5.65%
Savings Deposits........ 31,495 1,173 3.72 17,329 790 4.56 10,269 616 6.00
Time Deposits........... 52,256 2,279 4.36 60,408 3,401 5.63 70,609 4,988 7.06
Short-Term Borrowings... 3,928 143 3.64 647 30 4.64 13 1 7.69
-------- ------- -------- ------- -------- -------
Total Interest-Bearing
Sources................ $126,332 $ 4,794 3.79% $114,967 $ 5,683 4.94% $105,661 $ 7,005 6.63%
Demand Deposits......... 8,465 8,166 8,055
Cash and Due from Banks. (3,731) (3,720) (3,614)
Other Sources, Net...... 8,422 8,202 8,587
-------- ------- -------- ------- -------- -------
Total Sources of Funds.. $139,488 $ 4,794 3.44% $127,615 $ 5,683 4.45% $118,689 $ 7,005 5.90%
======== ------- ======== ------- -------- -------
Net Interest Revenue.... $ 7,911 $ 6,935 $ 5,481
======= ======= =======
Net Interest Revenue to
Earning Assets......... 5.67% 5.44% 4.62%
</TABLE>
For the purposes of this presentation, nonaccrual loans are accounted for in
Loans, Net of Reserve.
Interest revenue on Investment Securities and Loans is calculated
on a tax equivalency basis at a rate of 34 percent.
85
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UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
During 1993, the banking industry felt the pressure on net interest income as
more assets repriced at the low interest rate levels. Influenced by declining
earning asset yields, the industry continued to lower interest rates paid on
deposits. UNB's competitive market was not immune to these pressures and
responded accordingly by lowering depository rates. Attraction of new deposits
became highly competitive as investors sought out higher yielding instruments
such as mutual funds, stocks, and bonds.
Fortunately, UNB was negatively gapped at December 31, 1992, whereby $106
million in liabilities were scheduled to mature or reprice during fiscal 1993,
and only $46 million in assets were scheduled to mature or reprice. Repricing
of more liabilities than assets was the greatest contributor to the increase in
net interest income in 1993. Growth in earning assets also contributed
significantly to the change in net interest income, as can be analyzed by
review of the following summary of the changes in interest earned and paid
resulting from changes in volume and rates.
<TABLE>
<CAPTION>
1993 COMPARED TO 1992(1) 1992 COMPARED TO 1991(1)
INCREASE (DECREASE) DUE TO: INCREASE (DECREASE) DUE TO:
------------------------------ ------------------------------
VOLUME RATE NET VOLUME RATE NET
------------------- --------- ------------------- ---------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Investment Securities. $ 400 $ (361) $ 39 $ 237 $ (176) $ 61
Loans, Net of Reserve. 824 (630) 194 687 (490) 197
Funds Sold............ (56) (29) (85) 30 (48) (18)
Short-Term Invest-
ments................ (19) (42) (61) (192) 84 (108)
-------- --------- --------- ------- --------- ---------
Total interest-earning
assets............... $1,149 $(1,062) $ 87 $ 762 $ (630) $ 132
======== ========= ========= ======= ========= =========
Interest paid on:
Demand deposits....... $ 64 $ (327) $ (263) $473 $ (411) $ 62
Savings deposits...... 528 (145) 383 322 (149) 173
Time deposits......... (356) (766) (1,122) (472) (1,115) (1,587)
Short-Term borrowings. 119 (6) 113 30 -- 30
-------- --------- --------- ------- --------- ---------
Total interest-bearing
liabilities.......... $ 356 $(1,245) $ (889) $ 353 $(1,675) $(1,322)
======== ========= ========= ======= ========= =========
Net interest income..... $ 793 $ 183 $ 976 $ 409 $ 1,045 $ 1,454
======== ========= ========= ======= ========= =========
</TABLE>
- --------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
Noninterest income equalled $876 thousand in 1993 as compared with $528
thousand in 1992 and $517 thousand in 1991. The large increase in noninterest
income was accomplished through sales of mortgage loans and investment
securities. During the first quarter of 1993, Management elected to sell $4.7
million in fixed-rate, long-term real estate loans in strategy to reduce the
volume of long-term assets funded by short-term liabilities. The sale of this
block of mortgages produced $238 thousand in gross income, or $157 thousand net
of federal income taxes. During the fourth quarter of 1993, Management elected
to sell $2.2 million in investment securities as UNB repositioned the portfolio
for mark-to-market accounting to be adopted during the first quarter of 1994
pursuant to FASB Statement No. 115, as discussed in Note 1 of the financial
statements. The gain on sale of investment securities totalled $62 thousand
gross income, or $41 thousand net of federal income tax.
Noninterest expenses equalled $5.5 million in 1993, as compared with $4.9
million in 1992 and $4.3 million in 1991. Increased noninterest expenditures
represent the cost of new branch offices and an increase in salaries and
employee benefits, primarily the rising cost of health care. During 1993, UNB
expanded the
86
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
supermarket retail segment of the bank by relocation of the existing Huntingdon
Plaza Office into a new Bi-Lo Superstore within the same plaza center. This
location offers full-service banking as well as drive-up facilities. In the
first quarter of 1993, UNB opened a traditional branch on Lincoln Way East in
Chambersburg. This location complements the downtown headquarters location. As
with many businesses nationwide, UNB has felt the increasing burden of the cost
to provide adequate health care coverage for its employees. Health care costs
totalled $333 thousand in 1993 as compared with $170 thousand in 1992 and $144
thousand in 1991. UNB is continually seeking avenues to manage this cost over
the long run. FDIC insurance costs escalated significantly from 1990 to 1991,
when the banking industry was experiencing significant losses and the FDIC
assessment fund needed to be replenished. In subsequent years, FDIC insurance
costs have grown commensurate with depository growth. Costs of FDIC insurance
are now determined by the capitalization level of the institution and deposit
base. At present, the capitalization level of the bank commands the least
costly premium charge.
Management evaluates the adequacy of the loan loss reserve on a quarterly
basis. As part of this analysis, Management determines the appropriate loan
loss provisional level. In 1993, UNB provided $473 thousand for loan losses, an
increase over $325 thousand in 1992 and $300 thousand in 1991. In consideration
of the exceptional loan growth that UNB has experienced over the past two
years, and a fourth quarter increase in nonaccrual loans, Management elected to
make an additional $173 thousand provision to the reserve account and allocate
$27 thousand for possible other real estate deficiencies. These additional
provisions place UNB in a strengthened position to absorb potential future
losses.
FEDERAL INCOME TAXES--The federal income tax provision for book purposes was
$858 thousand in 1993, $641 thousand in 1992, and $346 thousand in 1991.
Federal tax provisions absorbed 32 percent of pretax profits in 1993, 31
percent in 1992, and 28 percent in 1991. UNB incurred Alternative Minimum Tax
(AMT) of $485 thousand in 1993, deferring $373 thousand to future tax
liability; this AMT position resulted primarily from timing differences
incurred by leasing activities.
The Corporation adopted FASB Statement No. 109, "Accounting for Income
Taxes," in the first quarter of 1993. UNB adopted the Statement of a
prospective basis, without restating any prior years and has determined that
the effect of its implementation on financial position and profitability was
not material for 1993 or 1992.
IMPACT OF INFLATION AND CHANGING PRICES--The majority of assets and
liabilities of a financial institution are monetary in nature and therefore
differ greatly from most commercial and industrial companies that have
significant investments in fixed assets or inventories. However, inflation does
have an important impact on the growth of total assets in the banking industry
and the resulting need to increase equity capital at a faster pace than asset
growth in order to maintain an appropriate equity-to-assets ratio. An important
effect of this has been the reduction of the proportion of earnings paid out as
dividends. Another significant effect of inflation is on other expenses, which
tend to rise during periods of general inflation.
Management of UNB believes that the most significant impact on financial
performance is the ability to react to interest rate swings in a timely and
prudent manner and to monitor noninterest expenditures. The Asset/Liability
function closely monitors economic indicators and anticipated interest rate
swings. Through such monitoring, Management is able to react on a timely basis
in adjusting strategy to minimize exposure to earnings and asset quality.
Management's strategy in this regard is to maintain an essentially neutral
position between interest-sensitive assets and liabilities in order to protect
against wide interest rate fluctuations.
87
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UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION--UNB functions as a financial intermediary and, as such,
trends in its sources and uses of funds should be examined when reviewing
financial condition. The table below depicts the major funding sources and
funding uses:
SOURCES AND USES OF FUNDS TRENDS
<TABLE>
<CAPTION>
1993 1992 1991
-------------------------- ---------------------------- --------
INCREASE/ INCREASE/
AVERAGE (DECREASE) % AVERAGE (DECREASE) % AVERAGE
BALANCE AMOUNT CHANGE BALANCE AMOUNT CHANGE BALANCE
-------- ---------- ------ -------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
FUNDING SOURCES
Demand deposits:
Noninterest-bearing... $ 8,465 $ 299 3.66% $ 8,166 $ 111 1.38% $ 8,055
Interest-bearing...... 38,653 2,070 5.66 36,583 11,813 47.69 24,770
Savings deposits....... 31,495 14,166 81.75 17,329 7,060 68.75 10,269
Time deposits.......... 52,256 (8,152) (13.49) 60,408 (10,201) (14.45) 70,609
Federal funds purchased
& other short-term
borrowings............ 3,928 3,281 507.11 647 634 4,876.92 13
Other.................. 13,614 1,895 16.17 11,719 757 6.91 10,962
-------- ------- -------- -------- --------
Total Sources....... $148,411 $13,559 10.05% $134,852 $ 10,174 8.16% $124,678
======== ======= ======== ======== ========
FUNDING USES
Loans.................. $111,451 $ 8,336 8.08% $103,115 $ 6,545 6.78% $ 96,570
Taxable investment
securities............ 25,047 6,264 33.35 18,783 2,884 18.14 15,899
Tax exempt investment
securities............ 498 48 10.67 450 (6) (1.32) 456
Federal funds sold &
securities purchased
u/a resell............ 2,033 (1,890) (48.18) 3,923 812 26.10 3,111
Deposits with banks at
interest.............. 375 3 0.81 372 (1,321) (78.03) 1,693
Money market
investments........... 84 (888) (91.36) 972 12 1.25 960
Other.................. 8,923 1,686 23.30 7,237 1,248 20.84 5,989
-------- ------- -------- -------- --------
Total Uses.......... $148,411 $13,559 10.05% $134,852 $ 10,174 8.16% $124,678
======== ======= ======== ======== ========
</TABLE>
DEPOSITS--UNB's primary funding source is the deposit base. Total deposits
equalled $129 million at December 31, 1993, reflecting a slight gain over $128
million in total deposits at year end 1992. Depository growth in the prior year
totalled $10 million, and was achieved through special promotions of core-type
depository products. Growth in deposits leveled off in 1993, when investors
sought other avenues of investment in an effort to obtain higher returns. UNB
experienced growth in investors savings and checking accounts; however,
maturing certificates of deposit were difficult to retain in the highly
competitive interest rate environment. Certificates of deposit under $100
thousand declined $1.7 million, with the primary reason from investors
repeatedly being to achieve higher rates in the nonbanking sector of the
financial industry.
88
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
Maturities of time certificates of deposit and other time deposits of
$100,000 or more at December 31, 1993, are summarized as follows:
<TABLE>
<CAPTION>
TIME CERTIFICATES OTHER TIME
OF DEPOSIT DEPOSITS TOTAL
----------------- ---------- ------
(In Thousands)
<S> <C> <C> <C>
3 months or less....................... $1,115 $ 0 $1,115
Over 3 through 6 months................ 3,400 0 3,400
Over 6 through 12 months............... 1,454 107 1,561
Over 12 months......................... 765 338 1,103
------ ---- ------
Total Deposits $100,000 or more...... $6,734 $445 $7,179
====== ==== ======
</TABLE>
Future growth in deposits is dependent upon UNB's ability to attract and
retain funding in an environment where the investor is seeking higher rates and
willing to venture out of the insured comfort of the banking system. UNB
anticipates several promotional deposit products will be offered during 1994 to
assist in retaining maturing certificates as well as attracting new depositors.
SHORT-TERM BORROWINGS--UNB's deposit base is complemented by another source
of funds--repurchase agreements. Such instruments are simply business cash
management accounts for which securities are pledged. UNB offers this type of
account to business clients at their request, but does not actively seek new
accounts due to the uninsured nature and required pledging. At December 31,
1993, cash management (repo) accounts totalled $4.7 million, reflecting a gain
of $1.5 million over prior year. Outstanding volumes in these accounts can
fluctuate significantly from day to day. The following table shows the
distribution of UNB's short-term borrowings and the weighted average interest
rates thereon. Also, provided pertaining to borrowings, are the maximum
amounts, average amounts, and weighted average interest rates for the last
three years.
<TABLE>
<CAPTION>
SECURITIES SOLD UNDER OTHER SHORT-TERM
AGREEMENTS TO PURCHASE BORROWINGS
---------------------- ----------------
(In Thousands)
<S> <C> <C>
Balance at December 31
1993............................. $4,687 $ 0
1992............................. 3,198 0
1991............................. 0 0
Weighted average interest rate at
year-end:
1993............................. 3.50% N/A
1992............................. 3.75 N/A
1991............................. N/A N/A
Maximum amount outstanding at any
month's end:
1993............................. $6,481 $3,000
1992............................. 5,772 0
1991............................. 1,175 0
Average amount outstanding during
the year:
1993............................. $3,714 $ 302
1992............................. 647 0
1991............................. 9 4
Weighted average interest rate dur-
ing the year:
1993............................. 3.59% 3.17%
1992............................. 4.64 0.00
1991............................. 7.29 5.58
</TABLE>
LOANS--UNB's primary use of funds has historically been meeting the credit
needs of our communities through retail lending. The year 1993 proved to be a
challenging one, as loan demand was very strong in our
89
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
markets during a time period when investors were looking to other financial
intermediaries to invest their funds. Funded by growth in savings accounts,
retained earnings, and cash management accounts, the loan portfolio grew $10.2
million in 1993. During the first quarter of the year, $4.7 million in mortgage
loans were sold to a secondary market investor. UNB replaced these long-term
assets with short-term, more liquid and diversified loans. In addition, normal
runoff of approximately $4 million per month was rewritten, bringing total
lending volume to approximately $63 million for the year. UNB's growth in 1993
was spread among consumer, leasing, and commercial categories. Retail consumer
loans and lease financing, combined, grew $8.3 million, or 17.4 percent in
1993, comparing similarly to $7.3 million, or 18.1 percent in 1992. The tables
below illustrate the mix of the loan portfolio and the maturity and repricing
frequency:
LOAN PORTFOLIO
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Commercial.......................... $ 24,881 $ 18,854 $ 18,998 $ 20,349 $17,718
Real Estate
Comm'l & Other.................... 15,675 14,872 12,476 10,234 10,845
Residential....................... 21,518 20,493 25,313 27,094 26,444
Construction...................... 357 816 1,095 535 282
Held for Resale................... 0 5,507 0 0 0
Consumer............................ 38,446 38,318 33,908 34,182 30,594
Leases.............................. 28,113 18,893 15,319 14,115 12,632
-------- -------- -------- -------- -------
Total Loans & Mortgage Loans Held
for Resale......................... $128,990 $117,753 $107,109 $106,509 $98,515
======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
LOAN MATURITY AND LESS THAN AFTER ONE BUT WITHIN AFTER FIVE
REPRICING FREQUENCY ONE YEAR FIVE YEARS YEARS TOTAL
- ------------------- --------- -------------------- ---------- --------
<S> <C> <C> <C> <C>
Fixed Interest Rate:
Commercial loans............. 1,780 1,203 740 3,723
All other loans.............. 1,988 57,864 20,768 80,620
------- ------- ------- --------
Total Fixed.................. $ 3,768 $59,067 $21,508 $ 84,343
------- ------- ------- --------
Variable Interest Rate:
Commercial loans............. 19,656 1,502 0 21,158
All other loans.............. 15,232 7,721 536 23,489
------- ------- ------- --------
Total Variable............... 34,888 9,223 536 44,647
------- ------- ------- --------
Total........................ $38,656 $68,290 $22,044 $128,990
======= ======= ======= ========
</TABLE>
Growth in the loan portfolio in 1994 will be dependent upon the bank's
ability to attract and retain deposit accounts. Our communities continue to
generate strong loan demand into the first quarter of 1994, and Management
anticipates this to continue throughout the year. The disparity between deposit
growth and loan demand resulted in a loan to deposit ratio of 90 percent at
year-end 1993.
Secured Commercial Real Estate Loans. Secured commercial real estate loans are
originated in amounts up to 85% of the appraised value of the property. Such
appraised value is determined by an independent appraiser previously approved
by UNB. UNB's commercial real estate loans are permanent loans secured by
approved property such as small office buildings, retail stores, small strip
plazas, and other non-residential buildings. UNB originates commercial real
estate loans with amortization periods of 1-20 years, primarily as adjustable-
rate mortgages.
90
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
Loans secured by commercial real estate generally involve a greater degree of
risk than residential mortgage loans and carry larger loan balances. This
increased credit risk is a result of several factors, including a concentration
of principal and a limited number of loans and borrowers, the effects of
general economic conditions on income-producing properties, and the increased
difficulty of evaluating and monitoring these types of loans. The repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project. UNB monitors cash
flows and collateral values on at least an annual basis for all commercial real
estate loans over $150 thousand.
Residential Loans. UNB's primary lending activity consists of the origination
of 1-4 family owner-occupied residential mortgage loans secured by first
mortgages in UNB's primary market areas. UNB requires an independent appraisal,
flood hazard insurance if applicable, and fire and casualty insurance on all
properties securing residential real estate loans. UNB's Lending Policy limits
the maximum loan-to-value ratio to 90% of the appraised value of the property,
based on an independent appraisal.
Consumer Loans. Consumer loans primarily consist of personal unsecured loans,
home improvement loans, automobile loans, and CD's and savings account loans.
The underwriting standards employed by UNB for consumer loans include a
determination of the applicant's primary history and other debts, and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. In addition, the stability of the applicant's monthly income
from primary employment is considered during the underwriting process.
Creditworthiness of the applicant is of primary consideration; however, the
underwriting process also includes a comparison of the value of security in the
relationship to the proposed loan amount.
Consumer Lease Receivables. This program, employed in 1985, lends itself to a
generally higher quality borrower and has historically carried a very low
delinquency ratio. The maximum loan amounts are 105% of MSRP with all residual
values insured by an A+ rated insurance company. Equipment lease receivables
comprise a relatively small portion of the lease portfolio.
Commercial Loans. UNB's strategy has been to build a quality commercial loan
portfolio on a slow and consistent basis. Commercial loans are primarily made
to small local businesses on a secured basis, with accounts receivable,
equipment, inventory, and real estate used as collateral. Loan-to-value ratios
range from 50% to 75% and loans vary from 1 year for lines of credit to 10
years for equipment, term, and business acquisition loans. The interest rates
on such loans can be fixed or variable.
91
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UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
The following table shows the allocation by category of the allowance for
loan losses for each of the past five years:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991 DECEMBER 31, 1990
-------------------- -------------------- -------------------- --------------------
PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH
BALANCE AT END CATEGORY CATEGORY CATEGORY CATEGORY
OF PERIOD TO GROSS TO GROSS TO GROSS TO GROSS
APPLICABLE TO AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- -------------- ---------- --------- ---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic Loans:
Real Estate Loans:
Residential............. 23 24% 41 30% 38 30% 23 30%
Commercial.............. 28 8% 59 9% 42 10% 27 9%
---------- ------- ---------- ------- --------- -------- --------- --------
Total Real Estate....... $ 51 32% $ 100 39% $ 75 40% $50 39%
---------- ------- ---------- ------- --------- -------- --------- --------
Commercial, financial
and agricultural....... 331 21% 375 17% 350 19% 350 21%
Installment............. 95 27% 182 29% 157 29% 124 26%
Lease Receivable........ 488 20% 143 15% 118 14% 101 14%
---------- ------- ---------- ------- --------- -------- --------- --------
$ 583 47% $ 325 44% $ 275 41% $ 225 40%
---------- ------- ---------- ------- --------- -------- --------- --------
Not allocated........... 224 N/A 261 N/A 210 N/A 177 N/A
---------- ---------- --------- ---------
Total............... $1,189 100% $1,061 100% $910 100% $802 100%
========== ========== ========= =========
<CAPTION>
DECEMBER 31, 1989
-----------------------
PERCENT
OF LOANS
IN EACH
BALANCE AT END CATEGORY
OF PERIOD TO GROSS
APPLICABLE TO AMOUNT LOANS
- -------------- ---------- ------------
<S> <C> <C>
Domestic Loans:
Real Estate Loans:
Residential............. 22 32%
Commercial.............. 28 10%
---------- ------------
Total Real Estate....... $ 50 42%
---------- ------------
Commercial, financial
and agricultural....... 325 19%
Installment............. 98 25%
Lease Receivable........ 77 14%
---------- ------------
$ 175 39%
---------- ------------
Not allocated........... 102 N/A
----------
Total............... $652 100%
==========
</TABLE>
The relationship of the allowance and net charge-offs to loan volume is
depicted historically in the table below:
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Allowance for loan losses to
nonperforming loans.................... 63.93% 79.54% 112.35% 204.60% 96.17%
Allowance for Loan Losses as percent of
Average Loans.......................... 1.06% 0.98% 0.92% 0.81% 0.74%
Net Loan Charge-Offs as percent of Aver-
age Loans.............................. 0.31% 0.17% 0.20% 0.16% 0.45%
Provision for Loan Losses as percent of
Average Loans.......................... 0.43% 0.32% 0.31% 0.31% 0.45%
Nonaccrual Loans (000's)................ $1,288 $865 $ 392 $ 299 $ 575
Restructured Loans...................... 227 227 0 0 0
Accruing Loans past due 90 days or more. 345 242 418 93 103
------ ------ ------ ------ -----
Total................................. $1,860 $1,334 $ 810 $ 392 $ 678
====== ====== ====== ====== =====
Nonaccrual Loans as a percent of
Average Loans.......................... 1.16% 0.84% 0.41% 0.31% 0.63%
Other Real Estate Owned................. $ 661 $ 518 $ 381 $ 398 $ 594
</TABLE>
The allowance for loan losses increased as a percent of average loans from
.98 percent in 1992 to 1.06 percent in 1993. Included in the analysis for the
adequacy of the allowance was the increase in nonperforming loans from $1.3
million at December 31, 1992 to $1.9 million at December 31, 1993. UNB'S recent
increase in nonperforming loans resulted from deterioration in financial
condition of a corporation which rents medical equipment to the health care
industry. UNB was advised in December of 1993 that said client's primary
funding source was requiring unexpected significant pay downs. Complete
analysis of known factors at that time led UNB to move $787 thousand total
lease receivables of this client to nonaccrual status. On February 28, 1994,
UNB negotiated a written lock box arrangement managed in trust whereby 50%
payment is submitted during a forebearance period of one year. Management
anticipates that this percentage will
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UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
increase to 100% in 1995, pursuant to the agreement. Long term loss potential
is not expected to be material to the overall profitability of UNB, or to the
adequacy of the allowance for loan losses. UNB accrued and collected lease
revenues through September 30, 1993. Total interest revenues which would have
been earned, throughout the fiscal year on non-accrual loans outstanding at
December 31, 1993 and December 31, 1992, equalled $203 thousand and $118
thousand, respectively. Actual interest income on those loans that was included
in net income for the respective periods equalled $128 thousand and $33
thousand. Consistent with regulatory guidelines, it is UNB's general policy to
cease accruing interest income on loans when they are contractually past due
ninety days or more as to interest or principal payments, or when factors
indicate collection of principal or interest is doubtful. Exceptions to this
policy may be made if the loan is adequately collateralized and in the process
of collection. At December 31, 1993 all nonperforming loans were secured.
The increase in nonaccruals, coupled with the loan growth over the past two
years, was a determining factor in management's decision to increase the
provision for loan losses to .43 percent of average loans as compared with .32
percent provisioned in 1992. At December 31, 1993, UNB had $3.3 million in
loans for which payments presently are current, but the borrowers are
experiencing financial difficulties. These loans are subject to ongoing
management attention, and their classification is reviewed on a quarterly
basis.
UNB has historically maintained a coverage ratio of reserve for loan losses
to nonperforming loans less than peer levels. The most recent peer data
available from the Uniform Bank Performance report indicates a peer coverage of
3.6x's. UNB's quarterly analysis of the adequacy of the allowance for loan
losses includes factors other than nonperforming asset volume such as, but not
limited to, past loan loss experience, current economic conditions, growth and
composition of the loan portfolio, credit analyses, and the status of problem
and potential problem loans. Included in this quarterly review, is
determination of specific allocations for identified loans, as well as general
allocations for each category type. Management believes that the allowance for
loan losses is adequate based upon this quarterly analysis. Ongoing analysis of
these key asset quality measures, as well as prudent loan policies and
procedures, minimizes the risk elements of the portfolio. The relationship of
nonperforming assets and other risk elements to total loans provides an
important measure of asset quality and the inherent risk of any loan portfolio.
Risk characteristics are monitored through an ongoing internal loan review
process, a periodic review provided by external professional loan review
consultants, external auditors, internal auditors, federal bank and bank
holding company examiners, and internal credit analyst. Responsibility for
UNB's asset quality risk monitoring belongs to the Loan Review Committee which
reports findings directly to the Board of Directors. The Committee's activities
and quarterly reporting responsibility to the Board contributes to the
mitigation of lending risks.
The allowance for loan losses is charged when Management determines that the
prospects of recovery of the principal of a loan or lease have significantly
diminished. Subsequent recoveries, if any, are credited to the allowance.
During 1993, $369 thousand in gross charge-offs were made, and $24 thousand in
recoveries occurred. Net loan charge-offs equalled .31 percent of average
loans, comparing higher than .17 percent in 1992. The following table shows the
charge-offs and recoveries by loan category for the past five years:
93
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses Balance January 1........ $1,061 $ 910 $802 $652 $643
Charge-Offs:
Commercial....................................... 43 44 26 70 275
Real Estate--Residential......................... 11 30 56 0 17
Real Estate--Commercial.......................... 126 0 0 0 0
Installment...................................... 163 66 40 53 90
Lease Financing.................................. 26 70 82 58 62
------ ------ ---- ---- ----
Total Charge-Offs.............................. $ 369 $ 210 $204 $181 $444
Recoveries:
Commercial....................................... 4 11 0 2 0
Real Estate--Residential......................... 0 0 0 4 0
Real Estate--Commercial.......................... 0 0 0 0 0
Installment...................................... 13 9 5 10 14
Lease Financing.................................. 7 16 7 15 19
------ ------ ---- ---- ----
Total Recoveries............................... $ 24 $ 36 $ 12 $ 31 $ 33
------ ------ ---- ---- ----
Net Charge-Offs.................................... $ 345 $ 174 $192 $150 $411
------ ------ ---- ---- ----
Provision for Loan Losses.......................... $ 473 $ 325 $300 $300 $420
------ ------ ---- ---- ----
Allowance for Loan Losses Balance December 31...... $1,189 $1,061 $910 $802 $652
====== ====== ==== ==== ====
</TABLE>
United will be required to adopt FASB Statement No. 114, "Accounting by
Creditors for Impairment of a Loan," in the first quarter of fiscal year ending
December 31, 1995. UNB has determined that the effect of such implementation
will not be material to the financial position and results of operations.
INVESTMENTS--As of December 31, 1993, the book values of investment
securities was $20 million, reflecting a decrease of $3.7 million from the
prior year. This decrease was a result of UNB's aggressive loan growth, which
absorbed all new depository funds as well as some of the funds generated by
investment sales, calls, and maturities. The mix within the portfolio remains
consistent with last year's mix, reinforcing Management's commitment to keep
the portfolio in high quality and liquid, with the majority of investments made
in Treasuries or Government Agencies. The following table sets forth the
carrying amount of the investment portfolio in each of the past five years:
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities............... $ 3,150 $ 2,124 $ 1,259 $ 755 $ 105
Other U.S. Gov't Securities*........... 15,052 18,895 9,168 5,959 5,080
State and Municipal.................... 200 550 550 450 620
All Other Securities................... 1,606 2,171 5,490 8,608 7,731
------- ------- ------- ------- -------
Total Investments.................... $20,008 $23,740 $16,467 $15,772 $13,536
======= ======= ======= ======= =======
</TABLE>
- --------
* Other U.S. Gov't Securities includes all holdings of mortgage-backed
securities issued by FNMA and FHLMC.
In preparing for implementation of FASB STATEMENT No. 115 in the first
quarter of 1994, Management updated Investment and Asset/Liability Policies to
incorporate mark-to-market accounting issues. Concurrently, Management reviewed
the investment portfolio and made the decision to sell $2.2
94
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
million in securities in order to reposition the portfolio for future needs.
Management's continuous review of the Corporation's ability to hold securities
to maturity will insure compliance with financial accounting standards as well
as liquidity to fund the Bank's needs. Future changes in Held to Maturity and
Available for Sale mix will be achieved through the classification of new
securities at the time of purchase; transfers out of Held to Maturity would be
rare.
However, the Revenue Reconciliation Act of 1993 (S)475 requires
classification of securities for tax purposes; Management has deemed all
securities to be Not Held for Sale. This necessitates that some securities have
a dual classification: 1) Available for Sale under the definition of FASB 115
and 2) Not Held for Sale under the definition of (S)475.
The following table sets forth the contractual maturities of investment
securities at December 31, 1993 and their respective weighted average tax
equivalent yields.
<TABLE>
<CAPTION>
AFTER 1 YEAR, AFTER 5 YEARS, AFTER
WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS TEN YEARS
-------------- --------------- ---------------- ------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ------ -------- ------ -------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury........... $ 500 5.45% $ 1,100 4.39% $ 1,550 4.81% -- --
Gov't Agency............ -- -- 11,096 5.50 3,920 6.71 $ 36 9.50%
State & Municipal....... 100 9.55 100 10.98 -- -- -- --
Other Securities........ 250 8.62 550 7.32 -- -- 806 7.58
------ ------ -------- ------ -------- ------ ---- ----
Total Investments....... $850 6.86% $12,846 5.55% $5,470 6.17% $842 7.66%
====== ====== ======== ====== ======== ====== ==== ====
</TABLE>
LIQUIDITY AND INTEREST RATE SENSITIVITY--As with any business, the need to
insure financial stability is foremost in management's decisions. This includes
contingency financing to satisfy any foreseen or unforeseen demand, as well as,
counteracting any adverse effect interest rate movements may cause. With this
directive, UNB's Management strives to maintain the most cost-effective funding
while preserving the earning power of its asset base.
Core deposits for 1993 averaged $126 million, giving UNB a strong springboard
for loan growth. This growth was further funded by the runoff of called and
matured securities. Additional growth or an unexpected reduction in deposits
can be financed by various other means including federal fund lines, repurchase
agreements, Federal Home Loan Bank, and Federal Reserve Bank borrowings. These
instruments created a borrowing potential of approximately $21 million at
December 31, 1993. UNB can attract, but does not actively seek, brokered
deposits. As of December 31, 1993, UNB had seven brokered certificates of
deposit totalling $693 thousand, which were issued in 1991 during an advertised
promotion of normal bank certificates of deposit. Each brokered certificate was
less than $100 thousand, and no such deposits were issued in 1992 or 1993.
Liquidity analyses are presented every month to the Asset and Liability
Management Committee (ALCO) with a 30 and 90 day measurability. As of December
31, 1993, UNB's 30 day ratio of available funds to net needs was 1.31 percent
and the 90 day ratio was 1.19 percent. These compared with 2.01 percent and
1.80 percent, respectively, at December 31, 1992. With the strong loan demand
and the downward trend of the ratios, Management has elected to modify
reporting criteria and monitor liquidity on a weekly basis to provide prudent
guidance for future liquidity needs.
Earning power for the bank is mainly attained through the net interest margin
or the difference between the cost of funds and earning asset yields. This can
be controlled by volume, rate, and repricing frequency; usually a blend is used
to obtain maximum earnings with minimal risk. Though risk is inherent in a
volatile
95
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
rate environment, assumptions can be made and forecasts run to assist
management in making prudent decisions to reduce risk. UNB's ALCO has the
responsibility of monitoring and adjusting volume and rate mix to ensure the
Corporation's continued profitability and adequate capitalization. The ALCO has
many tools which it can utilize to track, predict, and simulate trends and
changes to volumes and rates. At its monthly meetings, the ALCO reviews the
gaps, or the spread between asset and liability pricing at 30 days, 90 days,
and one year. Management has maintained a negative gap (more liabilities
repricing than assets in a given period of time) thus taking full advantage of
the downward rate movement. Exemplifying this strategy is the one year gap
which was $(33,393) as of December 31, 1992 and $(60,535) at year-end 1993.
Balance sheet gaps (volume) cannot solely be used to control interest rate
sensitivity. Interest rates themselves must be monitored and adjusted to
maintain an acceptable return on assets. Management's ability to forecast and
simulate rate movements allows changes to be made quickly and advantageously.
With the economists predicting a slight upward movement in rates for 1994,
Management is prepared to monitor these effects on earnings and to implement
changes in the balance sheet and rates to insure UNB's continued success.
INTEREST SENSITIVITY GAP ANALYSIS
DECEMBER 31, 1993
<TABLE>
<CAPTION>
AFTER 1 AFTER 5
0-3 3-12 BUT WITHIN BUT WITHIN AFTER
MONTHS MONTHS 5 YEARS 10 YEARS 10 YEARS
ASSETS: -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Investment Securities....... $ 4,864 $ 5,263 $ 9,085 $ 204 $ 592
Loans:
Real Estate............... 1,862 2,673 7,215 9,785 16,015
Commercial................ 18,204 3,624 950 44 2,059
Installment............... 3,762 8,010 13,213 6,032 1,102
Leases.................... 129 785 23,012 0 0
Other Interest-Bearing...... 1,633
-------- -------- -------- ------- -------
Total Earning Assets.... $ 30,454 $ 20,355 $ 53,475 $16,065 $19,768
======== ======== ======== ======= =======
LIABILITIES:
DEPOSITS:
NOW & MMDA................ $ 39,551
Savings................... 33,763
Time + 100M............... 1,115 4,960 1,103
All Other Time............ 10,050 17,218 12,606 150 27
Repurchase Agreements..... 4,687 0 0 0 0
Other Noninterest-Bearing. 0 0 0 0 0
-------- -------- -------- ------- -------
Total Interest-Bearing
Liabilities............ $ 89,166 $ 22,178 $ 13,709 $ 150 $ 27
======== ======== ======== ======= =======
Sensitivity Gap........... (58,712) (1,823) 39,766 15,915 19,741
Cumulative Gap............ (58,712) (60,535) (20,769) (4,854) 14,887
Gap Ratio................. 0.34 0.92 3.90 107.10 732.15
Cumulative Gap Ratio...... 0.34 0.46 0.83 0.96 1.12
</TABLE>
Capital Resources--UNB's equity capital grew $1.5 million in 1993,
representing internal capital generation of 13.4 percent. Over the past five
years, equity capital grew at an average rate of 8.2 percent, with all growth
funded internally. Regulation of UNB falls under the joint responsibility of
the Federal Reserve Bank of Philadelphia for the Corporation, the Office of the
Comptroller of the Currency and Federal
96
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION
Deposit Insurance Corporation for the bank, and the Pennsylvania Department of
Banking for both.Such regulatory authorities monitor capital growth,
sufficiency, and leverage position. UNB's regulatory capital ratios for the
past three years are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
----- ----- -----
<S> <C> <C> <C>
Capital Leverage........................................ 8.26% 7.52% 7.58%
Tier I Capital/Risk Weighted Assets..................... 10.72 10.42 10.10
Tier 1 and Tier 2 Capital/Risk Weighted Assets.......... 11.76 11.45 11.04
</TABLE>
At December 31, 1993, all UNB capital ratios exceeded minimum required
levels. Regulatory agencies are currently in the process of revising equity
capital guidelines to include recognition of unrealized gains and losses on
investment securities to be included in equity capital on the Corporation's
statement of condition beginning in the first quarter of 1994. It is
anticipated that initial adoption of mark-to-market accounting will not
materially affect the Corporation's capital adequacy ratios. However,
Management does concur with banking industry concerns regarding the volatility
of the capital base of the banking industry as a whole, exposed by major swings
in interest rates and/or stock price fluctuations. UNB closely monitors the
quality of the investment portfolio and will act prudently to protect the
capital adequacy of the Corporation.
Management is not aware of any known trends, events, or uncertainties that
will have or that are reasonably likely to have a material effect on liquidity,
capital resources, or results of operations. UNB management is not aware of any
current recommendations by the regulatory authorities which, if implemented,
would have such an effect on liquidity, capital resources or results of
operations.
97
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES QUARTERLY SUMMARY OF FINANCIAL
DATA--UNAUDITED (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1993
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income................................ $3,171 $3,276 $3,068 $3,102
Interest Expense............................... 1,293 1,233 1,177 1,091
------ ------ ------ ------
Net Interest Income........................... 1,878 2,043 1,891 2,011
Provision for loan losses...................... 75 75 75 248
------ ------ ------ ------
Net interest income after provision for loan
losses......................................... 1,803 1,968 1,816 1,763
Other operating income......................... 361 143 141 231
Other operating expense........................ 1,266 1,443 1,319 1,520
------ ------ ------ ------
Income before income taxes.................... 898 668 638 474
Applicable income taxes........................ 286 221 205 146
------ ------ ------ ------
Net income.................................... $ 612 $ 447 $ 433 $ 328
------ ------ ------ ------
Earnings per share (a)......................... $ 0.80 $ 0.58 $ 0.56 $ 0.43
</TABLE>
<TABLE>
<CAPTION>
1992
-------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest Income................................ $3,074 $3,146 $3,025 $3,027
Interest Expense............................... 1,527 1,403 1,391 1,362
------ ------ ------ ------
Net Interest Income........................... 1,547 1,743 1,814 1,665
Provision for loan losses...................... 75 75 75 100
------ ------ ------ ------
Net interest income after provision for loan
losses......................................... 1,472 1,668 1,739 1,565
Other operating income......................... 111 128 142 147
Other operating expense........................ 1,181 1,228 1,249 1,255
------ ------ ------ ------
Income before income taxes.................... 402 568 632 457
Applicable income taxes........................ 118 181 200 142
------ ------ ------ ------
Net income.................................... $ 284 $ 387 $ 432 $ 315
------ ------ ------ ------
Earnings per share (a)......................... $ 0.37 $ 0.50 $ 0.56 $ 0.41
</TABLE>
98
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations for the three month and six month periods ended June
30, 1994 compared to June 30, 1993: Net income for the three month period ended
June 30, 1994 totalled $318 thousand, as compared with $447 thousand for the
comparable period last year. Net income for the six month period ended June 30,
1994 totalled $736 thousand, representing a 1.00 percent annualized return on
average assets. Net profits for the comparable period last year equalled $1,059
thousand, or 1.36 percent return on assets. Variances with prior year
profitability are attributable to the inclusion of $238 thousand gain on the
sale of $5.0 million in mortgage loans in 1993 and $107 thousand in costs
related to the pending merger with FCFC incurred in 1994. Excluding these
atypical items, profitability levels have declined from 1.24 percent return on
assets to 1.09 percent. The 15 basis point decline in operational profitability
resulted from increased overhead costs at Unitas National Bank, and weakened
mortgage loan demand at Unitas Mortgage Corporation.
The banking industry has been experiencing significant pressure on net
interest margins as interest rates have moved upward over the past six months.
Through prudent asset and liability repricing management, UNB has maintained
the annualized net interest margin of 5.57 percent consistent with that of the
prior year period. Interest margin pressure continues to be an ongoing factor
to both profitability and growth at UNB. UNB's net interest margin compares
favorably to its national peer group average of 4.59 percent, ranking UNB in
the upper 89th percentile among peer banks.
Noninterest expenditures increased $184 thousand, or 7 percent over the
comparable six month period last year. Overhead costs were controlled in the
second quarter of 1994 to only $44 thousand over the comparable period last
year. During 1993, UNB opened a new branch facility in the Chambersburg area to
complement the downtown headquarters office, and relocated the Huntingdon Plaza
Office into a supermarket branch location. Staffing and facilities costs to
accommodate such expansion is included in the current year expenditures,
however, growth potential and related profitability to be gained by these
strategic locations are yet to be fully realized.
Financial Condition: Ongoing analysis of asset and liability pricing, in
conjunction with protecting UNB's net interest margin, has curtailed growth
over the first half of the year. Total assets at June 30, 1994 were $1.4
million lower than one year ago, and $371 thousand higher than year end 1993
footings. Several certificate of deposit promotions, coupled with call program
efforts, were successful in account generation; however, exodus of maturing
accounts to higher yielding instruments at other institutions made growth
difficult. Growth was therefore controlled by management's initiatives to
maintain interest earning and interest paying spreads which would ultimately
preserve the net interest margin. Nevertheless, UNB has been successful at
generating profitability in excess of our own budget projections for the six
month period.
Equity capital, net of unrealized gains and losses on available for sale
securities, increased $536 thousand during the first half of 1994, affording
UNB enhanced capital protection. All three measures of regulatory capital
adequacy reflect improvement over December 31, 1993 ratios, as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
------------- -----------------
<S> <C> <C>
Capital Leverage............................ 8.55% 8.26%
Tier 1 Capital to Risk Weighted Assets...... 11.15 10.72
Tier 1 and Tier 2 Capital to Risk Weighted
Assets..................................... 12.31 11.76
</TABLE>
Equity capital at June 30, 1994 included a charge of $225 thousand for net
unrealized losses in investment securities categorized as available-for-sale in
the adoption of FASB No. 115, "Accounting for Certain Investments in Debt and
Equity Securities".
99
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Asset quality remains good, as evidenced by a low net loan charge off level
of .06 percent of average loans. The allowance for loan losses has been
augmented through provisions from earnings to increase the reserve level from
1.03 percent of total loans last year to 1.07 percent at June 30, 1994.
Nonaccrual loans as a percent of average loans have remained stable at 1.45
percent in comparison with December 31, 1993 level. UNB aggressively works the
delinquent accounts to maintain past due loans below 2 percent of total loans.
At June 30, 1994, all past due accounts equalled 1.48 percent of average total
loans. As of June 30, 1994, all past due loans were well secured and in process
of collection.
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Nonperforming Loans:
Loans in nonaccrual status............................. $ 1,251 $ 836
Past due loans......................................... 171 261
Renegotiated loans..................................... 302 227
-------- --------
Total Nonperforming Loans............................. $ 1,724 $ 1,324
-------- --------
Other Real Estate owned................................. $ 641 $ 670
Loans outstanding at end of period...................... $119,334 $113,388
Average loans outstanding year-to-date.................. $117,061 $109,175
Nonperforming loans as % of total loans................. 1.45% 1.17%
Provision for possible loans losses..................... $ 198 $ 150
Net charge offs......................................... $ 61 $ 87
Net charge offs as % of average loans................... .06% .08%
Provision for possible loan losses as % of net charge
offs................................................... 324.6% 172.4%
Reserve for possible loan losses to average outstanding
loans.................................................. 1.14% 1.03%
Reserve for loan losses to nonperforming loans.......... 76.87% 84.90%
</TABLE>
Other than those described above, there are no material credits that
management has serious doubts as to the borrower's ability to comply with the
present loan repayment terms. There are no significant concentrations of credit
that would have a material adverse impact on United's financial condition or
results of operations.
Provision for possible loan losses was $198 thousand for the six month period
ended June 30, 1994, as compared with $150 thousand for the same period last
year. This increase in provision is consistent with the analytical factors for
reserve adequacy which includes loan growth, past due loan volume, nonaccrual
loans, charge-offs, and general credit quality. Net charge-offs against the
reserve for possible loan losses were $61 thousand in the 1994 period and can
be compared to $31 thousand during the 1993 period. Below is an analysis of the
consolidated reserve for possible loan losses for the six month periods ended
June 30, 1994 and 1993.
100
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary of Loan Loss Experience:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Allowance for Loan Losses Balance January 1, ................. $1,189 $1,061
Charge-Offs:
Commercial Loans............................................. $ 7 $ 10
Real Estate Loans:
Commercial.................................................. 0 55
Residential................................................. 0 0
Installment.................................................. 63 22
Lease Financing.............................................. 12 15
------ ------
Total Charge-Offs........................................... $ 82 $ 102
====== ======
Recoveries:
Commercial Loans............................................. $ 2 $ 3
Real Estate Loans:
Commercial.................................................. 0 0
Residential................................................. 0 0
Installment.................................................. 18 6
Lease Financing.............................................. 1 6
------ ------
Total Recoveries............................................ $ 21 $ 15
------ ------
Net Charge-Offs............................................... $ 61 $ 87
------ ------
Provision for Loan Losses..................................... $ 198 $ 150
------ ------
Allowance for Loan Losses Balance June 30, ................... $1,326 $1,124
====== ======
</TABLE>
Management reviews the ongoing analysis of key asset quality measures, as
well as adherence to prudent loan policies and procedures to minimize the risk
elements of the portfolio. On a quarterly basis, an analysis of the adequacy of
the allowance for loan losses in performed, and management believes that, based
upon the most recent analysis as of June 30, 1994, the allowance remains
adequate.
Cash flows from operations were $1.2 million for the six month period ended
June 30, 1994 comparing similar with cash generation in the comparable period
of 1993. Net cash used in investing activities equalled $787 thousand in 1994,
as compared with $7.0 million in 1993. Strong deposit growth in 1993 funded a
$4.9 million growth in loans, while loan growth in 1994 was constrained by
funding resources. During the first half of 1994, securities sold under
repurchase agreements totalling $4.0 million were redeployed by customers to
insured deposits, thus showing a shift in financing activities. Net cash used
in financing activities after dividend payment totalled $464 thousand, a
significant decline in funding when compared with $4.9 million net cash
provided by financing activities in the comparable 1993 period.
101
<PAGE>
REGULATION AND SUPERVISION
FCFC
FCFC is a bank holding company registered as such with the Federal Reserve
Board under the Bank Holding Company Act of 1956, as amended (the "Bank Holding
Company Act"). As a bank holding company, FCFC 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 FCFC
and its subsidiaries.
The Bank Holding Company Act and Regulation Y of the Federal Reserve Board
require every bank holding company to obtain the prior approval of the Federal
Reserve Board before it may acquire direct or indirect ownership or control of
more than 5% of the outstanding voting shares or substantially all of the
assets of a bank or merge or consolidate with another bank holding company. The
Federal Reserve Board may not approve acquisitions by FCFC of such percentage
of voting shares or substantially all the assets of any bank located in any
state other than Pennsylvania unless the laws of such state specifically
authorize such an acquisition.
The Bank Holding Company Act generally prohibits a bank holding company from
engaging in a nonbanking business or acquiring direct or indirect ownership or
control of more than 5% of the outstanding voting shares of any nonbanking
corporation, such as Reliable, subject to certain exceptions, the principal one
of which is applicable where the business activity in question is determined by
the Federal Reserve Board to be so closely related to banking or to managing or
controlling banks as 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 such as FCFC.
The Federal Reserve Board has issued risk-based capital adequacy guidelines
which provide for a standard designed principally as a measure of credit risk.
These guidelines require that: (1) at least 50% of a banking organization's
total capital ("Total Capital") be common and certain other "core" equity
capital ("Tier 1 Capital"); (2) assets and off-balance sheet items be weighted
according to risk; (3) the Total Capital to risk-weighted assets ratio be at
least 8%; and (4) the minimum leverage capital ratio, Tier 1 Capital to total
assets, be 3% for banking organizations that do not anticipate significant
growth and have well-diversified risk (including no undue interest rate risk
exposure), excellent asset quality, high liquidity and good earnings. The
minimum leverage capital ratio for other banking organizations is generally
expected to be 4-5%, depending on their particular condition and growth plans.
The table below presents FCFC's historical and pro forma capital position
relative to its minimum capital requirements:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
AT JUNE 30, 1994 AT JUNE 30, 1994
------------------- -------------------
PERCENTAGE PERCENTAGE
AMOUNT OF ASSETS AMOUNT OF ASSETS
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tier 1 Capital.......................... $174,004 15.95% $218,312 17.14%
Risk-Based Requirement.................. 43,639 4.00 50,934 4.00
Total Capital........................... 188,071 17.24 234,554 18.42
Risk-Based Requirement.................. 87,278 8.00 101,867 8.00
Leverage Capital........................ 174,004 8.89 218,312 9.68
Minimum Leverage Requirement............ 58,722 3.00 67,631 3.00
</TABLE>
102
<PAGE>
- --------
(1) Assuming that FCFC, United and Reliable had been combined as of June 30,
1994, and that pooling of interests accounting had been used to record the
business combinations. If FCFC and Reliable only were combined, the pro
forma Tier I Capital ratio would be 17.74%, the pro forma Total Capital
ratio would be 19.02% and the pro forma Leverage ratio would be 9.76%.
RELIABLE
Reliable is presently a unitary savings and loan holding company. Its only
subsidiary, Reliable Savings Bank, is a Qualified Thrift Lender ("QTL") because
more than 65% of its portfolio assets (as defined in the law) are invested in
residential mortgages, and certain mortgage backed securities and housing
related assets such as Federal Home Loan Bank stock and stock issued by the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. As a unitary savings and loan holding company, Reliable and any
subsidiary it might create are not restricted to the statutorily prescribed
list of permissible activities found in the Savings and Loan Holding Company
Act and in certain regulations of the predecessor of the OTS, and the Savings
and Loan Holding Company Act imposes no limits on their direct or indirect non-
savings institutions operations. Its stock may be acquired by a bank holding
company such as FCFC, a savings and loan holding company or any ordinary
corporation.
If Reliable were to acquire a second savings association and operate it as a
separate subsidiary, it would become a multiple savings and loan holding
company and its activities would be confined to a statutorily prescribed list
of activities regarded as closely related to the savings association business.
If Reliable Savings Bank were to lose its QTL status, thereafter Reliable would
be regulated and supervised by the OTS as a bank holding company, as described
above for FCFC, with each savings institution subsidiary being treated as a
bank for this purpose.
Upon consummation of the Reliable Merger, FCFC will be not only a bank
holding company subject to regulation and supervision by the Federal Reserve
Board under the Bank Holding Company Act as described above, but also a savings
and loan holding company subject to regulation and supervision by the OTS under
the Savings and Loan Holding Company Act, and by the Pennsylvania Department of
Banking under the Pennsylvania Savings Association Code of 1967, as amended.
While this dual regulation and supervision will increase FCFC's cost of
compliance with federal and state banking laws and regulations, it is not
expected to have a significant adverse effect on its operations or financial
condition.
SUBSIDIARY BANKS AND RELIABLE SAVINGS BANK
The Subsidiary Banks, other than Deposit, PBTC and Central are subject to the
supervision of and are regularly examined by the OCC. In addition, because such
banks are members of the Federal Reserve System, they are also subject to
examination by that System. Deposit, PBTC and Peoples are Pennsylvania-
chartered banks and are not members of the Federal Reserve System. They are
subject to the supervision of and regularly examined by the Pennsylvania
Department of Banking and the FDIC and are subject to certain regulations of
the Federal Reserve Board. Because Central is a Pennsylvania-chartered bank and
a member of the Federal Reserve System, it is subject to the supervision of and
is regularly examined by the Pennsylvania Department of Banking and the Federal
Reserve System. Reliable Savings Bank is a Pennsylvania-chartered savings
association and is subject to the supervision of and is regularly examined by
the Pennsylvania Department of Banking and the OTS. All the Subsidiary Banks
are members of the FDIC and Reliable Savings Bank is a member of the Savings
Association Insurance Fund of the FDIC and, as such, are subject to examination
by the FDIC.
The areas of operation of the Subsidiary Banks and Reliable Savings Bank
which are 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 and truth-in-savings
disclosure, permissible types of loans and investments, trust operations,
mergers and acquisitions, issuance of securities,
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payment of dividends, Community Reinvestment Act evaluations, mandatory
external audits, establishment of branches and other aspects of operations.
Under the Pennsylvania Banking Code, a state or national bank or a savings
association located in Pennsylvania may establish branches anywhere in the
state. In addition, the OCC, the FDIC, the Federal Reserve Board and the OTS
have issued to national banks, state nonmember banks, state member banks and
savings associations, respectively, capital adequacy and risk-based capital
guidelines similar to those adopted by the Federal Reserve Board for bank
holding companies as described above. The Subsidiary Banks and Reliable Savings
Bank are in compliance with all such guidelines.
RECIPROCAL INTERSTATE BANKING
As stated above, under the Bank Holding Company Act 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)
(referred to herein as the "Reciprocal Interstate Banking Law") 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 June 30, 1994 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 reciprocal
interstate law is applicable to savings associations and savings and loan
holding companies.
It is difficult to determine the precise effects that reciprocal interstate
banking will have on FCFC, Reliable and the Subsidiary Banks, but it is likely
that the number of potential buyers for Pennsylvania banks, bank holding
companies, savings associations and savings and loan holding companies will
increase. The reciprocal interstate laws also permit Pennsylvania bank holding
companies and Pennsylvania savings and loan holding companies that desire to
expand outside Pennsylvania to acquire banks, savings associations, bank
holding companies and savings and loan holding companies located in
jurisdictions with which Pennsylvania has reciprocity.
EFFECTS OF GOVERNMENTAL POLICIES
The business and earnings of FCFC and Reliable 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 banks and savings institutions from the Federal Reserve System
and changes in reserve requirements on 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 FCFC, Reliable or
the Subsidiary Banks.
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COMPARISON OF FCFC COMMON STOCK AND RELIABLE COMMON STOCK
GENERAL
Upon consummation of the Merger, the stockholders of Reliable, a Delaware
corporation, will become shareholders of FCFC, a Pennsylvania corporation.
Differences between the Delaware General Corporation Law (the "DGCL") and the
Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), as well
as differences between Reliable's certificate of incorporation (the "Reliable
Certificate") and by-laws (the "Reliable By-Laws"), on the one hand, and FCFC's
articles of incorporation (the "FCFC Articles") and by-laws (the "FCFC By-
Laws") on the other, will result in changes in the rights of the Reliable
shareholders when they become shareholders of FCFC. Set forth below is a
description of certain material provisions which affect the rights of holders
of FCFC Common Stock and Reliable Common Stock, based on the BCL, the DGCL and
the respective charter documents and By-Laws of FCFC and Reliable as in effect
on the date hereof. This description does not purport to be a complete
statement of the rights of holders of Reliable Common Stock and FCFC Common
Stock, and is qualified in its entirety by reference to the BCL, the DGCL and
the Reliable Certificate, the Reliable By-Laws, the FCFC Articles and the FCFC
By-Laws.
VOTING RIGHTS
General. Holders of Reliable Common Stock and holders of FCFC Common Stock
are each entitled to one vote for each share held on all matters submitted to a
shareholder vote. Except where a greater vote is required by law or by the FCFC
Articles or By-Laws, or the Reliable Certificate or By-Laws (see "Voting
Rights--Mergers, Consolidations, Etc.", "Voting Rights--Charter Amendments" and
"Voting Rights--By-Law Amendments" below), any matter submitted to a vote of
the shareholders at a duly organized meeting of the shareholders may be passed
by the affirmative vote of a majority of the votes cast by all shareholders
entitled to vote thereon.
Election of Directors. Nominees for the Board of Directors of FCFC must
receive the votes of a majority of the shares voted in order to be elected
whereas nominees for Reliable's Board are elected by a plurality of the votes
cast. The FCFC and Reliable By-Laws provide that their respective Boards of
Directors shall be divided into three classes, with one class to be elected at
each annual meeting of shareholders and each class to serve for a term of three
years. The FCFC and Reliable By-Laws provide that vacancies on the Board of
Directors, including vacancies resulting from an increase in the number of
directors, shall be filled by a majority vote of the remaining members of the
Board, and that each person so appointed will be a director until the
expiration of the term of office of the class of directors to which he was
appointed, except that each person elected to fill a vacancy on the Reliable
Board resulting from an increase in the number of directors shall serve only
until the next annual meeting of the shareholders.
Mergers, Consolidations, Etc. The FCFC Articles provide that no merger,
consolidation or liquidation or dissolution of FCFC nor any action that would
result in the sale or other disposition of all or substantially all of the
assets of FCFC shall be valid unless first approved by the affirmative vote of
the holders of at least 75% of the outstanding shares of FCFC Common Stock;
provided, however, that in a merger or consolidation, no vote of the
shareholders is required if the outstanding FCFC Common Stock is increased by
less than 100% as a result of the merger or consolidation.
The Reliable Certificate provides that certain business combinations
(including mergers, sales of assets, and sales or issuances of securities) with
any interested shareholder (any person who, directly or indirectly, owns or
controls more than 15% of the voting power of the Reliable Common Stock), plans
of liquidation or dissolution proposed by any interested shareholder, any
loans, guarantees or pledges by Reliable for the benefit of any interested
shareholder, and any recapitalization or securities reclassification or other
transaction which would increase the proportionate interest in Reliable of any
interested shareholder, must be approved by the Reliable Board and by the
affirmative vote of the holders of at least two-thirds of the voting power of
the then outstanding shares of Reliable Common Stock who are not interested
shareholders. Such
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supermajority approval is not required, however, if the transaction is approved
by a majority of directors unaffiliated with the interested shareholder or
meets minimum price requirements as to the consideration paid by the interested
shareholder.
The Reliable Certificate contains two further restrictions regarding
ownership and acquisition of Reliable Common Stock. Reliable may not acquire
Common Stock from any person who owns 5% or more of the outstanding Common
Stock (or any affiliate of such person) unless (i) the acquisition is approved
by the Reliable Board and a majority of the Reliable shareholders (other than
the proposed seller) or (ii) the Common Stock to be acquired has been owned by
the proposed seller for at least two years. In addition, no person may acquire
or offer to acquire beneficial ownership of more than 10% of the Common Stock;
any shares in excess of 10% owned by any person shall not be counted as shares
entitled to vote, and such person shall not be able to vote such shares.
Charter Amendments. Under the BCL, amendments to the FCFC Articles may be
proposed only by its Board of Directors. Generally, amendments must be approved
by the affirmative vote of a majority of the votes cast by all shareholders
entitled to vote thereon and, if any class or series of capital stock is
entitled to vote as a class, the affirmative vote of a majority of the votes
cast in each such class vote. However, under the FCFC Articles, the approval of
the holders of at least 75% of the outstanding shares of FCFC Common Stock is
required to amend the provisions of the FCFC Articles related to the approval
of mergers or similar transactions.
Generally, to amend a corporation's certificate of incorporation, the DGCL
requires approval first by the Board of Directors and then by the holders of a
majority of the outstanding shares entitled to vote thereon and a majority of
the outstanding shares of each class entitled to vote thereon as a class.
However, the Reliable Certificate provides that the affirmative vote of the
holders of at least two-thirds of the outstanding shares of capital stock of
Reliable entitled to vote generally in the election of directors is required to
amend or rescind the provisions of the Reliable Certificate related to (i) the
rights of holders of Reliable Common Stock, (ii) business combinations, (iii)
the Board of Directors, (iv) the prohibition of shareholder action taken
without a meeting, (v) the method for amending the Reliable By-Laws and (vi)
indemnification of directors and officers.
By-Law Amendments. The FCFC By-Laws may be amended by the affirmative vote of
the holders of 80% of the shares of FCFC Common Stock. The FCFC By-Laws may
also be amended by the affirmative vote of a majority of the FCFC Board of
Directors at any regular or special meeting of the Board subject to the power
of the FCFC shareholders to change such action by the affirmative vote of the
holders of 80% of the outstanding FCFC Common Stock.
The Reliable Certificate authorizes the Reliable Board to make, alter or
repeal the Reliable By-Laws, subject to the power of the Reliable shareholders
to change such action. In addition, the affirmative vote of the holders of two-
thirds of all votes entitled to be cast in the election of directors is
required to alter or repeal provisions in the Reliable By-Laws relating to (i)
the number, term, nomination and removal of directors and (ii) the calling of
special meetings of the shareholders.
PROCEDURES TO BRING BUSINESS BEFORE A MEETING
Both the FCFC and Reliable By-Laws limit the right to call special meetings
to the Board of Directors. The Reliable By-Laws provide that in order for a
shareholder to bring business (other than the election of directors) properly
before an annual shareholders' meeting, that shareholder must give written
notice thereof to the Secretary of Reliable not less than 120 days prior to the
anniversary of the date of the annual shareholders' meeting in the preceding
year. Any such notice must contain certain specified information concerning the
shareholder and the business to be brought before the annual meeting of
shareholders in order to be valid. A similar notice provision applies to any
attempt by a Reliable shareholder or an FCFC shareholder to nominate any person
as a director and certain disclosures concerning any potential nominee is also
required.
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LIABILITIES AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The FCFC By-Laws provide that FCFC shall indemnify any director, officer
and/or employee or any former director, officer and/or employee who was or is a
party to, or is threatened to be made a party to, or is called as a witness in
connection with, any threatened, pending or completed action, suit or
proceeding by reason of the fact that such person is or was a director, officer
and/or employee of FCFC, or is or was serving at the request of FCFC as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. In the case of an action or suit by or in
the right of FCFC, no indemnification shall be made in respect of a claim,
issue or matter as to which such person shall have been adjudged to be liable
for misconduct in the performance of his duty to FCFC. Except as may be
otherwise ordered by a court, there shall be a presumption that any officer,
director and/or employee is entitled to indemnification in the foregoing
circumstances unless either a majority of the directors not involved in the
proceedings or, if there are less than three such directors, then the holders
of one-third of the outstanding shares of FCFC, determine that the person is
not entitled to such presumption. In the event of any such determination, a
written opinion as to whether or not the parties involved are entitled to
indemnification shall be requested from independent counsel.
Also as permitted by the BCL, the FCFC By-Laws provide that except as may be
specifically provided by law, a director of FCFC will not be personally liable
for monetary damages with respect to any action taken, or any failure to act,
unless such director has breached or failed to perform the duties of his office
under Pennsylvania law relating to standard of care and justifiable reliance
and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. Any amendment or repeal of this provision which has
the effect of increasing director liability will operate prospectively only and
will not affect any action taken, or any failure to act, prior to the adoption
of such amendment.
The Reliable Certificate contains a provision eliminating the liability of
directors of Reliable for monetary damages except for liability (i) for any
breach of the director's duty of loyalty to Reliable or its shareholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL (which
relates to the unlawful payment of dividends or an unlawful stock purchase or
redemption) or (iv) for any transaction from which a director derived an
improper personal benefit. Any repeal or modification of this provision by the
Reliable shareholders will not adversely affect any right or protection of a
director of Reliable existing thereunder at the time of such repeal or
modification.
The Reliable Certificate provides that Reliable will indemnify any director,
officer, employee or agent to the fullest extent now permitted by law (a) at
the time of the act or omission to be indemnified against or (b) at the time of
such indemnification, whichever may be broader and more inclusive. Expenses
incurred by a director or officer in defending or investigating a threatened or
pending action, suit or proceeding may be paid by Reliable in advance of the
final disposition of that action, suit or proceeding, upon receipt of an
undertaking by or on behalf of that director or officer to repay that amount if
it is ultimately determined that he is not entitled to be indemnified by
Reliable.
QUALIFICATIONS FOR DIRECTORS
The FCFC By-Laws require that directors who have never served as such before
December 31, 1988 and who are elected after such date must maintain direct,
indirect or beneficial ownership of at least 2,500 shares of FCFC Common Stock.
In addition, directors of FCFC elected after December 31, 1988 who have never
served as directors before such date are not eligible for reelection when age
72 or over. The Reliable By-Laws prohibit the appointment, election or
reelection of a director who is more than 75 years of age. Each member of the
Reliable Board must resign at the annual meeting of the shareholders
immediately following his 75th birthday.
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"ANTI-TAKEOVER" PROVISIONS
In addition to certain provisions of their respective charter documents and
By-Laws which may be considered to be "anti-takeover" in nature, both FCFC and
Reliable are subject to certain statutory provisions that may discourage
takeovers or tender offers.
The BCL. The BCL includes provisions that, among other things, (i) strip
voting rights from "control shares", (ii) require disgorgement of short-term
profits upon disposition of stock by certain controlling persons and (iii)
permit directors to oppose a tender offer or other offer for securities of FCFC
on the basis of factors other than economic benefit to shareholders.
The BCL also requires approval of certain extraordinary corporate
transactions by a majority vote of all outstanding shares other than those held
by "interested shareholders" (generally, a beneficial owner of more than 20% of
the outstanding stock entitled to elect directors). Such transactions include
mergers, consolidations, share exchanges or sale of assets with interested
shareholders, or corporate divisions, voluntary dissolutions and
reclassifications of corporate securities in which interested shareholders
receive treatment different from other shareholders. However, no such
shareholder approval will be required for certain transactions, including a
transaction (i) that has been approved by a majority vote of the board of
directors, excluding directors who were either nominated for election by the
interested shareholder and first elected as director within two years of the
date of the vote on the proposed transaction or who are directors or officers
of, or who have a material equity interest in the interested shareholder or
(ii) in which the consideration to be received by the shareholders for shares
of any class of which shares are owned by the interested shareholder is not
less than the highest amount paid by the interested shareholder in acquiring
shares of the same class.
The BCL prohibits a corporation from engaging, except in certain instances,
in any business combination with any interested shareholder of the corporation
other than (i) a business combination approved by the board of directors of the
corporation prior to the date such shareholder becomes an interested
shareholder, (ii) by the affirmative vote of all of the holders of the
outstanding common stock of the corporation, (iii) if the consideration payable
to shareholders of the corporation in the business combination complies with
certain fair price conditions specified by Pennsylvania law, by holders of a
majority of the voting shares (excluding the shares held by the interested
shareholder or any associate or affiliate thereof) at a meeting called for such
purpose, no earlier than three months after the interested shareholder becomes
the beneficial owner of at least 80% of the corporation's voting shares, or
(iv) if the interested shareholder waits at least five years after its share
acquisition date and (a) obtains a majority of the votes of the shareholders
entitled to vote (excluding the shares held by the interested shareholder or
any associate or affiliate thereof) or (b) the business combination complies
with certain fair price conditions specified by Pennsylvania law and is
approved by the shareholders.
The DGCL. Section 203 of the DGCL provides that any person who acquires or
controls, directly or indirectly, 15% or more of a corporation's voting stock
(thereby becoming an "interested stockholder") may not engage in a "business
combination" with that corporation for a period of three years following the
date that person became an interested stockholder, unless (i) the board of
directors of that corporation approved, prior to such date, either the business
combination or the transaction that resulted in that person's becoming an
interested stockholder, (ii) upon consummation of the transaction that resulted
in that person's becoming an interested stockholder, that person owns at least
85% of that corporation's voting stock outstanding at the time the transaction
commenced (excluding for purposes of determining the number of shares
outstanding shares owned by persons who are directors and also officers of that
corporation and shares owned by employee stock plans in which participants do
not have the right to determine confidentially whether shares will be tendered
in a tender or exchange offer) or (iii) the business combination is approved by
the board of directors and authorized by the affirmative vote (at an annual or
special meeting and not by written consent) of the holders of at least 66-2/3%
of the outstanding shares of voting stock not owned by the interested
stockholder.
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A "business combination" is defined broadly by the DGCL to include (i)
mergers or consolidations of a corporation with an interested stockholder, (ii)
sales or other dispositions of 10% or more of the assets of a corporation with
or to an interested stockholder, (iii) certain transactions resulting in the
issuance or transfer to an interested stockholder of any stock of a corporation
or its subsidiaries, (iv) certain transactions which would result in increasing
the proportionate share of the stock of a corporation or its subsidiaries owned
by an interested stockholder and (v) receipt by an interested stockholder of
the benefit (except proportionately as a stockholder) of any loans, advances,
guarantees, pledges or other financial benefits from, by or to a corporation or
any of its majority-owned subsidiaries.
DIVIDEND REINVESTMENT PLAN
FCFC currently maintains a dividend reinvestment plan in order to provide its
shareholders with a simple and convenient method of investing cash dividends
and voluntary contributions of up to $10,000 per quarter in additional shares
of FCFC Common Stock. The price per share is equal to 95% of the then current
fair market value of FCFC Common Stock. The dividend reinvestment plan relates
only to dividends paid on (and further investment in) FCFC Common Stock.
Following the sale of any dividend reinvestment plan shares by an FCFC
shareholder, such shareholder is not eligible to purchase additional shares
pursuant to the plan for a period of six months. No such dividend reinvestment
plan is maintained by Reliable. Reliable shareholders who receive shares of
FCFC Common Stock in exchange for their shares of Reliable Common Stock will be
eligible to participate in the FCFC dividend reinvestment plan on the Effective
Date of the Merger.
MISCELLANEOUS
There are no sinking fund provisions, conversion rights or redemption
provisions applicable to Reliable Common Stock or FCFC Common Stock, and
holders of fully paid shares of Reliable Common Stock or FCFC Common Stock are
under no liability for further calls or assessments. Holders of Reliable Common
Stock and FCFC Common Stock are entitled to dividends when, as and if declared
by their respective Boards of Directors out of funds legally available
therefor. Neither the holders of Reliable Common Stock nor the holders of FCFC
Common Stock have preemptive rights to subscribe for additional shares of
Reliable Common Stock or FCFC Common Stock, as the case may be, which may be
issued from time to time. On liquidation, dissolution or winding up, whether
voluntary or involuntary, the holders of Reliable Common Stock and FCFC Common
Stock are entitled to share ratably in the assets of Reliable or FCFC, as the
case may be, after all liabilities of such corporation have been satisfied.
PREFERRED STOCK
FCFC's authorized capital includes a class of 3,000,000 shares of preferred
stock, par value $1 per share ("FCFC Preferred Stock"). As yet, no shares of
FCFC Preferred Stock have been issued. Such FCFC Preferred Stock may be issued
in one or more series by resolution of the Board of Directors from time to time
without further authorization by shareholders. Each series will have such
dividend rate and date from which dividends accumulate, and such general
voting, dividend, redemption, liquidation, conversion and sinking fund rights,
if any, as the Board of Directors of FCFC may determine. All shares of any one
series of FCFC Preferred Stock will have identical rights.
Each series of FCFC Preferred Stock will be entitled to receive, when and as
declared by the Board of Directors of FCFC, and before any dividends (other
than dividends payable in stock of junior shares) are paid on any series or
class ranking junior to the shares of such series, dividends at the rate fixed
by the FCFC Board of Directors for such series. Under Pennsylvania law, no
dividend may be paid on FCFC Common Stock which would reduce the remaining net
assets of FCFC below the amount to which holders of any series of FCFC
Preferred Stock, if issued, would be entitled in a voluntary liquidation.
The Reliable Certificate contains a similar provision authorizing the
issuance of up to 1,000,000 shares of preferred stock by resolution of the
Board of Directors. No such shares have yet been issued.
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The issuance of preferred stock by FCFC or Reliable could potentially be used
to discourage attempts by others to obtain control of FCFC or Reliable, as the
case may be, through merger, tender offer or otherwise by making such attempts
more difficult to achieve or more costly.
RELATIONSHIPS WITH INDEPENDENT PUBLIC ACCOUNTANTS
FCFC
The independent auditors for FCFC and its subsidiaries are selected annually
by the FCFC Board of Directors. Grant Thornton has been appointed to audit the
financial statements of FCFC for 1994. Jarrett * Stokes & Co. has served as the
independent auditor for FCFC or NBOC for each year since 1978.
Representatives of Jarrett * Stokes & Co. are expected to be present at the
Special Meeting and to be available to respond to appropriate questions.
RELIABLE
At present, the financial statements of Reliable are audited annually by
Edwards Leap & Sauer, independent certified public accountants. It is
anticipated that if the Merger is consummated, the financial statements of
Reliable will, in the future, be audited by FCFC's independent auditors.
Representatives of Edwards Leap & Sauer are expected to be present at the
Special Meeting and to be available to respond to appropriate questions.
LEGAL OPINIONS
The validity of the shares of FCFC Common Stock to be issued in the Merger
will be passed upon for FCFC by Tomb and Tomb, Attorneys-at-Law, Indiana,
Pennsylvania. David R. Tomb, Jr., a partner of the firm of Tomb and Tomb, is
Vice President, Secretary and Treasurer and a Director of FCFC. Information
concerning the beneficial ownership of FCFC Common Stock by Mr. Tomb is set
forth under "Management of FCFC--Board of Directors." During 1993, Tomb and
Tomb performed legal services for FCFC and its subsidiaries and the fees paid
for such services in 1993 were $65,000. Reed Smith Shaw & McClay, special
counsel to FCFC and Reliable in connection with the proposed Merger, will be
rendering an opinion with respect to certain tax matters in connection with the
proposed Merger. See "Plan of Reorganization--Conditions to the Merger."
EXPERTS
The audited consolidated financial statements of FCFC appearing on pages F-2
through F-14 of this Proxy Statement/ Prospectus have been examined by Jarrett
* Stokes & Co., independent certified public accountants, whose report thereon
is included herein on page F-2. Such financial statements have been included
herein in reliance upon such report, given upon the authority of such firm as
experts in auditing and accounting.
The consolidated financial statements of United at December 31, 1993 and
1992, and for each of the three years ended December 31, 1993 appearing on
pages F-22 through F-34 of this Proxy Statement/Prospectus have been audited by
Ernst & Young, independent auditors, as set forth in their report appearing on
page F-22, and are included herein in reliance upon such report, given upon the
authority of such firm as experts in accounting and auditing.
The audited consolidated financial statements of Reliable appearing on pages
F-41 through F-58 of this Proxy Statement/Prospectus have been examined by
Edwards Leap & Sauer, independent certified public accountants, whose report
thereon is included herein on page F-41. Such financial statements have been
included herein in reliance upon such report, given upon the authority of such
firm as experts in auditing and accounting.
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SHAREHOLDER PROPOSALS
Proposals of FCFC shareholders intended to be presented at FCFC's 1995 Annual
Meeting of Shareholders must be received by the Secretary of FCFC not later
than November 29, 1994 in order to be considered for inclusion in FCFC's proxy
statement for such meeting.
If the Plan of Reorganization is approved and the Merger becomes effective
before the date for Reliable's 1995 Annual Meeting, Reliable will have been
merged into FCFC, and no 1995 Annual Meeting of Shareholders of Reliable will
be held. In that event, holders of FCFC Common Stock issued in the Merger will
be entitled to vote at FCFC's 1995 Annual Meeting of Shareholders.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES:
Audited Financial Statements:
Auditor's Report......................................................... F-2
Balance Sheets........................................................... F-3
Statements of Income..................................................... F-4
Statements of Cash Flows................................................. F-5
Statements of Changes in Shareholders' Equity............................ F-6
Notes to Financial Statements............................................ F-6
Unaudited Interim Financial Statements:
Balance Sheets........................................................... F-15
Statements of Income..................................................... F-16
Statements of Changes in Shareholders' Equity............................ F-17
Statements of Cash Flows................................................. F-18
Notes to Financial Statements............................................ F-19
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES:
Audited Financial Statements:
Report of Independent Auditors........................................... F-22
Balance Sheet............................................................ F-23
Statement of Income...................................................... F-24
Statement of Changes in Shareholders' Equity............................. F-25
Statement of Cash Flows.................................................. F-26
Notes to Financial Statements............................................ F-27
Unaudited Interim Financial Statements:
Balance Sheet............................................................ F-35
Statement of Income...................................................... F-36
Statement of Changes in Shareholders' Equity............................. F-37
Statement of Cash Flows.................................................. F-38
Notes to Financial Statements............................................ F-39
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY:
Audited Financial Statements:
Independent Auditors' Report............................................. F-41
Balance Sheets........................................................... F-42
Statements of Income..................................................... F-43
Statements of Changes in Stockholders' Equity............................ F-44
Statements of Cash Flows................................................. F-45
Notes to Financial Statements............................................ F-46
Unaudited Interim Financial Statements:
Balance Sheets........................................................... F-59
Statements of Income..................................................... F-60
Statements of Changes in Stockholders' Equity............................ F-61
Statements of Cash Flows................................................. F-62
Notes to Financial Statements............................................ F-63
</TABLE>
F-1
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
AUDITOR'S REPORT
Report of Jarrett . Stokes & Co.
Independent Certified Public Accountants
Board of Directors and Shareholders of
First Commonwealth Financial Corporation
Indiana, Pennsylvania
We have audited the accompanying consolidated balance sheets of First
Commonwealth Financial Corporation and subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1993. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Commonwealth Financial Corporation and subsidiaries as of December 31, 1993
and 1992, and the results of their operations and cash flows for each of the
three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in NOTE 1 to the consolidated financial statements, the
Corporation changed its method of accounting for income taxes and investments.
JARRETT . STOKES & CO.
Indiana, Pennsylvania
March 2, 1994
- --------------------------------------------------------------------------------
F-2
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------
1993 1992
------------------------------
<S> <C> <C>
Assets
Cash and due from banks on demand $ 51,044 $ 63,337
Interest-bearing deposits with banks 2,569 18,196
Federal funds sold -0- 30,555
Securities available for sale 465,224 -0-
Investment securities, market value
$383,943 in 1993 and $674,066 in 1992 381,811 664,046
Loans 1,037,675 994,768
Unearned income (31,499) (30,241)
Reserve for possible loan losses (14,544) (14,267)
------------------------------
Net loans 991,632 950,260
------------------------------
Property and equipment 21,911 21,107
Other real estate owned 4,929 4,044
Other assets 36,149 36,003
------------------------------
Total assets $1,955,269 $1,787,548
==============================
Liabilities
Deposits (All Domestic):
Noninterest-bearing $ 167,306 $ 167,486
Interest-bearing 1,408,318 1,377,337
------------------------------
Total deposits 1,575,624 1,544,823
------------------------------
Short-term borrowings 171,497 52,676
Other liabilities 14,332 11,516
Long-term debt 7,363 8,130
------------------------------
Total liabilities 1,768,816 1,617,145
------------------------------
Shareholders' Equity
Preferred stock, $1 par value per share, 3,000,000
shares authorized and unissued -0- -0-
Common stock, $5 par value per share, 25,000,000
shares authorized, 9,321,012 issued and outstanding 46,605 46,605
Additional paid-in capital 35,296 35,455
Retained earnings 107,417 93,256
Unrealized gain on securities available for sale 1,584 -0-
------------------------------
190,902 175,316
Deferred compensation (4,449) (4,913)
------------------------------
Total shareholders' equity 186,453 170,403
------------------------------
Total liabilities and shareholders' equity $1,955,269 $1,787,548
==============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-3
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1993 1992 1991
-------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 86,121 $ 84,612 $ 81,357
Interest and dividends on investments:
Taxable interest 41,323 39,922 34,494
Interest exempt from Federal income taxes 2,955 4,118 4,184
Dividends 628 271 166
Interest on Federal funds sold 208 650 1,610
Interest on bank deposits 483 1,844 3,990
-------------------------------------------
Total interest income 131,718 131,417 125,801
-------------------------------------------
INTEREST EXPENSE
Interest on deposits 54,041 59,906 65,484
Interest on short-term borrowings 3,496 1,723 1,569
Interest on long-term debt 456 454 456
-------------------------------------------
Total interest expense 57,993 62,083 67,509
-------------------------------------------
NET INTEREST INCOME 73,725 69,334 58,292
Provision for possible loan losses 2,197 3,219 4,946
-------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 71,528 66,115 53,346
-------------------------------------------
OTHER INCOME
Net securities gains 2,333 679 677
Trust income 2,194 1,967 1,303
Service charges on deposit accounts 4,720 4,400 3,397
Other income 2,878 2,328 2,152
-------------------------------------------
Total other income 12,125 9,374 7,529
-------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 25,397 22,968 20,154
Net occupancy expense 3,595 3,235 2,796
Furniture and equipment expense 3,710 3,246 2,762
FDIC expense 3,521 3,222 2,474
Settlement of lender liability claim -0- 1,400 -0-
Other operating expenses 15,021 13,754 11,680
-------------------------------------------
Total other expenses 51,244 47,825 39,866
-------------------------------------------
INCOME BEFORE TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD 32,409 27,664 21,009
Applicable income taxes 9,719 7,076 5,025
-------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING METHOD 22,690 20,588 15,984
Cumulative effect of change in accounting method 500 -0- -0-
-------------------------------------------
NET INCOME $ 23,190 $ 20,588 $ 15,984
===========================================
Average Shares Outstanding 18,642,024 18,107,266 17,024,494
PER SHARE DATA:
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING METHOD $ 1.22 $ 1.14 $ 0.94
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD $ 0.02 $ 0.00 $ 0.00
NET INCOME $ 1.24 $ 1.14 $ 0.94
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-4
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1993 1992 1991
---------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 23,190 $ 20,588 $ 15,984
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 2,197 3,219 4,946
Depreciation and amortization 4,701 3,547 2,954
Net gains on sales of assets (2,617) (273) (904)
Changes net of acquisition:
Decrease (increase) in interest receivable 145 2,712 (209)
Increase in interest payable (896) (2,336) (3)
Increase (decrease) in income taxes payable 308 (567) 354
Provision for deferred taxes (1,189) (406) (478)
Other - net (719) (2,363) (663)
---------------------------------------
Net cash provided by operating activities 25,120 24,121 21,981
---------------------------------------
Investing Activities
Proceeds from investment securities transactions:
Sales 95,658 16,840 65,362
Maturities and redemptions 329,606 170,301 119,994
Proceeds from sales of loans and other assets 14,661 17,866 245
Acquisition of affiliate -0- (3,950) -0-
Changes net of acquisition:
Net decrease in time deposits with banks 15,627 39,945 3,583
Purchases of investment securities (603,637) (263,036) (301,778)
Net increase in loans (57,044) (22,614) (42,239)
Purchases of premises and equipment (3,425) (3,728) (1,936)
---------------------------------------
Net cash used by investing activities (208,554) (48,376) (156,769)
---------------------------------------
Financing Activities
Proceeds from issuance of long-term debt 202 2,500 -0-
Repayments of long-term debt (505) (179) -0-
Tax benefit of ESOP dividend 84 119 97
Discount on dividend reinvestment plan purchases (159) (124) (80)
Dividends paid (8,571) (6,860) (5,899)
Dividends paid by subsidiary prior to merger (169) (285) (263)
Changes net of acquisition:
Net increase in deposits 30,883 65,441 130,020
Net increase (decrease) in Federal funds purchased 45,955 (10,550) 3,150
Net increase (decrease) in other short-term borrowings 72,866 15,482 (11,112)
---------------------------------------
Net cash provided by financing activities 140,586 65,544 115,913
---------------------------------------
Net increase (decrease) in cash and cash equivalents (42,848) 41,289 (18,875)
Cash and cash equivalents acquired with acquisition -0- 6,300 -0-
Cash and cash equivalents at January 1 93,892 46,303 65,178
---------------------------------------
Cash and cash equivalents at December 31 $ 51,044 $ 93,892 $ 46,303
=======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-5
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional on Securities Total
Common Paid-in Retained Available Deferred Shareholders'
Stock Capital Earnings For Sale Compensation Equity
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1990 $ 42,561 $ 22,719 $ 71,918 $ (1,615) $ (4,821) $ 130,762
Net income -0- -0- 15,984 -0- -0- 15,984
Cash dividends declared -0- -0- (5,899) -0- -0- (5,899)
Cash dividends declared by
subsidiary prior to merger -0- -0- (263) -0- -0- (263)
Decrease in unrealized loss on
marketable equity securities -0- -0- -0- 1,197 -0- 1,197
Tax benefit on ESOP dividends -0- -0- 97 -0- -0- 97
Increase in deferred compensation -0- -0- -0- -0- (806) (806)
Discount on dividend reinvestment
plan purchases -0- (80) -0- -0- -0- (80)
---------------------------------------------------------------------------------------
Balance at December 31, 1991 42,561 22,639 81,837 (418) (5,627) 140,992
Net income -0- -0- 20,588 -0- -0- 20,588
Cash dividends declared -0- -0- (9,003) -0- -0- (9,003)
Cash dividends declared by
subsidiary prior to merger -0- -0- (285) -0- -0- (285)
Decrease in unrealized loss on
marketable equity securities -0- -0- -0- 418 -0- 418
Tax benefit on ESOP dividends -0- -0- 119 -0- -0- 119
Decrease in deferred compensation -0- -0- -0- -0- 714 714
Discount on dividend reinvestment
plan purchases -0- (124) -0- -0- -0- (124)
Acquisition of subsidiary 4,044 12,940 -0- -0- -0- 16,984
-------------------------------------------------------------------------------------
Balance at December 31, 1992 46,605 35,455 93,256 -0- (4,913) 170,403
Net income -0- -0- 23,190 -0- -0- 23,190
Cash dividends declared -0- -0- (8,944) -0- -0- (8,944)
Cash dividends declared by
subsidiary prior to merger -0- -0- (169) -0- -0- (169)
Increase in unrealized gain on
securities available for sale, net
of tax effect -0- -0- -0- 1,584 -0- 1,584
Tax benefit on ESOP dividends -0- -0- 84 -0- -0- 84
Decrease in deferred compensation -0- -0- -0- -0- 464 464
Discount on dividend reinvestment
plan purchases -0- (159) -0- -0- -0- (159)
-------------------------------------------------------------------------------------
Balance at December 31, 1993 $ 46,605 $ 35,296 $107,417 $ 1,584 $ (4,449) $ 186,453
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1993, 1992 and 1991
NOTE 1--Statement of Accounting Policies
General
The following summary of accounting and reporting policies is presented to aid
the reader in obtaining a better understanding of the financial statements and
related financial data of First Commonwealth Financial Corporation (the
"Corporation") and its subsidiaries contained in this report. Such policies
conform to generally accepted accounting principles and to general practice
within the banking industry.
The Corporation and its subsidiaries are on the accrual basis of accounting
except for certain trust related revenues which are recorded on a cash basis.
Recording income from such activities on a cash basis does not materially affect
net income.
Certain items of the consolidated statements for the years ended December 31,
1992 and 1991 have been reclassified to conform with the December 31, 1993
presentation.
- --------------------------------------------------------------------------------
F-6
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--Statement of Accounting Policies (Continued)
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated in consolidation.
Investments of 20 to 50 percent of the outstanding common stock of investees are
accounted for using the equity method of accounting.
Securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 ("FAS No. 115"), Accounting for Certain
Investments in Debt and Equity Securities. This statement addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Those
investments are to be classified in three categories and accounted for as
follows: (a) securities held-to-maturity, (b) trading securities and (c)
securities available-for-sale.
Debt securities that the Corporation has the positive intent and ability to hold
to maturity are classified as securities held-to-maturity and are reported at
amortized cost. Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings. Debt and equity securities not classified as either held-to-
maturity securities or trading securities are classified as securities
available-for-sale and are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity.
The Corporation adopted FAS No. 115 effective December 31, 1993 and classified
securities as either held-to-maturity or available-for-sale. The Corporation
does not engage in trading activities (see NOTES 4 and 5).
Prior to the implementation of FAS No. 115, investment securities consisted of
debt and equity securities. Debt securities were stated at cost adjusted for
amortization of premium and accretion of discount. These securities were
principally purchased with the intent of holding them until maturity.
Marketable equity securities were carried at the lower of aggregate cost or
market value. Net gain or loss on the sale of investment securities was
determined by using the specific identification method.
Loans
Loans are carried at the principal amount outstanding. Unearned income on
installment loans is taken into income on a declining basis which results in an
approximately level rate of return over the life of the loan. Interest is
accrued as earned on nondiscounted loans. When a loan becomes past due and
doubt exists as to the ultimate collection of principal and interest, the
accrual of income is discontinued and is only recognized at the time payment is
received.
Renegotiated loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms.
Loan Fees
Loan origination and commitment fees, net of associated direct costs, are
deferred and the net amount is amortized as an adjustment to the related loan
yield on the interest method, generally over the contractual life of the related
loans or commitments.
Other Real Estate Owned
Real estate, other than bank premises, is recorded at the lower of cost or
market at the time of acquisition. Expenses related to holding the property,
net of rental income, are generally charged against earnings in the current
period. Other real estate also includes properties that have in substance been
foreclosed. In-substance foreclosed properties are those properties where the
borrower has little or no remaining equity in the property considering its fair
market value; where repayment can only be expected to come from the operation or
sale of the property; and where the borrower has effectively abandoned control
of the property or it is doubtful that the borrower will be able to rebuild
equity in the property. In-substance foreclosed properties included in other
real estate owned were $111 and $1,514 at December 31, 1993 and 1992,
respectively.
Reserve for Possible Loan Losses
The reserve for possible loan losses represents management's estimate of an
amount adequate to provide for losses which may be incurred on loans currently
held. Management determines the adequacy of the reserve based on historical
patterns of loan charge-offs and recoveries, the relationship of the reserve to
outstanding loans, industry experience, current economic trends and other
factors relevant to the collectibility of loans currently in the portfolio.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line and accelerated
methods over the estimated useful life of the asset. Charges for maintenance
and repairs are expensed as incurred. Where a lease is involved, amortization
is charged over the term of the lease or the estimated useful life of the
improvement, whichever is shorter.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109 ("FAS No. 109"), Accounting for Income
Taxes (see NOTE 14). Under the asset and liability method utilized by FAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases given the provisions of the enacted tax laws. Deferred tax assets are
reduced, if necessary, by the amount of such benefits that are not expected to
be realized based upon available evidence.
Effective January 1, 1993, the Corporation adopted FAS No. 109 and has reported
the cumulative effect of that change in method of accounting for income taxes in
the 1993 consolidated statement of income.
Cash Flow Statement
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and Federal funds sold. Generally, Federal funds
are sold for one-day periods.
- --------------------------------------------------------------------------------
F-7
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 1--Statement of Accounting Policies (Continued)
Supplemental Disclosures
Cash paid during the year for:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Interest $59,119 $64,546 $67,518
Income taxes $ 9,245 $ 8,175 $ 5,187
</TABLE>
Noncash Investing and Financing Activities
The Corporation borrowed $250 in 1993 and $1,520 in 1991 and concurrently loaned
these amounts to the First Commonwealth Financial Corporation Employee Stock
Ownership Plan Trust ("ESOP") on identical terms. The loan has been recorded as
long-term debt on the Corporation's books and the offset was recorded as a
reduction in common shareholders' equity. Loan payments in the amount of $714
were made by the ESOP in each of the three years ending in 1993, thereby
reducing the outstanding amount related to deferred compensation to $4,449 at
December 31, 1993.
Earnings Per Common Share
Earnings per share have been calculated on the weighted average number of common
shares outstanding during each year, restated to reflect pooling of interests.
Additionally, average number of shares has been restated to reflect the two-for-
one stock split effected in the form of a 100% stock dividend declared on
January 18, 1994 (see NOTE 22).
Fair Values of Financial Instruments
The financial statements include various estimated fair values at December 31,
1993, as required by Statement of Financial Accounting Standards No. 107 ("FAS
No. 107"). Such information, which pertains to the Corporation's financial
instruments, is based on the requirements set forth in FAS No. 107 and does
not purport to represent the aggregate net fair value of the Corporation. It
is the Corporation's general practice and intent to hold its financial
instruments to maturity, except for certain securities designated as
securities available for sale, and not to engage in trading activities. Many
of the financial instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Therefore, the Corporation had to use significant estimations and
present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and the methodologies in absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
The following methods and assumptions were used by the Corporation in estimating
financial instrument fair values:
Cash and short-term instruments: The balance sheet carrying amounts for cash
and short-term instruments approximate the estimated fair values of such assets.
Securities: Fair values for investment securities and securities available for
sale are based on quoted market prices, if available. If quoted market prices
are not available, fair values are based on quoted market prices of comparable
instruments. The carrying value of nonmarketable equity securities, such as
Federal Reserve Bank stock and Federal Home Loan Bank stock, is considered a
reasonable estimate of fair value.
Loans receivable: Fair values of variable rate loans subject to frequent
repricing and which entail no significant credit risk are based on the carrying
values. The estimated fair values of other loans are estimated by discounting
the future cash flows using interest rates currently offered for loans with
similar terms to borrowers of similar credit quality. The carrying amount of
accrued interest is considered a reasonable estimate of fair value.
Off-balance-sheet instruments: Many of the Corporation's off-balance-sheet
instruments, primarily loan commitments and standby letters of credit, are
expected to expire without being drawn upon, therefore the commitment amounts do
not necessarily represent future cash requirements. Management has determined
that due to the uncertainties of cash flows and difficulty in predicting the
timing of such cash flows, fair values were not estimated for these instruments.
Deposit liabilities: For deposits which are payable on demand at the reporting
date, representing all deposits other than time deposits, management estimates
that the carrying value of such deposits is a reasonable estimate of fair value.
The carrying amounts of variable rate time deposit accounts and certificates of
deposit approximate their fair values at the report date. Fair values of fixed
rate time deposits are estimated by discounting the future cash flows using
interest rates currently being offered and a schedule of aggregated expected
maturities. The carrying amount of accrued interest approximates its fair
value.
Short-term borrowings: The carrying amounts of short-term borrowings such as
Federal funds purchased, securities sold under agreements to repurchase,
borrowings from the Federal Home Loan Bank and treasury, tax and loan notes
approximate their fair values.
Long-term debt: The carrying amounts of variable rate debt approximate their
fair values at the report date. Fair values of fixed rate debt are estimated by
discounting the future cash flows using the Corporation's estimated incremental
borrowing rate for similar types of borrowing arrangements.
NOTE 2--Business Combination
Effective December 31, 1993 the Corporation acquired all of the outstanding
common shares of Peoples Bank of Western Pennsylvania, a state-chartered bank
headquartered in New Castle, Pennsylvania. Each of the 375,000 outstanding
shares of common stock were exchanged for two shares of the Corporation's common
stock. The merger was accounted for as a pooling of interests, and accordingly,
all financial statements were restated as though the merger had occurred at the
beginning of the earliest period presented.
Effective April 30, 1992, the Corporation acquired all of the outstanding common
shares of Central Bank ("Central"), a state-chartered bank headquartered in
Hollidaysburg, Pennsylvania, for 808,765 shares of the Corporation's common
stock and $3,950 in cash. The acquisition was accounted for as a purchase
transaction, whereby the identifiable tangible and intangible assets and
liabilities of Central have been recorded at their fair values at the
acquisition date. Goodwill of $4,858 and core deposit
- --------------------------------------------------------------------------------
F-8
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 2--Business Combination (continued)
intangibles of $2,873 acquired in the transaction are being amortized on a
straight-line basis over respective periods of fifteen and ten years. Under
the purchase method of accounting, the results of operations of Central from
the date of acquisition were included in the financial statements.
NOTE 3--Cash and Due From Banks on Demand
Regulations of the Board of Governors of the Federal Reserve System impose
uniform reserve requirements on all depository institutions with transaction
accounts (checking accounts, NOW accounts, etc.). Reserves are maintained in
the form of vault cash or a noninterest-bearing balance held with the Federal
Reserve Bank. The subsidiary banks maintained with the Federal Reserve Bank
average balances of $3,355 during 1993 and $3,971 during 1992.
NOTE 4--Investment Securities
Below is an analysis of the book values and approximate fair values of debt
securities at December 31:
<TABLE>
<CAPTION>
1993 1992
-------------------------------------------------------------------------------------------------
Gross Gross Approximate Gross Gross Approximate
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ -0- $ -0- $ -0- $ -0- $ 62,958 $ 1,562 $ (16) $ 64,504
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities 207,349 923 (805) 207,467 380,749 6,143 (612) 386,280
Other 85,570 425 (121) 85,874 89,362 1,170 (126) 90,406
Obligations of States and
Political Subdivisions 73,366 1,646 (349) 74,663 72,642 1,639 (209) 74,072
Debt Securities Issued By
Foreign Governments 745 4 -0- 749 350 -0- (2) 348
Corporate Securities 10,722 442 (73) 11,091 21,768 285 (152) 21,901
Other Mortgage Backed
Securities 4,059 40 -0- 4,099 22,522 221 (92) 22,651
------------------------------------------------------------------------------------------------
Total Debt Securities $381,811 $3,480 $(1,348) $383,943 $650,351 $11,020 $(1,209) $660,162
================================================================================================
</TABLE>
Mortgage backed securities include mortgage backed obligations of the U.S.
Government agencies and corporations, mortgage backed securities issued by other
organizations and other asset backed securities. These obligations have
contractual maturities ranging from 5 to 34 years and have an anticipated
average life to maturity ranging from less than one year to 10 years.
The amortized cost and estimated market value of debt securities at December 31,
1993, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
--------------------
<S> <C> <C>
Due within 1 year $ 20,174 $ 20,326
Due after 1 but within 5 years 111,271 112,482
Due after 5 but within 10 years 30,439 30,662
Due after 10 years 8,519 8,907
-------------------
170,403 172,377
Mortgage backed securities 211,408 211,566
-------------------
Total debt securities $381,811 $383,943
===================
</TABLE>
Proceeds from the sales of investment securities were $16,840 and $65,362 in
1992 and 1991, respectively. Gross gains of $803 and $1,456 were recognized
during 1992 and 1991, respectively, while gross losses of $124 and $779 were
recognized in the corresponding periods.
Marketable equity securities included in investment securities at December 31,
1992 with a cost basis of $6,219 had gross unrealized gains of $331 and gross
unrealized losses of $122. The Corporation also held nonmarketable equity
securities in the amount of $7,476 at December 31, 1992, primarily Federal Home
Loan Bank stock and Federal Reserve Bank stock. At December 31, 1993 equity
securities have been classified as securities available for sale.
Investment securities with a book value of $249,160 and $181,787 were pledged at
December 31, 1993 and 1992, respectively, to secure public deposits and for
other purposes required or permitted by law.
- --------------------------------------------------------------------------------
F-9
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 5--Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of
securities available for sale at December 31, 1993:
<TABLE>
<CAPTION>
Gross Gross Approx.
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $103,253 $ 862 $ (125) $103,990
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed
Securities 285,854 2,507 (978) 287,383
Other 49,726 323 (133) 49,916
Obligations of States and
Political Subdivisions 97 -0- -0- 97
Corporate Securities 4,688 50 -0- 4,738
Other Mortgage Backed
Securities 6,327 25 (9) 6,343
-------------------------------------------
Total Debt Securities 449,945 3,767 (1,245) 452,467
Equity Securities 12,841 -0- (84) 12,757
-------------------------------------------
Total Securities
Available for Sale $462,786 $3,767 $(1,329) $465,224
===========================================
</TABLE>
Mortgage backed securities include mortgage backed obligations of the U.S.
Government agencies and corporations, mortgage backed securities issued by other
organizations and other asset backed securities. These obligations have
contractual maturities ranging from 5 to 34 years and have an anticipated
average life to maturity ranging from less than one year to 10 years.
The amortized cost and estimated market value of debt securities at
December 31, 1993, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or repay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
--------------------
<S> <C> <C>
Due within 1 year $ 4,960 $ 5,083
Due after 1 but within 5 years 141,804 142,652
Due after 5 but within 10 years 8,815 8,804
Due after 10 years 2,185 2,202
-------------------
157,764 158,741
Mortgage backed securities 292,181 293,726
-------------------
Total debt securities $449,945 $452,467
===================
</TABLE>
Proceeds from the sales of investment securities during 1993 were $95,658.
Gross gains of $2,350 and gross losses of $17 were realized on those sales.
NOTE 6--Loans (all domestic)
Loans at year end were divided among these general categories:
<TABLE>
<CAPTION>
December 31,
----------------------
1993 1992
----------------------
<S> <C> <C>
Commercial, financial,
agricultural and other $ 153,039 $196,979
Real estate loans:
Construction and land
development 9,718 11,676
1-4 Family dwellings 412,799 373,174
Other real estate loans 220,804 188,226
Loans to individuals for household,
family and other personal
expenditures 239,904 220,085
Leases, net of unearned income 1,411 4,628
---------------------
Subtotal 1,037,675 994,768
Unearned income (31,499) (30,241)
---------------------
Total loans and leases $1,006,176 $964,527
=====================
</TABLE>
Management's estimate of the fair value of loans was $1,035,850 and $991,491 at
December 31, 1993 and 1992, respectively.
Most of the Corporation's business activity was with customers located within
Pennsylvania. The portfolio is well diversified, and as of December 31, 1993,
there were no significant concentrations of credit.
NOTE 7--Reserve for Possible Loan Losses
Description of changes:
<TABLE>
<CAPTION>
1993 1992 1991
------------------------
<S> <C> <C> <C>
Reserve balance at January 1 $14,267 $ 9,426 $8,323
Additions:
Recoveries of previously
charged off loans 1,564 1,115 825
Provision charged to operating
expense 2,197 3,219 4,946
From acquisition -0- 4,501 -0-
Deductions:
Loans charged off 3,484 3,994 4,668
------------------------
Reserve balance at December 31 $14,544 $14,267 $9,426
========================
</TABLE>
For Federal tax purposes, the reserve for possible loan losses was $1,911 in
1993 and $2,222 in 1992.
NOTE 8--Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit and commercial letters of credit. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract or notional amount of
those instruments reflects the extent of involvement the Corporation has in
particular classes of financial instruments. The Corporation does not issue any
other instruments with significant off-balance-sheet risk.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party of the financial instrument for commitments to extend credit,
standby letters of credit and commercial letters of credit written is
- --------------------------------------------------------------------------------
F-10
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 8--Financial Instruments with Off-Balance-Sheet Risk (continued)
represented by the contract or notional amount of those instruments. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. The following table
identifies the notional amount of those instruments at December 31, 1993 and
1992.
<TABLE>
<CAPTION>
1993 1992
------------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $182,013 $153,319
Standby letters of credit $ 17,900 $ 11,858
Commercial letters of credit $ 65 $ 10
</TABLE>
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 of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the counter-party. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit and commercial letters of credit written are
conditional commitments issued by the Corporation to guarantee the performance
of a customer to a third party. Those guarantees are primarily issued to
support public and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.
NOTE 9--Premises and Equipment
Premises and equipment are described as follows:
<TABLE>
<CAPTION>
1993 1992
----------------
<S> <C> <C>
Land $ 3,615 $ 2,977
Buildings and improvements 22,200 21,084
Leasehold improvements 3,312 3,254
Furniture and equipment 20,377 19,221
----------------
Subtotal 49,504 46,536
Less accumulated depreciation and
amortization 27,593 25,429
----------------
Total premises and
equipment $21,911 $21,107
================
</TABLE>
Depreciation and amortization related to premises and equipment was $3,008 in
1993, $2,637 and $1,901, in 1992 and 1991, respectively.
NOTE 10--Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
<TABLE>
<CAPTION>
1993 1992
----------------------
<S> <C> <C>
N.O.W. and Super N.O.W. accounts $ 169,897 $ 168,130
Savings and MMDA accounts 426,640 411,380
Time deposits 811,781 797,827
----------------------
Total interest-bearing deposits $1,408,318 $1,377,337
======================
</TABLE>
Included in time deposits at December 31 were certificates of deposit in
denominations of $100 or more maturing as follows:
<TABLE>
<CAPTION>
1993 1992
-----------------
<S> <C> <C>
3 months or less $19,734 $ 25,289
3 to 6 months 12,543 15,906
6 to 12 months 16,542 11,140
Over 12 months 47,006 49,731
-----------------
Total $95,825 $102,066
=================
</TABLE>
Interest expense related to $100 or greater certificates of deposit amounted to
$5,426 in 1993, $7,389 in 1992, and $7,566 in 1991.
Management's estimated fair value of deposits was $1,590,502 and $1,565,065 at
December 31, 1993 and 1992, respectively.
NOTE 11--Short-term Borrowings
Short-term borrowings at December 31 were as follows:
<TABLE>
<CAPTION>
1993 1992
------------------------------------------------------
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds
purchased $ 46,155 $22,782 3.10% $ -0- $ 2,505 6.75%
Borrowings from
FHLB 62,276 22,673 3.32 -0- -0- -0-
Securities sold
under agreements
to repurchase 43,498 41,714 4.28 34,272 25,595 4.69
Treasury, tax and
loan note option 19,568 8,756 2.91 18,404 10,359 3.41
------------------------------------------------------
Total $171,497 $95,925 3.64 $52,676 $38,459 4.48
======================================================
Maximum total at
any month-end $171,497 $67,056
======================================================
</TABLE>
Interest expense on short-term borrowings for the years ended December 31 is
detailed below:
<TABLE>
<CAPTION>
1993 1992 1991
-----------------------
<S> <C> <C> <C>
Federal funds purchased $ 705 $ 169 $ 58
Borrowings from FHLB 753 -0- -0-
Securities sold under agreements to
repurchase 1,783 1,201 1,089
Treasury, tax and loan note option 255 353 422
----------------------
Total interest on
short-term borrowings $3,496 $1,723 $1,569
======================
</TABLE>
- --------------------------------------------------------------------------------
F-11
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 12--Long-Term Debt
Long-term debt at December 31, 1993 follows:
<TABLE>
<CAPTION>
Amount Rate
------ ------
<S> <C> <C>
Bank subordinated notes due September, 1997 $ 716 8.38%
ESOP loan due September, 1997 2,678 80% of Prime
Bank loan due December, 1997 2,000 Prime
ESOP loan due March, 2001 1,770 Prime
Mortgage note due October, 2003 199 6.26%
------
Total long-term debt $7,363
======
</TABLE>
All subordinated notes are unsecured and equally subordinated in right of
payment to depositors and other creditors. The notes are redeemable at 102% of
principal until maturity, at the bank's option. The subordinated notes do not
provide for sinking fund obligations. Scheduled loan payments and subordinated
note maturities are summarized below:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 Thereafter
-------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loan payments $1,419 $1,483 $1,484 $1,307 $272 $682
Note maturities -0- -0- -0- 716 -0- -0-
-------------------------------------------------
Total $1,419 $1,483 $1,484 $2,023 $272 $682
=================================================
</TABLE>
Management estimated the fair value of long-term debt at December 31, 1993 to be
$7,433 and $8,207 at December 31, 1992.
NOTE 13--Common Share Commitments
At December 31, 1993 the Corporation had 25,000,000 common shares authorized and
18,642,024 shares outstanding after reflecting the two-for-one stock split
effected in the form of a 100% stock dividend (see NOTE 22). The Corporation
may be required to issue additional shares to satisfy common share purchases
related to the employee stock ownership plan described in NOTE 15.
NOTE 14--Federal Income Taxes
As discussed in Note 1, effective January 1, 1993 the Corporation adopted FAS
No. 109. As permitted under FAS No. 109, prior years' financial statements have
not been restated. The adoption of this statement resulted in a cumulative
benefit of $500 in 1993. This benefit was primarily due to lower tax rates in
the year that FAS No. 109 was adopted than tax rates were in the years of
purchase business combinations.
The income tax provision consists of:
<TABLE>
<CAPTION>
1993 1992 1991
-------------------------
<S> <C> <C> <C>
Current tax provision for income
before securities transactions $ 9,591 $7,229 $5,273
Securities transactions 817 231 230
-------------------------
Total current tax
provision 10,408 7,460 5,503
-------------------------
Deferred tax provision (credit) on:
Loan loss provision (327) (72) (404)
Bond discount (53) (130) (62)
Leasing income (432) (236) (44)
Purchase accounting valuations (209) -0- -0-
Depreciation (15) 110 31
Loan origination fees and costs 185 47 172
Other 162 (103) (171)
-------------------------
Total deferred tax benefit (689) (384) (478)
-------------------------
Total tax provision $ 9,719 $7,076 $5,025
=========================
</TABLE>
Temporary differences between financial statement carrying amounts and tax bases
of assets and liabilities that represent significant portions of the deferred
tax assets (liabilities) at January 1, 1993 and December 31, 1993 were as
follows:
<TABLE>
<CAPTION>
December 31 January 1
------------------------
<S> <C> <C>
Reserve for possible loan losses $ 4,422 $ 4,095
Accumulated accretion of bond discount (278) (331)
Lease financing deduction (149) (581)
Purchase accounting valuations, other
than excess purchase price (2,191) (2,400)
Accumulated depreciation (348) (363)
Unrealized gain on securities
available for sale (851) -0-
Loan origination fees and costs (192) (7)
Other - net 325 487
------------------------
Deferred tax asset balance $ 738 $ 900
========================
</TABLE>
Management does not feel a need to establish a valuation allowance against the
deferred tax asset because of the Corporation's ability to recover previously
paid taxes through carrybacks.
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:
<TABLE>
<CAPTION>
1993 1992 1991
-----------------------------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $11,343 35.0 $9,406 34.0 $7,143 34.0
Increase (decrease)
resulting from:
Effect of
nontaxable
interest (1,979) (6.1) (2,406) (8.7) (2,346) (11.2)
Other 355 1.1 76 0.3 228 1.1
-----------------------------------------------
Total tax
provision $ 9,719 30.0 $7,076 25.6 $5,025 23.9
===============================================
</TABLE>
NOTE 15--Retirement Plans
All employees with at least one year of service are eligible to participate in
the employee stock ownership plan. Contributions to the plan are determined by
the board of directors, and are based upon a prescribed percentage of the annual
compensation of all participants. These contributions are used to purchase the
Corporation's common shares. Contributions to the plan were $622 in 1993, $680
in 1992 and $518 in 1991.
The Corporation also has a savings plan pursuant to the provisions of section
401(k) of the Internal Revenue Code. Under the terms of the plan, each
participant will receive an automatic employer contribution to the plan in an
amount equal to 3% of compensation. Each participating employee may contribute
up to 5% of compensation to the plan which is matched by the employer's
contribution equal to 60% of the employee's contribution. The 401(k) plan
expense was $1,158 in 1993, $984 in 1992, $875 in 1991.
Statement of Financial Accounting Standards No. 106 ("FAS No. 106"), Employers'
Accounting for Postretirement Benefits Other than Pensions established standards
for accounting for postretirement benefits, primarily health care benefits. FAS
No. 106 was effective for all fiscal years
- --------------------------------------------------------------------------------
F-12
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 15--Retirement Plans (continued)
beginning after December 15, 1992. Since the Corporation generally does not
offer these benefits, the impact on net income is not considered material.
Employees of Central were covered by a noncontributory defined benefit plan,
which covered substantially all of its employees. The plan was fully funded,
and no contributions were made during the past three years. The net periodic
cost was $16 during 1992. The plan was terminated during 1993 and Central
employees were included in the Corporation's employee stock ownership plan and
401(k) plan. The plan termination resulted in a gain of $186 thousand recorded
during 1993.
NOTE 16--Deferred Compensation
The Corporation had borrowed amounts which were concurrently loaned to the First
Commonwealth Financial Corporation Employee Stock Ownership Plan Trust ("ESOP")
on the same terms. The combined balances of the ESOP related loans were $4,449
at December 31, 1993.
The loans have been recorded as long-term debt on the Corporation's consolidated
balance sheets. A like amount of deferred compensation was recorded as a
reduction of common shareholders' equity. Deferred compensation, included as a
component of shareholders' equity, represents the Corporation's prepayment of
future compensation expense. As the Corporation makes annual contributions to
the ESOP, these contributions, plus dividends accumulated on the Corporation's
common stock held by the ESOP, will be used to repay the loan to the
Corporation. As the loan is repaid, common stock is allocated to the ESOP
participants and deferred compensation is reduced by the amount of the principal
payment on the loan. Interest on this loan was $245 in 1993 and $286 in 1992
and $382 in 1991. Dividends on common shares held in the ESOP used for debt
service were $417 in 1993, $351 in 1992 and $289 in 1991.
NOTE 17--Commitments and Contingent Liabilities
During 1990, a subsidiary bank was named as a defendant in a forgery claim where
the bank allegedly allowed checks bearing forged endorsements to be negotiated.
Management feels that its maximum exposure is not significant and that it has
adequate defenses for the claim. This action is being vigorously defended and,
in the opinion of management, should be resolved in the bank's favor.
There are no material legal proceedings to which the Corporation or its
subsidiaries are a party, or of which any of their property is the subject,
except proceedings which arise in the normal course of business and, in the
opinion of management, will not have any material adverse effect on the
consolidated financial position of the Corporation and its subsidiaries.
The Corporation leases various premises and assorted equipment under
noncancelable agreements. Total future minimum rental commitments at December
31, 1993 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 Thereafter Total
-----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Premises $451 $352 $255 $212 $148 $805 $2,223
Equipment 171 36 17 1 -0- -0- 225
-----------------------------------------------
Total $622 $388 $272 $213 $148 $805 $2,448
===============================================
</TABLE>
Under the terms of various lease agreements, increases in utilities and taxes
may be passed on to the lessee. Such adjustments are not reflected in the above
table. Additionally, various lease renewal options are available and are not
included in the minimum lease commitments until such options are exercised.
Total lease expense amounted to $1,034 in 1993, $1,326 in 1992 and $1,248 in
1991.
NOTE 18--Related Party Transactions
Some of the Corporation's or its subsidiaries' directors, executive officers,
principal shareholders and their related interests, had transactions with the
subsidiary banks in the ordinary course of business during 1993. All loans and
commitments to loans in such transactions were made on substantially the same
terms, including collateral and interest rates, as those prevailing at the time
for comparable transactions. In the opinion of management, these transactions
do not involve more than the normal risk of collectibility nor do they present
other unfavorable features. It is anticipated that further such extensions of
credit will be made in the future.
The following is an analysis of loans to those parties whose aggregate loan
balances exceeded $60 during 1993.
<TABLE>
<S> <C>
Balances December 31, 1992 $34,840
Advances 7,599
Repayments (17,307)
Other 102
-------
Balances December 31, 1993 $25,234
=======
</TABLE>
Three loans to two directors, or their related interests were placed on a
nonaccrual status during 1992 due to cash flow deficiencies. The original loans
were made on substantially the same terms as those prevailing at the time for
comparable transactions. One loan to a director has been in compliance with the
terms of the loan and has been removed from a nonaccrual status. The original
amount of this loan was $616 and the balance at December 31, 1993 was $500. The
remaining two loans to one director remained on a nonaccrual status during 1993.
The original balances of these loans were $1,969 and the recorded balance of
these loans at December 31, 1993 was reduced to $987. In the opinion of
management, adequate amounts have been provided in the reserve for possible loan
losses for these loans.
NOTE 19--Dividend Restrictions
The amount of funds available to the parent from its subsidiary banks is limited
by restrictions imposed on all national banks by the Comptroller of the Currency
and on all state chartered banks by the Pennsylvania Department of Banking.
During 1993, dividends from subsidiary banks were restricted not to exceed
$44,908. These restrictions have not had, and are not expected to have, a
significant impact on the Corporation's ability to meet its cash obligations.
NOTE 20--Jointly-Owned Company
Investment in Commonwealth Trust Credit Life Insurance Company ("Commonwealth
Trust"), a jointly-owned credit life reinsurance company in which the
Corporation has a 50% interest in the voting common stock, is carried at cost,
adjusted for the Corporation's proportionate share of the
- --------------------------------------------------------------------------------
F-13
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
earnings. Dividends, if any, reduce the basis of the investment.
Commonwealth Trust has been in operation since June of 1989. The Corporation's
net investment in Commonwealth Trust at December 31, 1993 was $1,162 and income
from its investment was $221 during 1993.
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only)
Balance Sheets
- --------------
<TABLE>
<CAPTION>
December 31,
---------------------
1993 1992
---------------------
<S> <C> <C>
Assets
Cash $ 2,571 $ 2,625
Investment in subsidiaries 187,054 171,568
Investment in jointly-owned company 1,162 941
Premises and equipment 1,181 890
Dividends receivable from subsidiaries 3,679 3,095
Receivable from subsidiaries 440 842
Other assets 279 397
-------------------
Total assets $196,366 $180,358
===================
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 947 $ 399
Dividends payable 2,517 2,143
Loans payable 6,449 7,413
Shareholders' equity, exclusive of
deferred compensation 190,902 175,316
Deferred compensation (4,449) (4,913)
-------------------
Total liabilities and
shareholders' equity $196,366 $180,358
===================
</TABLE>
Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1993 1992 1991
---------------------------
<S> <C> <C> <C>
Dividends from subsidiaries $13,490 $11,082 $11,085
Operating expenses (5,598) (4,893) (4,378)
---------------------------
Income before taxes and equity
in undistributed earnings of
subsidiaries 7,892 6,189 6,707
Applicable income tax benefits 1,782 1,433 1,250
---------------------------
Income before equity in
undistributed earnings of
subsidiaries 9,674 7,622 7,957
Equity in undistributed
earnings of subsidiaries 13,516 12,966 8,027
---------------------------
Net income $23,190 $20,588 $15,984
===========================
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1993 1992 1991
------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 23,190 $ 20,588 $15,984
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 1,190 865 723
Decrease (increase) in
prepaid income taxes (262) (298) 911
Undistributed equity in
subsidiaries (13,516) (12,966) (8,027)
Other - net (11) (165) (618)
------------------------------
Net cash provided by
operating activities 10,591 8,024 8,973
------------------------------
Investing Activities
Purchases of premises and
equipment (499) (106) (300)
Acquisition and additional
investment in subsidiary (1,000) (3,950) -0-
------------------------------
Net cash used by
investing activities (1,499) (4,056) (300)
------------------------------
Financing Activities
Proceeds from issuance of
long-term debt -0- 2,500 -0-
Repayment of long-term
debt (500) -0- -0-
Tax benefit of ESOP dividend 84 119 97
Discount on dividend reinvestment
plan purchases (159) (124) (80)
Cash dividends paid (8,571) (6,860) (5,899)
------------------------------
Net cash used by
financing activities (9,146) (4,365) (5,882)
------------------------------
Net increase (decrease) in cash (54) (397) 2,791
Cash at beginning of year 2,625 3,022 231
------------------------------
Cash at end of year $ 2,571 $ 2,625 $ 3,022
==============================
</TABLE>
Supplemental schedule of noncash investing and financing activities
The Corporation borrowed $250 in 1993 and $1,520 in 1991 and concurrently loaned
these amounts to the ESOP on identical terms. The loans were recorded as long-
term debt and the offset was recorded as a reduction of the common shareholders'
equity. Loan payments in the amount of $714 were made during each of the three
years ended 1993 thereby reducing the outstanding amount related to deferred
compensation to $4,449 at December 31, 1993.
NOTE 22--Subsequent Event
On January 18, 1994, the Board of Directors declared a two-for-one stock split
effected in the form of a 100% stock dividend in the amount of 9,321,012 shares
payable on February 10, 1994. Accordingly, the average number of shares and all
per share amounts have been restated to reflect the stock split on a retroactive
basis.
F-14
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
----------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks.................. $ 50,766 $ 51,044
Interest-bearing bank deposits........... 397 2,569
Securities available for sale............ 442,248 465,224
Investment securities (Market Value
$348,822 in 1994 and
$383,943 in 1993)...................... 363,677 381,811
Loans (all domestic)..................... 1,105,676 1,037,675
Less unearned income................... 32,976 31,499
Less reserve for possible loan losses 15,063 14,544
---------- ----------
Net loans........................... 1,057,637 991,632
Property and equipment................... 22,248 21,911
Other real estate owned.................. 2,319 4,929
Other assets............................. 41,705 36,149
---------- ----------
TOTAL ASSETS........................ $1,980,997 $1,955,269
========== ==========
LIABILITIES
Deposits (all domestic):
Noninterest-bearing.................... $ 172,687 $ 167,306
Interest-bearing....................... 1,448,328 1,408,318
---------- ----------
Total deposits...................... 1,621,015 1,575,624
Short-term borrowings.................... 157,020 171,497
Other liabilities........................ 13,892 14,332
Long-term debt........................... 7,639 7,363
---------- ----------
Total liabilities................... 1,799,566 1,768,816
---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value per
share, 3,000,000 shares authorized
and unissued........................... -0- -0-
Common stock $1 par value per share,
100,000,000 shares authorized and
18,642,024 and 9,321,012 shares
issued and outstanding in 1994 and
1993, respectively..................... 18,642 46,605
Additional paid-in capital............... 74,556 35,296
Retained earnings........................ 101,492 107,417
Unrealized gain (loss) on securities
available for sale..................... (8,527) 1,584
---------- ----------
186,163 190,902
Deferred compensation.................... (4,732) (4,449)
---------- ----------
Total shareholders' equity............. 181,431 186,453
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.............. $1,980,997 $1,955,269
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
For the 3 Months For the 6 Months
Ended June 30, Ended June 30,
---------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans............... $22,291 $21,669 $43,312 $43,364
Interest and dividends on investments:
Taxable interest....................... 10,278 10,431 20,492 20,488
Interest exempt from federal
income taxes.......................... 884 667 1,755 1,477
Dividends.............................. 205 138 431 289
Interest on federal funds sold........... 4 34 12 137
Interest on bank deposits................ 7 156 27 355
------- ------- ------- -------
Total Interest Income................. 33,669 33,095 66,029 66,110
Interest Expense
Interest on deposits..................... 12,784 13,561 25,543 27,355
Interest on short-term borrowings........ 1,712 884 3,234 1,547
Interest on long-term debt............... 130 113 236 228
------- ------- ------- -------
Total Interest Expense................ 14,626 14,558 29,013 29,130
------- ------- ------- -------
Net interest income........................ 19,043 18,537 37,016 36,980
Provision for possible loan losses....... 573 519 1,112 1,112
------- ------- ------- -------
Net interest income after provision
for possible loan losses................. 18,470 18,018 35,904 35,868
Other Income
Securities gains......................... 26 396 239 1,053
Trust income............................. 513 563 1,143 1,166
Service charges on deposits.............. 1,228 1,141 2,374 2,325
Other income............................. 662 803 1,492 1,345
------- ------- ------- -------
Total Other Income.................... 2,429 2,903 5,248 5,889
Other Expenses
Salaries and employee benefits........... 6,363 6,334 13,012 12,656
Net occupancy expense.................... 924 926 1,895 1,862
Furniture and equipment expense.......... 873 882 1,738 1,666
FDIC expense............................. 889 883 1,778 1,767
Other operating expenses................. 3,775 3,932 7,333 7,643
------- ------- ------- -------
Total Other Expenses.................. 12,824 12,957 25,756 25,594
------- ------- ------- -------
Income before taxes and cumulative
effect of change in accounting
method................................... 8,075 7,964 15,396 16,163
Applicable income taxes.................. 2,499 2,292 4,690 4,652
------- ------- ------- -------
Net income before cumulative effect of
change in accounting method.............. 5,576 5,672 10,706 11,511
Cumulative effect of change in method
of accounting for income taxes........... -0- -0- -0- 500
------- ------- ------- -------
Net Income................................. $ 5,576 $ 5,672 $10,706 $12,011
======= ======= ======= =======
Per Share Data:
Net income before effect of change
of accounting method..................... $0.30 $0.30 $0.57 $0.62
Cumulative effect of change in
accounting method........................ 0.00 0.00 0.00 0.03
Net income................................. 0.30 0.30 0.57 0.64
Cash dividends per share................... 0.14 0.125 0.28 0.25
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (loss)
Additional on Securities Total
Common Paid-in Retained Available Deferred Shareholders'
Stock Capital Earnings For Sale Compensation Equity
------- ----------- --------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992......... $46,605 $35,455 $ 93,256 $ -0- $(4,913) $170,403
Net income......................... -0- -0- 12,011 -0- -0- 12,011
Cash dividends declared............ -0- -0- (4,397) -0- -0- (4,397)
Decrease in deferred compensation -0- -0- -0- -0- 357 357
Discount on dividend reinvestment
plan purchases................... -0- (82) -0- -0- -0- (82)
------- ------- -------- ---- -------- ---------
Balance at June 30, 1993............. $46,605 $35,373 $100,870 $ -0- $(4,556) $178,292
======= ======= ======== ====== ======== =========
Balance at December 31, 1993......... $46,605 $35,296 $107,417 $ 1,584 $(4,449) $186,453
Net income......................... -0- -0- 10,706 -0- -0- 10,706
Cash dividends declared............ -0- -0- (5,220) -0- -0- (5,220)
Transfer to reflect 2-for-1
stock split effected in
the form of a 100% stock
dividend......................... 46,605 (35,258) (11,347) -0- -0- -0-
Transfer to reflect change in
par value of common stock
from $5 per share to $1
per share........................ (74,568) 74,568 -0- -0- -0- -0-
Increase in unrealized gain
(loss) on securities
available for sale, net of
tax effect....................... -0- -0- -0- (10,111) -0- (10,111)
Net increase in deferred
compensation..................... -0- -0- -0- -0- (283) (283)
Discount on dividend reinvestment
plan purchases................... -0- (50) (64) -0- -0- (114)
------- -------- -------- ------- ------- --------
Balance at June 30, 1994............. $18,642 $74,556 $101,492 $(8,527) $(4,732) $181,431
======= ======= ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the 6 Months
Ended June 30,
-----------------
1994 1993
---- ----
<S> <C> <C>
Operating Activities
Net income......................................... $10,706 $12,011
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses.............. 1,112 1,112
Depreciation and amortization................... 2,356 2,258
Net gains on sales of assets.................... (306) (1,203)
Increase in interest receivable................. (442) (223)
Decrease in interest payable.................... (262) (780)
Increase in income taxes payable................ 58 1,024
Provision for deferred taxes.................... (17) (978)
Other - net..................................... 1,637 (843)
-------- -------
Net cash provided by operating activities..... 14,842 12,378
-------- -------
Investing Activities
Investment securities transactions:
Proceeds from sales............................. 7,009 46,130
Proceeds from maturities and redemptions........ 63,940 177,493
Purchases....................................... (52,768) (305,009)
Transactions with securities available for sale:
Proceeds from sales............................. 36,539 -0-
Proceeds from maturities and redemptions........ 43,233 -0-
Purchases....................................... (72,197) -0-
Proceeds from sales of loans and other assets...... 5,128 5,435
Net decrease in time deposits with banks........... 2,172 9,000
Net increase in loans.............................. (71,286) (24,331)
Purchase of premises and equipment................. (2,616) (1,220)
------- -------
Net cash used by investing activities............ (40,846) (92,502)
------- -------
Financing Activities
Repayments of long-term debt....................... (7) -0-
Discount on dividend reinvestment plan purchases... (113) (82)
Dividends paid..................................... (5,127) (4,285)
Dividends paid by subsidiary prior to merger....... -0- (114)
Net increase in deposits........................... 45,450 18,738
Net increase in federal funds purchased............ (5,505) 12,325
Net increase in other short-term borrowings........ (8,972) 34,598
------- -------
Net cash provided by financing activities..... 25,726 61,180
------- -------
Net decrease in cash and cash equivalents..... (278) (18,944)
Cash and cash equivalents at January 1............... 51,044 91,451
------- -------
Cash and cash equivalents at June 30................. $50,766 $72,507
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994
(Unaudited)
NOTE 1 Management Representation
- ------ -------------------------
In the opinion of management, the unaudited interim consolidated financial
statements include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair statement of financial position as of June 30,
1994 and the results of operations for the three and six month periods ended
June 30, 1994 and 1993, and statements of cash flows and changes in
shareholders' equity for the three and six month periods ended June 30, 1994 and
1993. The results of the three and six months ended June 30, 1994 and 1993 are
not necessarily indicative of the results to be expected for the entire year.
The interim consolidated financial statements should be read in conjunction with
the annual consolidated financial statements of First Commonwealth Financial
Corporation and Subsidiaries, including the notes thereto.
NOTE 2 Reserve For Possible Loan Losses (in thousands)
- ------ --------------------------------
1994 1993
---- ----
Reserve balance January 1...................... $14,544 $14,267
Additions:
Provision charged to operating expenses.... 1,112 1,112
Recoveries of previously charged off
loans..................................... 632 773
Deductions:
Loans charged off.......................... 1,225 1,667
------- -------
Reserve balance March 31....................... $15,063 $14,485
======= =======
NOTE 3 Cash Flow Disclosures (dollar amounts in thousands)
- ------ ---------------------
Cash paid during the first three months of the year for interest and income
taxes were as follows:
1994 1993
---- -----
Interest $29,275 $30,056
Income Taxes 4,649 3,740
During 1994 the Corporation borrowed $730 and concurrently loaned this amount to
the ESOP Trust on identical terms. ESOP loan payments of $447 were made by the
ESOP Trust during the respective 1994 and 1993 periods, thereby resulting in
outstanding amounts related to deferred compensation of $4,732 at June 30, 1994
and $4,556 at June 30, 1993.
F-19
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 1994
(Unaudited)
NOTE 4 Change of Accounting Method
- ------ ---------------------------
The Corporation adopted Statement of Financial Accounting Standards No. 109
("FAS No. 109"), "Accounting for Income Taxes", effective January 1, 1993. FAS
No. 109 is an asset and liability approach for financial accounting and
reporting for income taxes. The effect of adopting FAS No. 109 resulted in a
cumulative benefit of $500 thousand in the first quarter of 1993.
NOTE 5 Proposed Business Combination
- ------ -----------------------------
On March 25, 1994, the Corporation entered into a definitive agreement to merge
United National Bancorporation and its subsidiaries ("United") into the
Corporation. Under the terms of the Agreement and Plan of Reorganization, the
holders of shares of United common stock will receive two shares of the
Corporation's common stock for each share of United common stock. The
transaction is expected to be accounted for as a pooling of interests.
United was organized as a Pennsylvania business corporation established in 1982
for the purposes of operating as a bank holding company. United is
headquartered in Chambersburg, Pennsylvania with two active Subsidiaries.
Unitas National Bank, a national banking association, headquartered in
Chambersburg, Pennsylvania and Unitas Mortgage Corporation, having its principal
place of business in Carlisle, Pennsylvania, and is engaged in the origination
of mortgages for the secondary market. Total assets of United were $148 million
serviced through twelve community offices. The proposed transaction requires
the approval of the shareholders of United and approval of the appropriate
regulatory agencies.
On April 21, 1994 the Corporation entered into a definitive agreement to merge
Reliable Financial Corporation ("Reliable") into the Corporation. Under the
terms of the Agreement and Plan of Reorganization, the holders of shares of
Reliable common stock will receive 1.6 shares of the Corporation's common stock
for each share of Reliable common stock. The transaction is expected to be
accounted for as a pooling of interests.
Reliable is a holding company which was established in 1991 for the purpose of
owning 100% of the outstanding common stock of Reliable Savings Bank, PaSA.
Reliable Savings Bank, PaSA is a Pennsylvania-chartered savings association,
headquartered in Bridgeville, Pennsylvania with total assets of $151 million
serviced through three community offices. Reliable shares are traded on the
NASDQ National Market System under the symbol "RESB". The proposed transaction
requires the approval of the shareholders of Reliable and approval of the
appropriate regulatory agencies.
F-20
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 1994
(Unaudited)
NOTE 6 Earnings per Common Share
- ------ -------------------------
Earnings per share have been calculated on the weighted average number of common
shares outstanding during each period, restated to reflect pooling of interests.
Additionally, average number of shares has been restated to reflect the two-for-
one stock split effected in the form of a 100% stock distribution on the
corporation's common stock declared on January 18, 1994. The weighted average
number of shares outstanding for each period presented was 18,642,024.
NOTE 7 Reclassifications
- ------ -----------------
Certain items of the Consolidated Statements of Income for the three and six
months ended June 30, 1993 have been reclassified to conform with the June 30,
1994 presentations. None of these reclassifications affected net income.
F-21
<PAGE>
[LETTERHEAD OF ERNST & YOUNG APPEARS HERE]
Report of Independent Auditors
The Board of Directors and Shareholders
United National Bancorporation
We have audited the accompanying consolidated balance sheets of United
National Bancorporation and subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United National
Bancorporation and subsidiaries at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1993 the Corporation
changed its method of accounting for income taxes.
/s/ Ernst & Young
January 14, 1994
F-22
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
1993 1992
-------- --------
(In Thousands)
<S> <C> <C>
Assets
Cash and due from banks $ 3,758 $ 6,030
Federal funds sold 1,600 --
-------- --------
Cash and Cash Equivalents 5,358 6,030
Interest-bearing deposits in banks 33 1,686
Investment securities (Market value 1993 -- $20,363; 1992 -- $24,161) 20,008 23,740
Mortgage loans held for sale (Market value 1992 -- $5,809) -- 5,507
Loans:
Real estate 37,550 36,181
Installment and consumer 38,446 38,318
Commercial, financial, and agricultural 24,881 18,854
Lease financing 28,113 18,893
-------- --------
128,990 112,246
Less: Allowance for loan losses (1,189) (1,061)
Unearned income (10,514) (9,466)
-------- --------
Net Loans 117,287 101,719
Premises and equipment, net of accumulated
depreciation (1993 -- $2,566; 1992 -- $2,317) 2,570 2,201
Accrued interest receivable 630 729
Other assets 1,717 1,649
-------- --------
TOTAL ASSETS $147,603 $143,261
======== ========
Liabilities
Deposits:
Noninterest-bearing $ 8,776 $ 9,188
Interest-bearing 120,543 118,674
-------- --------
Total Deposits 129,319 127,862
Securities sold under agreements to repurchase 4,687 3,198
Net deferred tax liabilities 934 561
Other liabilities 381 809
-------- --------
Total Liabilities 135,321 132,430
Shareholders' Equity
Preferred Stock -- $10.00 par value:
Authorized and unissued 5,000,000 shares -- --
Common Stock -- $2.50 par value:
Authorized 10,000,000 shares; issued and
outstanding shares -- 769,147 in 1993 and 699,407 in 1992 1,923 1,748
Surplus 4,115 2,476
Retained earnings 6,244 6,607
-------- --------
Total Shareholders' Equity 12,282 10,831
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $147,603 $143,261
======== ========
</TABLE>
See accompanying notes.
4
F-23
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
1993 1992 1991
------- ------- -------
(In Thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans, including fees $10,946 $10,822 $10,625
Investment securities:
Taxable 1,573 1,382 1,297
Tax-exempt 28 32 33
Other 70 216 342
------- ------- -------
Total Interest Income 12,617 12,452 12,297
Interest expense:
Deposits 4,651 5,653 7,004
Short-term borrowings 143 30 1
------- ------- -------
Total Interest Expense 4,794 5,683 7,005
------- ------- -------
Net Interest Income 7,823 6,769 5,292
Provision for loan losses 473 325 300
------- ------- -------
Net Interest Income After
Provision for Loan Losses 7,350 6,444 4,992
Other income:
Gain on sale of mortgages 238 -- --
Trust department 138 138 157
Investment securities gains 62 15 34
Service fees and other 438 375 326
------- ------- -------
876 528 517
------- ------- -------
Other expenses:
Salaries and employee benefits 2,854 2,377 2,108
Occupancy expense 718 637 567
Special services 293 259 271
Taxes, other than income 57 107 98
FDIC insurance 293 268 238
Other 1,333 1,265 978
------- ------- -------
5,548 4,913 4,260
------- ------- -------
Income Before Income Taxes 2,678 2,059 1,249
Income Taxes 858 641 346
------- ------- -------
NET INCOME $ 1,820 $ 1,418 $ 903
======= ======= =======
Per share data:
Net income $2.37 $1.84 $1.17
Cash dividends .47 .43 .39
</TABLE>
See accompanying notes.
5
F-24
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Retained
Stock Surplus Earnings Total
------- ------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at January 1, 1991 $1,446 $ 846 $ 6,857 $ 9,149
Net income 903 903
Cash dividends (301) (301)
10% common stock dividend --
57,637 shares at fair market value 144 664 (811) (3)
------ ------ ------- -------
Balance at December 31, 1991 1,590 1,510 6,648 9,748
Net income 1,418 1,418
Cash dividends (331) (331)
10% common stock dividend --
63,375 shares at fair market value 158 966 (1,128) (4)
------ ------ ------- -------
Balance at December 31, 1992 1,748 2,476 6,607 10,831
Net income 1,820 1,820
Cash dividends (364) (364)
10% common stock dividend --
69,740 shares at fair market value 175 1,639 (1,819) (5)
------ ------ ------- -------
Balance at December 31, 1993 $1,923 $4,115 $ 6,244 $12,282
====== ====== ======= =======
</TABLE>
See accompanying notes.
6
F-25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
1993 1992 1991
-------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Operating Activities
Net income $ 1,820 $ 1,418 $ 903
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 473 325 300
Provision for depreciation and amortization 249 221 198
Amortization of investment security premiums
and accretion of discounts, net 94 16 4
Deferred income taxes 373 180 19
Realized investment security gains (62) (15) (34)
Gain on sale of mortgages (238) -- --
(Increase) decrease in other assets 31 (1,006) 238
Decrease in other liabilities (433) (273) (42)
-------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,307 866 1,586
Investing Activities
Net increase in loans (16,041) (10,166) (1,068)
Proceeds from sale of mortgages 5,745 -- --
Purchase of premises and equipment, net (618) (837) (494)
Proceeds from sales of investment securities 2,555 2,016 2,183
Proceeds from maturities of investment securities 11,471 5,556 4,375
Purchase of investment securities (10,326) (14,846) (7,210)
Net decrease in short-term investments 1,653 414 2,398
-------- -------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (5,561) (17,863) 184
Financing Activities
Net increase in deposits 1,457 10,425 3,093
Net increase in short-term borrowings 1,489 3,198 --
Cash dividends (364) (331) (301)
-------- -------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,582 13,292 2,792
-------- -------- -------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (672) (3,705) 4,562
Cash and cash equivalents at beginning of year 6,030 9,735 5,173
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,358 $ 6,030 $ 9,735
======== ======== =======
</TABLE>
See accompanying notes.
7
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993
1. Significant Accounting Policies
Principles of Consolidation
United National Bancorporation (the Corporation) and its subsidiaries (Unitas
National Bank [the Bank], Unitas Real Estate Corp., Unitas Commercial Leasing
Corp., Unitas Financial Corp., Unitas Life Insurance Co., Unitas Mortgage
Corp., and Unitas Services Corp.) provide financial services. The
consolidated financial statements include the accounts of the Corporation and
its wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated. Investments in subsidiaries are carried at the
parent company's equity in the underlying net assets.
Mortgage Loans Held for Sale
The Bank identified a pool of conventional fixed-rate mortgages at December
31, 1992 which it was holding for sale. Mortgage loans held for sale are
carried at the aggregate of lower of cost or market value. No loans were held
for sale at December 31, 1993.
Investment and Mortgage-Backed Securities
Investment securities are stated at cost adjusted for amortization of
premiums and accretion of discounts. Security gains and losses are determined
using the specific identification method. In classifying debt securities
acquired and held in the investment portfolio, management continually
evaluates the Corporation's ability to hold the securities to maturity as
well as its intent to hold the securities for the foreseeable future.
Management's evaluation of the Corporation's ability to hold securities to
maturity is based on an evaluation of its ability to satisfy liabilities in
the normal course of business and meet regulatory and legal requirements such
as minimum capital requirements. Additionally, management continually
evaluates the probability of events that might occur which may cause the
Corporation to sell debt securities. Currently, management is not aware of
such probable events; thus all debt securities are classified as investment
securities at December 31, 1993.
Revenue Recognition
Interest on loans is recognized based upon the principal amount outstanding.
The accrual of interest income is discontinued when circumstances indicate
that collection is questionable. When interest accruals are discontinued,
interest credited to income in the current year is reversed. Management may
elect to continue the accrual of interest when the estimated net realizable
value of collateral is sufficient to cover the principal balance and accrued
interest.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on the risk
characteristics of the portfolio, past loan loss experience, local economic
conditions, and such other relevant factors which, in management's judgment,
deserve recognition. The allowance is increased by provisions for loan losses
charged to operations.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are charged to operations over
the estimated useful lives of the assets, computed by the straight-line
method.
Lease Financing
The Corporation provides equipment (principally automobiles) financing
through lease arrangements. Direct financing leases are stated at the
aggregate of lease payments receivable plus estimated residual values
(1993 -- $10,340,000; 1992 -- $5,891,000). Unearned income on direct
financing leases is amortized over the lease term resulting in an approximate
level rate of return.
8
F-27
<PAGE>
- --------------------------------------------------------------------------------
1. Significant Accounting Policies (continued)
Per Share Data
Net income and dividends per share have been restated to reflect a 10 percent
stock dividend to shareholders of record December 9, 1993, payable January
18, 1994. The effect of common stock equivalents is not significant for any
period presented.
Cash Flow Information
For purposes of the statements of cash flows, the Corporation considers cash
and due from banks and federal funds sold as cash and cash equivalents.
Generally, federal funds are purchased and sold for one-day periods. Cash
paid during the years ended December 31, 1993, 1992, and 1991 for interest
was $4,883,000, $5,961,000, and $5,314,000, respectively. Cash paid for
income taxes was $585,000 in 1993, $544,000 in 1992, and $288,000 in 1991.
Accounting Change -- Income Taxes
The Corporation adopted FASB Statement No. 109, "Accounting for Income
Taxes," in the first quarter of its fiscal year ended December 31, 1993.
The Corporation adopted the Statement on a prospective basis without
restating any prior years and has determined that the effect of its
implementation on the Corporation's financial position and results of
operations was not material for 1993 or 1992. In accordance with FASB
Statement No. 109, the liability method is used in accounting for income
taxes. Deferred income taxes are provided for differences between the tax
basis of an asset or liability and its reported amount in the financial
statements at the statutory tax rates that will be in effect when the
differences are expected to reverse.
Recently Issued FASB Statement
The Corporation is required to adopt FASB Statement No. 115, "Accounting
for Certain Investment in Debt and Equity Securities," in the first quarter
of its fiscal year ending December 31, 1994 and will be required to adopt
FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan,"
in the first quarter of its fiscal year ending December 31, 1995. The
Corporation has determined that the effect of its implementation of these
FASB Statements on the Corporation's financial position and results of
operations will not be material.
2. Restrictions on Cash and Due from Banks
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of those reserve balances for the year ended
December 31, 1993 was approximately $1,130,000.
3. Investment Securities
The amortized cost and estimated market value of investment securities were
as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1993:
U.S.Treasury securities and obligations
of U.S. government corporations
and agencies $ 17,006 $ 281 $ (17) $ 17,270
Obligations of states and
political subdivisions 200 3 -- 203
Corporate securities 800 29 -- 829
Foreign securities 250 19 -- 269
Mortgage-backed securities 1,195 40 -- 1,235
--------- ---------- ---------- ---------
Total debt securities 19,451 372 (17) 19,806
Equity securities 557 -- -- 557
--------- ---------- ---------- ---------
Total $ 20,008 $ 372 $ (17) $ 20,363
========= ========== ========== =========
</TABLE>
9
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
3. Investment Securities (continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1992:
U.S.Treasury securities and obligations
of U.S. government corporations
and agencies $ 18,822 $ 329 $ (80) $ 19,071
Obligations of states and
political subdivisions 550 22 -- 572
Corporate securities 1,316 48 (4) 1,360
Foreign securities 249 22 -- 271
Mortgage-backed securities 2,244 84 -- 2,328
--------- ---------- ---------- ---------
Total debt securities 23,181 505 (84) 23,602
Equity securities 559 -- -- 559
--------- ---------- ---------- ---------
Total $ 23,740 $ 505 $ (84) $ 24,161
========= ========== ========== =========
</TABLE>
At December 31, 1993 and 1992, investment securities with a carrying value of
$14,649,000 and $9,830,000, respectively, were pledged as collateral to
secure public deposits and for other purposes.
The amortized cost and estimated market value of debt securities at December
31, 1993, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
--------- ---------
(In Thousands)
<S> <C> <C>
Due in one year or less $ 850 $ 863
Due after one year through five years 12,068 12,249
Due after five years through ten years 5,338 5,459
Due after ten years -- --
------- -------
18,256 18,571
Mortgage-backed securities 1,195 1,235
------- -------
$19,451 $19,806
======= =======
</TABLE>
Proceeds from sales of investments in debt securities during 1993 were
$2,555,000. Gross gains of $62,000 and gross losses of $-0- were realized
on those sales. Proceeds from sales of investments in debt securities
during 1992 were $2,016,000. Gains of $35,000 and gross losses of $20,000
were realized on those sales. Proceeds from such sales were $2,183,000 in
1991. Gains of $41,000 were realized on those sales and a loss of $7,000
was realized on the sale of an interest-bearing time deposit.
4. Related Party Loans
Certain directors and executive officers of the Corporation and the Bank,
including their associates and companies, have loans with the Bank. Such
loans were made in the ordinary course of business at the Bank's normal
credit terms including interest rate and collateralization and do not
represent more than a normal risk of collection. Total loans to these
persons amounted to approximately $1,893,000 and $1,958,000 at December 31,
1993 and 1992, respectively. During 1993, $257,000 of new loans were made
and repayments totalled $322,000.
10
F-29
<PAGE>
- --------------------------------------------------------------------------------
5. Allowance for Loan Losses
Changes in the allowance for loan losses for each of the three years ended
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
(In Thousands)
Balance beginning of year $1,061 $ 910 $ 802
Provision charged to operations 473 325 300
Recoveries on loans 24 36 12
Loans charged off (369) (210) (204)
------ ------ -----
Balance end of year $1,189 $1,061 $ 910
====== ====== =====
</TABLE>
6. Regulatory Matters
Dividends are paid by the Corporation from its assets which are mainly
provided by dividends from the Bank. However, certain regulatory
restrictions exist regarding the ability of the Bank to transfer funds to
the Corporation in the form of cash dividends, loans, or advances. As of
December 31, 1993, the Bank had retained earnings of $7,982,000 of which
$3,070,000 was available for distribution to the Corporation as dividends
without prior regulatory approval.
Under Federal Reserve regulation, the Bank also is limited as to the amount
it may loan to its affiliates, including the Corporation, unless such loans
are collateralized by specified obligations. At December 31, 1993, the
maximum amount available for transfer from the Bank to the Corporation in
the form of loans approximated 20 percent of consolidated net assets.
The Bank is also required to maintain minimum amounts of capital to total
"risk-weighted" assets, as defined by the banking regulators. At December
31, 1993, the Bank was required to have minimum Tier I and total capital
ratios of 4.00 percent and 8.00 percent, respectively. The Bank's actual
ratios at that date were 10.72 percent and 11.76 percent, respectively. The
Bank's leverage ratio at December 31, 1993 was 8.26 percent.
7. Income Taxes
Effective January 1, 1993, the Corporation changed its method of accounting
for income taxes from the deferred method to the liability method required
by FASB Statement No. 109, "Accounting for Income Taxes" (see Note 1,
"Accounting Changes"). As permitted under the new rules, prior years'
financial statements have not been restated. There was no cumulative effect
of adopting Statement No. 109 as of January 1, 1993. There was no effect on
the pre-tax income from continuing operations as a result of the adoption
of Statement No. 109.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1993 are as follows (In Thousands):
<TABLE>
<S> <C>
Deferred tax liabilities:
Leasing activity $2,205
Other 99
------
Total Deferred tax liabilities 2,304
Deferred tax assets:
Allowance for loan loss 188
Alternative minimum tax carryforward 1,182
------
Total deferred tax assets 1,370
------
Net deferred tax liabilities $ 934
======
</TABLE>
11
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. Income Taxes (continued)
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Liability Method Deferred Method
-------------------------------------
1993 1992 1991
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Current $ 485 $ 461 $ 327
Deferred 373 180 19
------ ------ ------
Income taxes $ 858 $ 641 $ 346
====== ====== ======
</TABLE>
Deferred taxes resulted from the following timing differences for the years
ended December 31, 1992 and 1991:
<TABLE>
<CAPTION>
1992 1991
------ ------
(In Thousands)
<S> <C> <C>
Leasing activities $ 199 $ (42)
Allowance for loan losses (69) (66)
Alternative minimum tax 58 178
Other (8) (51)
----- -----
$ 180 $ 19
===== =====
</TABLE>
Income taxes applicable to investment securities gains included in the
provision for income taxes totaled $21,000 in 1993, $5,000 in 1992, and
$12,000 in 1991.
A reconciliation of the provision for income taxes and the amount which would
have been provided at statutory rates is as follows:
<TABLE>
<CAPTION>
Liability Method Deferred Method
-----------------------------------
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Tax at statutory rate on pre-tax income $ 911 $ 700 $ 425
Effect of tax-exempt income (53) (59) (68)
Other -- -- (11)
----- ----- -----
Income taxes $ 858 $ 641 $ 346
===== ===== =====
</TABLE>
8. Pension Plan
The Corporation has a defined benefit pension plan covering substantially all
of its employees. The benefits are based on years of service and the
employee's compensation. The Corporation's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. No contributions were made in 1993, 1992, or 1991. Contributions
are intended to provide not only for benefits attributed to service to date
but also for those expected to be earned in the future.
The following table sets forth the Plan's funded status and amounts
recognized in the Corporation's financial statements at December 31:
<TABLE>
<CAPTION>
1993 1992
------ ------
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $751 in 1993 and $574 in 1992 $ (764) $ (588)
======= ======
Projected benefit obligation for service rendered to date $(1,100) $ (890)
Plan assets at fair value, primarily listed stocks and bonds 1,126 1,064
------- ------
Plan assets in excess of projected benefit obligation 26 174
Unrecognized net loss from past experience different
from that assumed 188 78
Unrecognized net transition asset (195) (215)
------- ------
Prepaid pension cost included in other assets $ 19 $ 37
======= ======
</TABLE>
12
F-31
<PAGE>
- --------------------------------------------------------------------------------
8. Pension Plan (continued)
Net pension expense (income) included the following components:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 60 $ 48 $ 40
Interest cost on projected benefit obligation 77 63 53
Actual return on plan assets (83) (79) (74)
Net amortization and deferral (14) (20) (20)
----- ----- ----
Net periodic pension expense (income) $ 40 $ 12 $ (1)
===== ===== ====
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 8 percent and 7 percent, respectively, at
December 31, 1993 and 1992. The expected long-term rate of return on plan
assets was 8 percent in 1993 and 7 percent in 1992 and 8.5 percent in 1991.
9. Loan Commitments and Standby Letters of Credit
Loan commitments are made to accommodate the financial needs of the Bank's
customers. Standby letters of credit commit the Bank to make payments on
behalf of customers when certain specified future events occur. They
primarily are issued to facilitate customers' trade transactions.
Historically, more than 90 percent of standby letters of credit expire
unfunded.
Both arrangements have credit risk essentially the same as that involved in
extending loans to customers and are subject to the Bank's normal credit
policies. Collateral (e.g., securities, receivables, inventory, equipment) is
obtained based on management's credit assessment of the customer.
The Bank's maximum exposure to credit loss for loan commitments (unfunded
loans and unused lines of credit, including home equity lines of credit) and
standby letters of credit outstanding at December 31, 1993 was as follows (In
Thousands):
<TABLE>
<CAPTION>
<S> <C>
Loan commitments:
Home equity loans $ 828
Lines of credit 793
Real estate construction 907
Standby letters of credit 498
------
Total $3,026
======
</TABLE>
Loan commitments and standby letters of credit were $1,828,000 and $651,000,
respectively, at December 31, 1992.
10. Concentration of Credit Risk
Most of the Bank's business is with customers in the five county area of
Central Pennsylvania where it has full-service branch locations. The Bank's
consumer and real estate loan portfolios are principally to borrowers
throughout this market area. The Bank requires collateral on all real estate
exposures and generally requires loan-to-value ratios of no greater than 80
percent. The Bank's lease portfolio includes customers in this area as well
as other parts of South Central Pennsylvania. The commercial, financial, and
agricultural portfolio is diversified with no industry comprising greater
than 10 percent of total loans outstanding.
Collateral requirements on such loans are determined on a case-by-case basis
based on management's credit evaluations of the respective borrower.
13
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
11. Shareholders' Equity
In 1987, the Corporation established a dividend reinvestment and stock
purchase plan. Shareholders of common stock may participate in the plan which
provides that additional shares of common stock may be purchased with
reinvested dividends at prevailing market prices. To the extent that shares
are not available on the open market, the Corporation has reserved 266,200
shares of common stock to be issued under the dividend reinvestment plan.
The Corporation has reserved 133,100 shares covered by the 1986 Stock Option
Plan which expires January 1997.
The Plan permits the granting of stock options, including incentive stock
options (ISOs) and nonqualified stock options (NQSOs) to key employees.
Options may be accompanied by stock appreciation rights (SARs). The
exercise of a SAR requires the surrender of an unexercised related option.
The purchase price of the common stock covered by each ISO will not be less
than 100 percent (85 percent for NQSOs) of the fair market value of the
stock on the date of the grant of such option. The duration of each option
granted under the Plan will not exceed 10 years from the date of grant. No
option will be exercisable during the year ending on the first anniversary
date of the granting of such option. The Plan provides that SARs will be
automatically exercised on the last business day prior to the expiration of
the related option if, on that date, the fair market value of a share of
common stock exceeds the per share price of the related option. In the
event of termination of employment, options will generally remain
exercisable until the earlier of the expiration of the option term or three
months from the date of termination of employment.
At December 31, 1993, all option holders have expressed their intention to
exercise the fixed award portion of their plan. Accordingly, no compensation
expense has been recorded. Had the holders intended to exercise the SAR
portion of their plan, compensation expense of approximately $528,000, based
on the market value of the Corporation's shares at December 31, 1993, would
have been recorded.
The changes in option shares outstanding are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Options outstanding at beginning of year 34,243 17,303 17,303
Options granted at $10.52-$16.14 per share 15,400 16,940 --
------ ------ ------
Options outstanding at end of year 49,643 34,243 17,303
====== ====== ======
Options available for grant at December 31 83,457
======
Options exercisable at December 31 34,243
======
</TABLE>
12. United National Bancorporation (Parent Company Only) Financial Information
<TABLE>
<CAPTION>
December 31
1993 1992
------ ------
(In Thousands)
<S> <C> <C>
Balance Sheet
Assets
Cash $ 37 $ 43
Investment in:
Bank subsidiary 12,209 10,770
Nonbank subsidiaries 36 18
------- -------
Total Assets $12,282 $10,831
======= =======
Shareholders' Equity $12,282 $10,831
======= =======
</TABLE>
14
F-33
<PAGE>
- --------------------------------------------------------------------------------
12. United National Bancorporation (Parent Company Only) Financial Information
(continued)
<TABLE>
<CAPTION>
Year Ended December 31
1993 1992 1991
------ ------ ------
Statements of Income (In Thousands)
<S> <C> <C> <C>
Income:
Dividends from Bank subsidiary $ 404 $ 370 $ 351
Other 12 40 --
------- ------- -------
416 410 351
Expenses 53 41 35
------- ------- -------
Income before equity in undistributed
net income of subsidiaries 363 369 316
Equity in undistributed net income of:
Bank subsidiary 1,439 1,049 583
Nonbank subsidiaries 18 -- 4
------- ------- -------
Net income $ 1,820 $ 1,418 $ 903
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
1993 1992 1991
------ ------ ------
Statements of Cash Flows (In Thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 1,820 $ 1,418 $ 903
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income of subsidiaries (1,457) (1,049) (587)
Other (5) (8) (3)
------- ------- -----
Net cash provided by operating activities 358 361 313
Financing activities
Cash dividends (364) (331) (301)
------- ------- -----
Net cash used by financing activities (364) (331) (301)
------- ------- -----
Increase (decrease in cash) (6) 30 12
Cash at beginning of year 43 13 1
------- ------- -----
Cash at end of year $ 37 $ 43 $ 13
======= ======= =====
</TABLE>
15
F-34
<PAGE>
United National Bancorporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
June 30, December 31,
1994 1993
---------- ------------
(000's)
Assets
Cash and due from banks $ 3,937 $ 3,758
Federal funds sold 1,400 1,600
-------- --------
Cash and cash equivalents 5,337 5,358
Interest-bearing deposits in banks 54 33
Investment Securities:
Held to Maturity (fair value 1994 - 5,930 20,008
$5,950; 1993 - $20,363)
Available for Sale at fair value 13,562 --
Loans:
Real estate 37,946 37,550
Installment and Consumer 39,836 38,446
Commercial, financial, and
agricultural 22,931 24,881
Lease financing 28,832 28,113
-------- --------
Total Loans 129,545 128,990
Less: Allowance for loan losses (1,325) (1,189)
Unearned income (10,212) (10,514)
-------- --------
Net Loans 118,008 117,287
Premises and equipment, net of
accumulated depreciation
(1994-$2,724; 1993-$2,378) 2,545 2,570
Other assets 2,538 2,347
-------- --------
Total Assets $147,974 $147,603
======== ========
Liabilities
Deposits:
Noninterest-bearing $ 9,667 $ 8,776
Interest-bearing 123,402 120,543
-------- --------
Total Deposits 133,069 129,319
Securities sold under
agreements to repurchase 673 4,687
Other liabilities 1,639 1,315
-------- --------
Total Liabilities 135,381 135,321
Shareholders' Equity
Preferred Stock-$10.00 par value:
Authorized and unissued 5,000,000 shares -- --
Common Stock-$2.50 par value:
Authorized 10,000,000 shares: issued
and outstanding - 769,147 shares 1,923 1,923
Surplus 4,115 4,115
Retained earnings 6,555 6,244
-------- --------
Total Shareholders' Equity 12,593 12,282
-------- --------
Total Liabilities and Shareholders'
Equity $147,974 $147,603
======== ========
See accompanying notes.
F-35
<PAGE>
United National Bancorporation and Subsidiaries
Consolidated Statements of Income (unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
1994 1993 1994 1993
---- ---- ---- ----
(000's) (000's)
<S> <C> <C> <C> <C>
Interest Income
Loans Including Fees $ 2,606 $ 2,837 $ 5,246 $ 5,541
Investments 298 433 579 862
Other 10 6 23 44
-------- -------- -------- --------
Total Interest Income 2,914 3,276 5,848 6,447
Total Interest Expense 999 1,233 1,990 2,526
-------- -------- -------- --------
Net Interest Income 1,915 2,043 3,858 3,921
Provision for Loan Losses 99 75 198 150
-------- -------- -------- --------
Net Interest Income
After Provision for Loan Losses 1,816 1,968 3,660 3,771
Gain (loss) on Sale of Mortgages 0 (1) 9 238
Other Income 137 144 306 266
Other Expense 1,487 1,443 2,893 2,709
-------- -------- -------- --------
Income Before Income Taxes 466 668 1,082 1,566
Income Taxes 148 221 346 507
-------- -------- -------- --------
Net Income $ 318 $ 447 $ 736 $ 1,059
======== ======== ======== ========
Net Income Per Share $ 0.41 $ 0.58 $ 0.96 $ 1.38
Cash Dividends Per Share $ 0.13 $ 0.12 $ 0.26 $ 0.24
Average Number of Shares Outstanding 769,147 769,147 769,147 769,147
</TABLE>
See accompanying notes.
F-36
<PAGE>
United National Bancorporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months
Ended June 30,
----------------
1994 1993
------ ------
(In Thousands)
Operating Activities:
Net Income $ 736 $1,059
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for Loan Losses 198 150
Provision for Depreciation & Amortization 159 120
Amortization of Investment Security Premiums
and Accretion of Discounts, net 30 48
Deferred Income Taxes 131 192
Gain on Sale of Loans (8) (238)
Realized Investment Security Gains (18) 0
(Increase) Decrease in Other Assets (191) (37)
Increase (Decrease) in Other Liabilities 193 (91)
------ ------
Net Cash Provided By Operating Activities 1,230 1,203
Investing Activities:
Net (Increase) Decrease in Loans (946) (9,958)
Proceeds from sale of Mortgage Loans 153 5,009
Purchase of premises and equipment, net (134) (439)
Proceeds from sales of AFS investment securities 1,493 0
Proceeds from maturities of AFS investment securities 1,852 0
Proceeds from maturities of HTM investment securities 3,648 3,532
Purchase of AFS investment securities (6,588) 0
Purchase of HTM investment securities (244) (6,827)
Net (increase) decrease in short term investments (21) 1,667
------ ------
Net Cash Used In Investing Activities (787) (7,016)
Financing Activities:
Net Increase (Decrease) in Deposits 3,750 4,364
Net Increase (Decrease) in short-term borrowings (4,014) 769
Cash Dividends (200) (182)
------ ------
Net Cash Provided By (Used In) Financing Activities (464) 4,951
------ ------
Decrease in Cash and Cash Equivalents (21) (862)
Cash and Cash Equivalents, Beginning of Period 5,358 6,030
------ ------
Cash and Cash Equivalents, End of Period $5,337 $5,168
====== ======
See accompanying notes.
F-37
<PAGE>
United National Bancorporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
<TABLE>
<CAPTION>
Unrealized
Common Retained Gain (Loss)
Stock Surplus Earnings AFS Securities Total
------ ------- -------- -------------- -----
<S> <C> <C> <C> <C> <C>
Balance at 12/31/92 $1,748 $2,476 $6,607 $ 0 $10,831
Net income 1,059 1,059
Cash Dividends (182) (182)
------ ------ ------ ----- -------
Balance at 6/30/93 $1,748 $2,476 $7,484 $ 0 $11,708
====== ====== ====== ===== =======
Balance at 12/31/93 $1,923 $4,115 $6,244 $ 0 $12,282
Net Income 736 736
Cash Dividends (200) (200)
Changes in unrealized
gain (loss) on
securities available
for sale, net of
tax effect (225) (225)
------ ------ ------ ----- -------
Balance at 6/30/94 $1,923 $4,115 $6,780 $(225) $12,593
====== ====== ====== ===== =======
</TABLE>
See accompanying notes.
F-38
<PAGE>
UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1994
BASIS OF PRESENTATION
- ---------------------
Note 1 Management Representation: The accompanying unaudited consolidated
- ------ --------------------------
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six months ended June 30, 1994 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1994. For further
information, refer to the consolidated financial statements and footnotes
thereto included in United National Bancorporation's annual report on Form 10-K
for the year ended December 31, 1993.
Note 2 Reserve For Possible Loan Losses: (In thousands)
- ------ ---------------------------------
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Reserve balance January 1 $1,189 $1,061
Additions:
Provision charged to operating expenses 198 150
Recoveries of previously charged
off loans 21 15
Deductions:
Loans charged off 82 102
------ ------
Reserve balance June 30 $1,326 $1,124
</TABLE>
Note 3 Cash Flow Disclosures: (In thousands)
- ------ ----------------------
Cash paid during the first three months of the year for interest and income
taxes were as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Interest $2,016 $2,635
Income Taxes 215 315
</TABLE>
Note 4 Change in Accounting Method: The Corporation adopted Statement of
- ------ ----------------------------
Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income
Taxes" effective January 1, 1993. FAS No. 109 is an asset and liability
approach for financial accounting and reporting for income taxes. As permitted
by Statement 109, UNB has elected not to restate the financial statements of any
prior year and the cumulative effect of the change had no material impact on the
balance sheet or income statement in the first quarter of 1993.
The Corporation adopted Statement of Financial Accounting Standards No. 115
"Accounting for certain Investments in Debt and Equity Securities" in the first
quarter of 1994. Accordingly, Management reviewed the investment portfolio and
classified certain securities as "Available-for-Sale". Such securities will be
marketed-to-market on a quarterly basis, with net unrealized gains (losses), net
of taxes, posted to equity capital.
F-39
<PAGE>
UNITED NATIONAL BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Note 5 Proposed Business Combination: On March 25, 1994, UNB signed a
- ------ ------------------------------
Definitive Agreement to merge the Corporation into First Commonwealth Financial
Corporation of Indiana, PA ("FCFC"). Total assets of the combined entity will
exceed $2.0 billion, affording our bank subsidiary, Unitas National Bank, and
active nonbank subsidiary, Unitas Mortgage Corporation, excellent long term
growth and profitability potential. We are confident that this partnership will
open significant opportunities for these subsidiaries as they become independent
affiliates of FCFC. Management of UNB anticipates acquisition costs to UNB in
excess of $200 thousand during 1994; however, Management is not aware of
forseeable future events which would otherwise materially alter the
profitability or safety and soundness of UNB. We expect certain cost savings in
noninterest expenditures subsequent to the merger.
F-40
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Independent Auditors' Report
[LETTERHEAD OF EDWARDS LEAP & SAUER APPEARS HERE]
To the Board of Directors and Stockholders
Reliable Financial Corporation
Reliable Savings Bank, PaSA
Bridgeville, Pennsylvania
We have audited the accompanying consolidated balance sheets of Reliable
Financial Corporation (the "Corporation") and subsidiary as of September 30,
1993 and 1992 and the related consolidated statements of income, changes in
retained earnings and stockholders' equity and cash flows for the years ended
September 30, 1993 and 1992 and the statements of income, changes in retained
earnings and stockholders' equity and cash flows of Reliable Savings Bank, PaSA
(the "Savings Bank") for the year ended September 30, 1991. These financial
statements are the responsibility of the Corporation's and the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 Reliable
Financial Corporation and subsidiary as of September 30, 1993 and 1992 and the
results of their operations and cash flows for the years then ended and the
results of operations and cash flows of Reliable Savings Bank, PaSA for the year
ended September 30, 1991, in conformity with generally accepted accounting
principles.
Edwards Leap & Sauer
Pittsburgh, Pennsylvania
November 5, 1993
F-41
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
September 30,
1993 1992
-------------------------
(in thousands)
<S> <C> <C>
ASSETS
Cash $ 1,029 $ 955
Interest-bearing deposits in other institutions 20,587 33,763
Investment securities, at cost (approximate market value of
$35,856 and $12,796, respectively) 30,718 7,813
Federal Home Loan Bank stock, at cost 922 1,101
Loans 85,255 99,459
Allowance for loan losses (700) (495)
Mortgage-backed securities, at cost (approximate market value of
$6,117 and $226, respectively) 5,930 224
Accrued interest receivable 348 91
Premises and equipment, net 2,553 2,627
Other assets 141 265
-------- --------
$146,783 $145,803
======== ========
=================================================================================================================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
<S> <C> <C>
Deposit accounts $114,619 $114,099
Accrued interest payable 829 924
Advances from borrowers for taxes and insurance 707 650
Other liabilities 824 553
-------- --------
116,979 116,226
RETAINED EARNINGS AND STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share,
4,000,000 shares authorized, 1,460,242 shares issued of which
1,398,862 are outstanding 15 15
Additional paid-in capital 13,657 13,657
Retained earnings--substantially restricted 17,348 15,905
-------- --------
31,020 29,577
Less: Treasury stock; 61,380 shares at cost (1,216) -0-
-------- --------
$146,783 $145,803
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statements of Income
================================================================================
<TABLE>
<CAPTION>
Years Ended September 30,
1993 1992 1991
------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 9,012 $ 10,537 $ 11,250
Investment securities 1,662 1,224 941
Dividends 191 215 222
--------- --------- -------
10,865 11,976 12,413
================================================================================================================
INTEREST EXPENSE
Deposit accounts 4,500 6,147 7,912
--------- --------- -------
NET INTEREST INCOME 6,365 5,829 4,501
- ----------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 250 200 155
--------- --------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,115 5,629 4,346
================================================================================================================
NON-INTEREST INCOME
Net gain on sales of investment securities 1,133 261 -0-
Net gain on sales of real estate owned 49 11 -0-
Other 317 191 162
--------- --------- -------
7,614 6,092 4,508
=================================================================================================================
NON-INTEREST EXPENSES
Compensation 859 766 660
Employee benefits 183 114 124
Occupancy expense 308 295 287
Deposit insurance 236 267 221
Data processing 343 332 296
Other 646 446 336
--------- --------- -------
2,575 2,220 1,924
--------- --------- -------
INCOME BEFORE INCOME TAXES 5,039 3,872 2,584
================================================================================================================
PROVISION FOR INCOME TAXES 1,884 1,529 872
--------- --------- -------
NET INCOME $ 3,155 $ 2,343 $ 1,712
========= ========= =======
================================================================================================================
NET INCOME PER COMMON SHARE $ 2.21 $ 1.61 N/A*
========= ========= =======
Weighted average shares used in computing net
income per common share 1,425,596 1,457,944 N/A*
========= ========= =======
</TABLE>
* Not Applicable
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statement of Changes in Stockholders' Equity
================================================================================
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
-------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1990
(Reliable Savings Bank) $-0- $ -0- $12,361 $ -0- $12,361
Net Income -0- -0- 1,712 -0- 1,712
=======================================================================================================================
Balance at September 30, 1991
(Reliable Savings Bank) -0- -0- 14,073 -0- 14,073
Proceeds from issuance of
common stock 15 13,657 -0- -0- 13,672
Net Income -0- -0- 2,343 -0- 2,343
Dividends declared -0- -0- (511) -0- (511)
=======================================================================================================================
Balance at September 30, 1992 15 13,657 15,905 -0- 29,577
Net Income -0- -0- 3,155 -0- 3,155
Treasury stock (purchased 72,712
shares) -0- -0- -0- (1,420) (1,420)
Treasury stock (reissued 11,332
shares) -0- -0- (91) 204 113
Dividends declared -0- -0- (1,621) -0- (1,621)
=======================================================================================================================
Balance at September 30, 1993 $ 15 $13,657 $17,348 $(1,216) $29,804
==== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Years Ended September 30,
1993 1992 1991
----------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,155 $ 2,343 $ 1,712
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 137 138 134
Net accretion/amortization of premiums and discounts 13 (1) (1)
Net gain on sales of investment securities (1,133) (261) -0-
Net gain on sales of real estate owned (49) (11) -0-
Unamortized loan fees (427) (73) (51)
Provision for loan losses 250 200 155
Increase (decrease) in cash due to changes in assets and liabilities:
Accrued interest receivable (257) (13) 160
Other assets 124 (118) (15)
Accrued interest payable (95) (200) 16
Other liabilities 73 137 (29)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,791 2,141 2,081
====================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities -0- 800 1,000
Proceeds from sales of and redemption of investment securities 1,766 424 -0-
Purchase of investment securities (23,550) (6,709) -0-
Redemption (purchase) of FHLB stock 179 -0- (140)
Net loans repaid by customers 13,742 11,357 519
Purchase of mortgage-backed securities (5,977) -0- -0-
Proceeds from sales of real estate owned 1,163 39 13
Premises and equipment expenditures (63) (45) (94)
Net change in long-term interest-bearing deposits in other institutions -0- -0- 790
------- ------- -------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (12,740) 5,866 2,088
====================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 520 (5,332) 7,782
Net increase (decrease) in advances from borrowers for taxes and insurance 57 (103) (123)
Proceeds from issuance of common stock, net of issuance costs of $930 -0- 13,672 -0-
Purchase of treasury stock (1,420) -0- -0-
Proceeds from reissuance of treasury stock 113 -0- -0-
Dividends paid (1,423) (219) -0-
------- ------- -------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,153) 8,018 7,659
====================================================================================================================
NET CHANGE IN CASH AND CASH EQUIVALENTS (13,102) 16,025 11,828
Cash and cash equivalents at beginning of year 34,718 18,693 6,865
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $21,616 $34,718 $18,693
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements
Years ended September 30, 1993, 1992 and 1991
================================================================================
Note A--Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements as of and for the years ended
September 30, 1993 and 1992 include Reliable Financial Corporation and its
wholly-owned subsidiary, Reliable Savings Bank, PaSA. The consolidated financial
statements for the year ended September 30, 1991 include Reliable Savings Bank,
PaSA and its wholly-owned subsidiary, Reliable Savings Service Corporation. All
significant intercompany balances and transactions have been eliminated.
Investment Securities:
Investment securities are carried at cost, adjusted for amortization of
premium and accretion of discount over the term of the security using the
interest method or methods which approximate the interest method. Gains or
losses on the sale of securities are recognized upon realization using both the
weighted average and the specific-identification methods. All securities
currently owned are classified as held for investment as management has the
ability to hold such investments until maturity and the intent to hold them for
the foreseeable future.
Mortgage-Backed Securities:
Mortgage-backed securities are stated at cost, adjusted for amortization of
premium and accretion of discount using the interest method or methods which
approximate the interest method. The Corporation has the ability and
management's intention is to hold such assets to maturity. Should any be sold,
gains and losses will be recognized based on the specific identification method.
Loans and Allowance for Loan Losses:
Loans are stated at the amount of unpaid principal less the undisbursed
portion of loans and unamortized loan fees. The allowance for loan losses is
established through a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible.
Real Estate Owned (REO):
Real estate acquired in satisfaction of a loan and in-substance
foreclosures are reported in other assets. In-substance foreclosures are
properties in which a borrower with little or no equity in the collateral,
effectively abandons control of the property or has no economic interest to
continue involvement in the property. The borrower's ability to rebuild equity
based on current financial conditions is also considered doubtful. Properties
acquired by foreclosure or deed in lieu of foreclosure and properties classified
as in-substance foreclosures are transferred to REO and recorded at the lower of
cost or fair value at the date actually or constructively received. Fair value
is measured by market transactions. If there are no active markets for similar
items, fair value is determined by discounting a forecast of expected cash flows
at a rate commensurate with the risk involved.
F-46
<PAGE>
- --------------------------------------------------------------------------------
Interest Income:
Interest on loans is recorded when earned. Accrual of interest is
discontinued on a loan when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection is questionable. Loan origination fees are
deferred and recognized over the life of the loan as an adjustment of yield
(interest income).
Depreciation:
The Savings Bank generally computes depreciation on the straight-line
method for financial reporting purposes over the assets' estimated useful lives
which range from 7 to 50 years for buildings and leasehold improvements and from
5 to 10 years for furniture and fixtures. Depreciation for tax purposes is
computed under the straight-line method for assets placed in service prior to
January 1, 1981. Assets placed in service after December 31, 1980 are
depreciated under the provisions of Accelerated Cost Recovery System (ACRS) or
the Modified Accelerated Cost Recovery System (MACRS), which stipulates that the
cost of assets be recovered over recovery lives as determined by the Internal
Revenue Code. As a result, there may be timing differences between book
depreciation and tax depreciation.
Income Taxes:
Deferred income taxes are reported for timing differences between items of
income or expense reported in the financial statements and those reported for
income tax purposes. The differences relate principally to depreciation of
premises and equipment, recognition of interest income and the provision for
loan losses.
Earnings per Share:
Earnings per share are calculated on the basis of the weighted average
number of shares outstanding. As a result of the stock conversion, as described
in Note P, the newly issued stock was outstanding for 184 days during the fiscal
year ended September 30, 1992. Options to purchase an additional 34,000 shares
at $10/share, as described in Note L, were available for the year ended
September 30, 1993, with 11,332 shares actually purchased during the quarter
ended March 31, 1993. Therefore, the weighted average number for shares
outstanding was 1,425,596 and 1,457,944 at September 30, 1993 and 1992,
respectively.
Cash Equivalents:
For the purposes of the Statements of Cash Flows, the Corporation and the
Savings Bank consider all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
totaled $20,586,837, $33,762,891 and $18,201,160 at September 30, 1993, 1992 and
1991, respectively. Net loans transferred to real estate owned, a non-cash
operating activity, totaled $1,138,140, $0 and $32,943 in the years ended
September 30, 1993, 1992 and 1991, respectively.
Reclassification of Prior Years' Statements:
Certain items previously reported in the prior years' financial statements
have been reclassified to conform with the current year's classifications. These
reclassifications have no effect on net income.
F-47
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Note B--Investment Securities
Investment securities at September 30 are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1993
---------------------------------------------------------
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 8,983,966 $ 69,784 $-0- $ 9,053,750
U.S. agency obligations 17,000,000 129,662 -0- 17,129,662
State and municipal
obligations 3,264,441 81,893 -0- 3,346,334
Corporate debt 499,044 5,656 -0- 504,700
Federal Home Loan Mortgage
Corporation common stock 970,103 4,851,772 -0- 5,821,875
----------- ---------- ---------- -----------
$30,717,554 $5,138,767 $-0- $35,856,321
=========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1993
---------------------------------------------------------
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 1,997,485 $ 33,765 -0- $ 2,031,250
U.S. agency obligations 2,500,000 85,781 -0- 2,585,781
State and municipal obligations 1,715,000 14,580 -0- 1,729,580
Corporate debt 497,666 1,709 -0- 499,375
Federal Home Loan Mortgage Corporation
common stock 1,102,353 4,847,647 -0- 5,950,000
----------- ---------- --------- -----------
$ 7,812,504 $4,983,482 $-0- $12,795,986
=========== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Years Ended
September 30,
---------------------------
1993 1992
----------- ----------
<S> <C> <C>
Gross realized gains:
Federal Home Loan Mortgage
Corporation common stock $ 1,133,333 $ 261,061
=========== ===========
</TABLE>
The maturities of investment securities at September 30, 1993
were as follows:
<TABLE>
<CAPTION>
Carrying Market
Amount Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 2,143,883 $ 2,165,600
Due from one to five years 25,693,568 25,879,269
Due from five to ten years 1,910,000 1,989,577
Due after ten years -0- -0-
Marketable equity security 970,103 5,821,875
----------- -----------
$30,717,554 $35,856,321
=========== ===========
</TABLE>
F-48
<PAGE>
- ---------------------------------------------------------------------------
Note C--Loans
Loans at September 30 consisted of the following:
<TABLE>
<CAPTION>
1993 1992
----------- ------------
<S> <C> <C>
Residential mortgage $78,782,333 $ 93,049,040
Real estate construction 5,765,420 5,450,472
Commercial real estate 1,837,585 456,171
Non-residential and land 1,941,955 2,391,215
Loans on deposit accounts 1,047,040 1,020,583
Home improvement loans 53,662 64,077
Consumer 570,623 391,259
----------- ------------
89,998,618 102,822,817
Less: Undisbursed portion of loans 3,555,533 1,749,066
Unamortized loan fees 1,188,441 1,615,346
----------- ------------
$85,254,644 $ 99,458,405
=========== ============
</TABLE>
As of September 30, loans secured by one-to-four family residences
represented 93.94% and 95.80% of the total loan portfolio for 1993 and 1992,
respectively. Total loans on non-accrual status at September 30, 1993 and 1992
totaled approximately $2,600,000 and $1,200,000, respectively.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $495,000 $295,000 $155,000
Provision charged to operations 250,000 200,000 154,619
Loans charged off (44,768) -0- (14,619)
-------- -------- --------
$700,232 $495,000 $295,000
======== ======== ========
</TABLE>
The Savings Bank primarily grants residential mortgage loans to customers
in Allegheny and Washington counties, Pennsylvania. The Savings Bank maintains a
diversified loan portfolio and the ability of its debtors to honor their
contracts is not substantially dependent on any particular economic business
sector.
- --------------------------------------------------------------------------------
Note D--Accrued Interest Receivable
Accrued interest receivable at September 30 consisted of the following:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Loans $ 1,449 $ 5,254
Investments 346,343 86,126
-------- -------
$347,792 $91,380
======== =======
</TABLE>
F-49
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Note E--Premises and Equipment
Premises and equipment at September 30 consisted of the following:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Land $ 120,253 $ 120,253
Building 2,305,845 2,301,456
Leasehold improvements 258,024 242,691
Furniture and fixtures 862,535 819,555
---------- ----------
3,546,657 3,483,955
Less: Accumulated depreciation 993,171 856,769
---------- ----------
$2,553,486 $2,627,186
========== ==========
</TABLE>
Depreciation expense totaled $136,402, $138,110 and $133,844 for the years
ended September 30, 1993, 1992 and 1991, respectively.
- --------------------------------------------------------------------------------
Note F--Federal Home Loan Bank Stock
The Savings Bank is required to own stock of the Federal Home Loan Bank
based on a percentage of net residential mortgages outstanding. During the year
ended September 30, 1993, the Savings Bank was required to redeem stock to the
Federal Home Loan Bank at its cost basis. The amount of common stock owned was
$922,100 and $1,100,800 at September 30, 1993 and 1992, respectively.
- --------------------------------------------------------------------------------
Note G--Deposit Accounts
Deposit accounts at September 30 consisted of the following:
<TABLE>
<CAPTION>
Weighted
Average Rate At 1993 1992
September 30, ---------------------- -----------------------
1993 Amount % Amount %
--------------- ------------ ---- ------------ ----
<S> <C> <C> <C> <C> <C>
Regular Passbook Savings 2.75% $ 29,843,096 26% $ 28,599,688 25%
Other Passbook Savings 2.75% 774,857 1% 1,229,640 1%
Christmas Club Savings 2.75% 630,625 1% 670,033 1%
Money Market Accounts 2.80% 14,771,856 13% 14,035,181 12%
NOW Checking Accounts 2.25% 6,296,495 5% 5,633,579 5%
Certificate Accounts
Maturities:
6 months or less 3.07% 15,680,504 14% 17,098,033 15%
6 months to 1 year 3.34% 10,430,759 9% 12,458,547 11%
1 year to 3 years 4.79% 12,272,065 11% 13,576,041 12%
More than 3 years 7.00% 19,762,189 17% 17,334,740 15%
------------ ---- ------------ ----
58,145,517 51% 60,467,361 53%
Non-Interest Bearing Accounts 4,156,062 3% 3,463,672 3%
------------ ---- ------------ ----
$114,618,508 100% $114,099,154 100%
============ ==== ============ ====
</TABLE>
Certificates of deposit with balances exceeding $100,000 totaled $1,234,650
and $1,026,810 at September 30, 1993 and 1992, respectively.
The Savings Bank paid cash of approximately $4,600,000, $6,300,000, and
$7,900,000 in interest on deposits during the years ended September 30, 1993,
1992 and 1991, respectively.
F-50
<PAGE>
- --------------------------------------------------------------------------------
Interest expense for the years ended September 30 is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------------- -------------- --------------
<S> <C> <C> <C>
Savings and NOW accounts $ 1,494,143 $ 1,890,983 $ 1,976,217
Time deposits 3,005,806 4,256,044 5,936,262
-------------- -------------- --------------
$ 4,499,949 $ 6,147,027 $ 7,912,479
============== ============== ==============
</TABLE>
- --------------------------------------------------------------------------------
Note H--Stockholders' Equity
Retained earnings at September 30, 1992, the most recent date for which tax
returns were filed, included approximately $4,917,000 for which no provision for
federal income tax has been made. These amounts represent allocations of income
to bad debt deductions for tax purposes only. Reduction of amounts so allocated
for purposes other than tax bad debt losses will create income for tax purposes
only, which will be subject to the then current corporate income tax rate.
Treasury stock is shown at cost and consists of 61,380 shares of the
Corporation's stock at September 30, 1993. The Corporation purchased 72,712
shares of Treasury stock at an average price per share of approximately $19.50
and reissued 11,332 shares which cost approximately $18.00 per share, at $10.00
per share during the year ended September 30, 1993. The reissuance was in
conjunction with the Benefit Plans as described in Note L.
- --------------------------------------------------------------------------------
Note I--Income Taxes
In addition to charging income for taxes actually paid or payable, the
provision for income taxes can reflect deferred income tax credits which result
from timing differences in computing income for financial and income tax
reporting. There were no deferred tax credits included in the income tax
provisions for the years ended September 30, 1993, 1992 and 1991. The principal
timing differences are a result of recognition of bad debt deductions, interest
income, loan fees and accelerated depreciation methods.
For Federal income tax purposes the Savings Bank is permitted a tax bad
debt deduction unrelated to any loan loss provision for book purposes. This
deduction is computed by one of two methods, the experience method taking into
account the six year moving average of net charge-offs to loans, and the
percentage of taxable income method, subject to certain limitations. The amount
of the tax bad debt deduction for the year ended September 30, 1992 was $-0-and
approximately $145,000 for the short tax year ended September 30, 1991. Due to
the limitations referenced above, no tax bad debt deduction is anticipated for
the tax year ended September 30, 1993.
The Corporation made income tax payments of $1,847,644 and $1,442,703
during the years ended September 30, 1993 and 1992, respectively. The Savings
Bank made income tax payments of $866,270 during the year ended September 30,
1991.
The income tax provision at September 30 consisted of the following:
<TABLE>
<CAPTION>
1993 1992 1991
-------------- -------------- ------------
<S> <C> <C> <C>
Federal income taxes $ 1,587,873 $ 1,209,935 $ 687,308
State income taxes 296,037 318,782 184,705
-------------- -------------- ------------
$ 1,883,910 $ 1,528,717 $ 872,013
============== ============== ============
</TABLE>
F-51
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate primarily due to the following:
<TABLE>
<CAPTION>
1993 1992 1991
-------------- -------------- ------------
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
Decrease in deferred loan fees (2.9) (.6) (1.4)
Exempt interest, dividends, net (.9) (.6) (.7)
Change in accounting method -0- -0- .2
Bad debt deduction 1.7 1.8 .1
Capital loss carryover -0- (.5) -0-
Other, net (.4) (2.8) (5.6)
-------------- -------------- ------------
Effective tax rate 31.5% 31.3% 26.6%
============== ============== ============
</TABLE>
State income taxes are paid on income determined in accordance with
generally accepted accounting principles.
In February of 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes", that supersedes SFAS No. 96 and APB 11. The primary changes
incorporated in SFAS 109 include, among other things, relaxation of the criteria
for recognizing deferred tax assets and reduction in the complexity of
calculating deferred taxes by reducing the need to schedule the reversal of
temporary differences year-by-year. The statement is effective for fiscal years
beginning after December 15, 1992. The Corporation plans to adopt SFAS 109 in
the first quarter of fiscal 1994. The adoption of SFAS 109 will require the
Corporation to change to the liability method for financial accounting and
reporting for income taxes. The Corporation currently estimates that its
deferred tax liability would be decreased by approximately $370,000. The
resulting benefit will be recorded through the income statement and reported as
a cumulative effect of a change in an accounting principle.
- --------------------------------------------------------------------------------
Note J--Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA") of 1989
FIRREA was signed into law on August 9, 1989 and regulations for savings
institutions' minimum capital requirements went into effect on December 7, 1989.
In addition to its capital requirements, FIRREA includes provisions for changes
in the federal regulatory structure for institutions including a new deposit
insurance system, increased deposit insurance premiums, and restricted
investment activities with respect to noninvestment-grade corporate debt and
certain other investments. FIRREA also increases the required ratio of
housing-related assets in order to qualify as a savings institution.
The regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5 percent of total assets and, a minimum 3 percent core
capital ratio. The risk-based capital ratio requirement is 8.0 percent of total
risk adjusted assets as of December 31, 1992. Prior to December 31, 1992 it was
7.2% of total risk adjusted assets.
The Savings Bank, at September 30, 1993, meets all regulatory tangible
capital, core capital and risk-based capital requirements of 8.0 percent, as
defined by FIRREA. Failure to meet these capital requirements would expose the
Savings Bank to regulatory sanctions, including limitations on asset growth. The
following table shows that the Savings Bank is in compliance with regulatory
capital standards:
F-52
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Adjusted
Amount Total Assets
---------- --------------
(dollars in thousands)
<S> <C> <C>
GAAP capital $ 25,903 18.19%
========== ==============
Tangible capital $ 25,903 18.19%
Tangible capital requirement 2,135 1.50%
---------- --------------
Excess $ 23,768 16.69%
========== ==============
Core capital $ 25,903 18.19%
Core capital requirement 4,271 3.00%
---------- --------------
Excess $ 21,632 15.19%
========== ==============
Risk-based capital $ 26,603 42.71%
Minimum risk-based capital requirement 4,984 8.00%
---------- --------------
Excess $ 21,619 34.71%
========== ==============
</TABLE>
Risk-based capital includes supplementary capital of $700,232, representing
the general allowance for loan losses.
The following is a reconciliation of net income and retained earnings (as
shown in these audited financial statements) to net income and retained earnings
as presented in the Office of Thrift Supervision quarterly reports:
<TABLE>
<CAPTION>
September 30, 1993 September 30, 1992
------------------------- -------------------------
Twelve Twelve
Months Ended Balance Months Ended Balance
------------ ------- ------------ -------
Retained Retained
Net Income Earnings Net Income Earnings
------------ -------- ------------ --------
(in thousands)
<S> <C> <C> <C> <C>
Balances on regulatory reports $3,203 $19,067 $2,208 $15,864
Add (deduct) audit adjustments for:
Income (loss) of parent (48) (7) 41 41
Other activity -0- (1,712) 94 -0-
------ ------- ------ -------
Balances on accompanying consolidated
financial statements $3,155 $17,348 $2,343 $15,905
====== ======= ====== =======
</TABLE>
Other activity for the year ended September 30, 1993 consists of dividends
declared of approximately $1,621,000 and the effect of treasury stock reissued
at approximately $91,000 less than the purchase price.
- --------------------------------------------------------------------------------
Note K--Commitments
In the normal course of business, there are various outstanding commitments
and contingent liabilities, such as commitments to extend credit. These
commitments involve, to varying degrees, elements of credit risk in excess of
amounts recognized in the balance sheets.
Loan commitments are made to accommodate the financial needs of the Savings
Bank's customers.
These arrangements have credit risk essentially the same as that involved
in extending loans to customers and are subject to the Savings Bank's normal
credit policies and loan underwriting standards. Collateral is obtained based on
management's credit assessment of the customer. Management currently expects no
loss from these activities.
F-53
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
The Savings Bank's maximum exposure to credit loss for loan commitments
(unfunded loans) outstanding at September 30, 1993 and 1992, was $3,330,720 and
$1,272,000, respectively. Commitments for fixed rate loans totaled $2,741,720
and $773,000 at September 30, 1993 and 1992, respectively, with rates ranging
from 6.5% to 12%. The Savings Bank had outstanding commitments at September 30,
1993 and 1992 of $-0- and $324,000, respectively to purchase investment
securities.
Lease commitments: Annual rentals under long-term monthly operating leases
for property amounted to $22,800 in 1993, 1992 and 1991. At September 30, 1993,
the minimum rental commitment, including any current renewal options under
existing leases with initial or remaining terms of more than one year was as
follows:
<TABLE>
<CAPTION>
Years Ending Gross Rental
September 30 Expense
------------ -----------
<S> <C>
1994 $ 23,900
1995 24,000
1996 24,000
1997 13,900
1998 10,800
Remaining term 1,800
--------
TOTAL COMMITMENT $ 98,400
========
</TABLE>
- --------------------------------------------------------------------------------
Note L--Pension, Retirement and Benefit Plans
On August 9, 1991, the Savings Bank elected to terminate its previously
existing defined benefit pension plan. Under Statement of Financial Accounting
Standards No. 88 (SFAS 88), "Employer's Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits", a
termination of a defined benefit plan is considered both a settlement (an
irrevocable transaction relieving an employer of the responsibility for a
pension benefit obligation) and a curtailment (elimination for employees of the
accrual of defined benefits for future service). All balances in the plan as of
September 30, 1991, which were determined by actuaries to equal $845,627 vested
in the plan participants in relation to their respective present values
determined at a weighted average discount rate and long-term rate of return on
plan assets of 7.5% in the plan as of the termination date. Therefore, there was
no settlement or curtailment gain or loss associated with the termination. The
plan trust continued to hold the plan assets until distribution of $861,351 on
January 20, 1992. By definition, the accumulated benefit obligation is the value
of the assets. Pension expense for 1991 totaled $31,377.
On June 25, 1991, the Savings Bank adopted a 401(k) retirement plan,
whereby the employees may elect to make pre-tax contributions through a salary
reduction of up to 10% of their monthly salary. The Savings Bank may match
dollar for dollar up to 5% of employees' monthly salary reduction or make
elective contributions to the Plan. The Savings Bank's contributions to the Plan
were $29,047, $22,786 and $1,770 for the years ended September 30, 1993, 1992
and 1991, respectively.
On January 23, 1992, the Board of Directors of the Savings Bank adopted the
Reliable Savings Bank, PaSA Recognition and Retention Plan ("RRP") as a method
of providing officers and key employees with a proprietary interest in Reliable
Financial Corporation. All employees of the Savings Bank and its affiliates are
eligible to receive awards from the plan. The standard vesting rate of an award
is 20% per year commencing one year from the date of the award.
In August, 1992 an award under the RRP was granted to President Stephen
Grippi, representing 6,000 shares which were purchased at $17.50 per share.
Vesting under this award is 33 1/3% over three years. Amortization, on a
straight line basis over three (3) years, of this award for the years
F-54
<PAGE>
ended September 30, 1993 and 1992 totaled $49,500 and $3,500, respectively.
During the year ended September 30, 1993, 2,000 shares had vested.
On January 14, 1992, the Board of Directors of Reliable Financial adopted
Reliable Financial Corporation 1992 Incentive Stock Option Plan (the "Option
Plan") and the Reliable Financial Corporation 1992 Stock Option Plan for
Nonemployee Directors (the "Directors' Plan"). Under the Option Plan, options
may only be granted to officers and other key employees. The Option Plan is
designed to encourage the continued employment of these employees and to attract
new employees by facilitating their purchase of a stock interest in Reliable
Financial. Options granted under the Option Plan may include both incentive
stock options ("ISOs") within the meaning of Section 422A of the Internal
Revenue Code and nonstatutory stock options ("Nonstatutory Options").
The Pension Committee will, from time to time, select employees to whom
Options are to be granted and the number of Options to be granted based upon the
employee's performance, compensation and the nature of his responsibilities,
duties and functions.
Pursuant to the Option Plan, up to 109,518 shares of Reliable Financial
common stock may be issued or transferred for the exercise of options to
purchase shares of common stock.
The Committee will determine the dates on which each Option will become
exercisable. Each ISO will continue to be exercisable over a maximum period of
ten years from the date granted, and each Nonstatutory Option will be
exercisable over a period of ten years and one day from the date granted.
Under circumstances set forth in the Option Plan, all or a portion of the
Options may be exercised for specified periods following termination of
employment. An Option may not be transferred by an optionee during his or her
lifetime. The exercise price per share of Common Stock covered by an Option
shall be the fair market value of Common Stock on the date of grant. The
shares purchased upon exercise of an Option are to be paid for in cash or
through the delivery of previously-acquired shares of Common Stock or in a
combination of cash and such shares.
The Pension Committee, with shareholder ratification, has granted to
President Grippi options under the Option Plan to purchase 12,000 shares of
stock. One-third of these options were exercised on the first anniversary date
of the conversion.
The Directors' Plan is designed to promote the growth and profitability of
Reliable Financial and the Savings Bank and to provide non-employee directors
with an incentive to assume the significant duties and responsibilities entailed
therewith. Benefits under the Directors' Plan are granted to non-employee
directors, a group currently consisting of 4 people. Pursuant to the Directors'
Plan, up to 36,506 shares of the common stock of Reliable may be issued or
transferred pursuant to the exercise of options to purchase shares of common
stock ("Directors' Options"). Directors' Options may only be granted to members
of Reliable's Board of Directors who are not employees of Reliable, the Savings
Bank or any other subsidiary or affiliate thereof on the date the Directors'
Options are granted. Directors' Options granted under the Directors' Plan are
nonstatutory stock options.
The Directors' Plan provides that each of the 4 non-employee directors
serving at the consummation of the conversion of the Savings Bank from mutual to
stock form receive options to purchase 5,500 shares of Reliable common stock.
New directors, subsequently elected, also receive the option to purchase 5,500
shares, to the extent shares remain available under the Directors' Plan. The
exercise price of the outstanding Directors' Options is $10.00 per share, which
was the fair market value of Reliable's common stock on the date of grant. No
Directors' Option may be exercised after the expiration of ten years and one day
from the date of grant of such option. One-third of these Directors' Options
were exercised on the first anniversary of the date of grant.
F-55
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Note M--Reliable Financial Corporation
Reliable Financial Corporation was formed on November 7, 1991 to acquire
100% of the common stock of Reliable Savings Bank, PaSA as a result of the
Savings Bank's conversion from mutual to stock form. Prior to March 30, 1992,
Reliable Financial Corporation had no significant assets. Reliable Financial
Corporation currently has no independent business operations. Certain items
previously reported in the prior years' financial statements have been
reclassified to conform with the current year's classifications. These
reclassifications have no effect on the consolidated net income.
The condensed financial information for Reliable Financial Corporation as
of and for the years ended September 30, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS
1993 1992
------------ -----------
<S> <C> <C>
ASSETS
Interest-bearing deposits $ 4,416,208 $ 7,134,702
Investment in Reliable Savings Bank 11,830,791 8,627,252
Prepaid taxes 839 42,572
----------- -----------
$16,247,838 $15,804,526
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dividends Payable $ 489,602 $ 292,048
Accrued expenses 27,212 8,148
----------- -----------
516,814 300,196
Stockholders' Equity
Common stock, par value $0.01 per share, 4,000,000 shares authorized,
1,460,242 shares issued and outstanding 14,602 14,602
Additional paid-in capital 13,657,743 13,657,743
Retained earnings 3,275,153 1,831,985
Treasury stock, at cost (1,216,474) -0-
----------- -----------
15,731,024 15,504,330
----------- -----------
$16,247,838 $15,804,526
=========== ===========
STATEMENTS OF INCOME
Interest and other operating income $ 159,708 $ 108,733
Dividends from Reliable Savings Bank -0- 511,086
----------- ------------
159,708 619,819
EXPENSES
Operating expenses 208,344 16,586
----------- ------------
INCOME (LOSS) BEFORE TAXES (48,636) 603,233
PROVISION FOR INCOME TAXES -0- 51,243
----------- ------------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY (48,636) 551,990
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 3,203,539 1,791,080
----------- -----------
NET INCOME $ 3,154,903 $ 2,343,070
=========== ===========
</TABLE>
F-56
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1993 1992
--------------- ---------------
<S> <C> <C>
Net income $ 3,154,903 $ 2,343,070
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase (decrease) in cash due to changes in assets and liabilities:
Equity in undistributed earnings of subsidiary (3,203,539) (1,791,080)
Prepaid taxes 41,732 (42,572)
Accrued expenses 19,064 8,148
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,160 517,566
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Reliable Savings Bank stock -0- (6,836,171)
--------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES -0- (6,836,171)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net -0- 13,672,345
Purchase of treasury stock (1,420,240) -0-
Proceeds from reissuance of treasury stock 113,320 -0-
Dividends paid (1,423,734) (219,038)
--------------- ---------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,730,654) 13,453,307
--------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,718,494) 7,134,702
Cash and cash equivalents at beginning of year 7,134,702 -0-
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,416,208 $ 7,134,702
=============== ===============
</TABLE>
- --------------------------------------------------------------------------------
Note N--Supplemental Information
The following condensed statement summarizes the financial position of the
Savings Bank's wholly-owned subsidiary, Reliable Savings Service Corporation,
which has been consolidated with the financial statements of Reliable Savings
Bank, PaSA at September 30, 1992 (immediately prior to liquidation). Under the
authority of the Board of Directors of the Savings Bank, liquidation of the
service corporation was approved as of September 30, 1992.
The statement is presented as supplemental information only and is not
necessary for the fair presentation of the consolidated financial statements.
RELIABLE SAVINGS SERVICE CORPORATION
CONDENSED BALANCE SHEET
September 30, 1992 (immediately prior to liquidation)
<TABLE>
<C> <S>
ASSETS
Cash in bank $ -0-
Receivable--Parent 5,764
-----------
$ 5,764
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Common stock $ 21,000
Additional paid-in capital 40,000
Retained earnings (deficit) (55,236)
-----------
$ 5,764
===========
</TABLE>
F-57
<PAGE>
Reliable Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
Note O--Related-Party Transactions
Certain officers and directors and their affiliates of Reliable Savings
Bank, PaSA were indebted to the Savings Bank at September 30, 1993 and 1992.
Related party loans are made on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated persons and generally do
not involve more than normal risk of collectibility. The aggregate dollar amount
of these loans (exclusive of loans to any such person which in the aggregate do
not exceed $60,000 at September 30, 1993) was $706,387 and $726,979 at September
30, 1993 and 1992, respectively. During the year ended September 30, 1993 and
1992, $67,000 and $87,900 of new loans were made to related parties and
repayments by any such person(s) totaled $87,592 and $90,336, respectively.
- --------------------------------------------------------------------------------
Note P--Conversion
On March 16, 1992, the members of the Savings Bank formally approved the
Plan of Conversion under which the Savings Bank converted from a
Pennsylvania-chartered mutual savings and loan association to a
Pennsylvania-chartered permanent reserve fund capital stock savings and loan
association. Included in the Plan of Conversion was the formation of a holding
company, Reliable Financial Corporation, which owns all of the common stock of
Reliable Savings Bank, PaSA, as its wholly-owned subsidiary. The conversion was
consummated on March 30, 1992.
- --------------------------------------------------------------------------------
Note Q--Accounting Standards
In addition to SFAS 109, as previously discussed in Note I, certain other
recent accounting standards relating to the Corporation have been promulgated by
the Financial Accounting Standards Board. Statement of Financial Accounting
Standards No. 107 requires entities to disclose the fair value of "Financial
Instruments" for which it is practicable to estimate fair value, with certain
exceptions. Statement of Financial Accounting Standards No. 114 addresses the
accounting by creditors for impairment of certain loans. Statement of Financial
Accounting Standards No. 115 relates to accounting for certain investments in
debt and equity securities.
The Corporation is not currently required to and has elected not to adopt
early implementation of any of these standards. The impact of such adoption was
not determined at this time.
F-58
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1994 1993
---------- -------------
<S> <C> <C>
Cash $ 748 $ 1,029
Interest-bearing deposits in other institutions 15,530 20,587
-------- --------
Cash and Cash Equivalents 16,278 21,616
FHLMC stock available for sale (market value 717 -
of $5,143 at June 30, 1994)
Investment securities, at cost (market value 38,386 30,718
of $37,210 and $35,586)
Mortgage-backed securities, at cost (market value 5,049 5,930
of $4,938 and $6,117)
Federal Home Loan Bank stock, at cost 848 922
Loans 87,568 85,255
Allowance for possible loan losses (850) (700)
Accrued interest receivable 419 348
Premises and equipment, net 2,456 2,553
Other assets 484 141
-------- --------
$151,355 $146,783
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts $116,415 $114,619
Accrued interest payable 555 829
Advances from borrowers for taxes and insurance 2,164 707
Other liabilities 1,504 824
-------- --------
120,638 116,979
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 4,000,000 shares 15 15
authorized; 1,460,242 shares issued;
1,410,194 and 1,398,862 shares outstanding
Additional paid-in capital 13,657 13,657
Retained earnings - substantially restricted 18,043 17,348
-------- --------
31,715 31,020
Less: Treasury stock, at cost 998 1,216
-------- --------
30,717 29,804
-------- --------
$151,355 $146,783
======== ========
</TABLE>
See notes to consolidated financial statements.
F-59
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share data)
- --------------------------------------------------------------------------------
Three Months Nine Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
INTEREST INCOME
Loans $ 1,674 $ 2,033 $ 5,273 $ 6,126
Interest-bearing deposits in
other institutions 103 188 299 610
FHLMC stock available for sale 33 29 84 86
Investment securities 576 436 1,599 1,162
Mortgage-backed securities 76 76 235 146
Dividends 46 47 126 146
---------- ---------- ---------- ----------
2,508 2,809 7,616 8,276
INTEREST EXPENSE
Deposit accounts 1,032 1,110 3,124 3,420
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,476 1,699 4,492 4,856
PROVISION FOR POSSIBLE LOAN
LOSSES 50 50 150 150
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE
LOAN LOSSES 1,426 1,649 4,342 4,706
NON-INTEREST INCOME
Net gain on sales of FHLMC stock 1,308 215 1,542 698
Net gain on real estate owned - 42 - 37
Other 77 86 266 231
---------- ---------- ---------- ----------
2,811 1,992 6,150 5,672
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE
Compensation 233 219 677 639
Employee benefits 47 45 138 136
Occupancy expense 84 78 240 226
Deposit insurance 66 52 200 169
Data processing 85 85 246 256
Other 484 146 803 451
---------- ---------- ---------- ----------
999 625 2,304 1,877
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT ON PRIOR
YEARS OF CHANGE IN TAX
ACCOUNTING METHOD 1,812 1,367 3,846 3,795
PROVISION FOR INCOME TAXES 906 479 1,723 1,431
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT
ON PRIOR YEARS OF CHANGE IN
TAX ACCOUNTING METHOD 906 888 2,123 2,364
CUMULATIVE EFFECT ON PRIOR YEARS
OF CHANGE IN TAX ACCOUNTING
METHOD - - 365 -
---------- ---------- ---------- ----------
NET INCOME $ 906 $ 888 $ 2,488 $ 2,364
========== ========== ========== ==========
PER SHARE DATA (BASED ON AVERAGE
SHARES OUTSTANDING)
Income before cumulative effect
of change in tax accounting
method $ 0.46 $ 0.63 $ 1.50 $ 1.65
---------- ---------- ---------- ----------
Cumulative effect of change in
tax accounting method - - 0.26 -
---------- ---------- ---------- ----------
Net income $ 0.64 $ 0.63 $ 1.76 $ 1.65
========== ========== ========== ==========
Cash dividends declared $ 0.40 $ 0.30 $ 1.20 $ 0.80
========== ========== ========== ==========
Weighted average shares
outstanding 1,417,043 1,411,584 1,414,268 1,428,712
========== ========== ========== ==========
See notes to consolidated financial statements.
F-60
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1994 AND 1993
(Unaudited)
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Additional Retained Treasury Total
stock Paid-In Capital Earnings Stock
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1992 $15 $13,657 $15,905 $-0- $29,577
Net Income -0- -0- 2,364 -0- 2,364
Treasury stock (purchased -0- -0- -0- (1,420) (1,420)
72,712 shares)
Treasury stock (reissued -0- -0- (91) 204 113
11,332 shares)
Dividends declared -0- 0- (1,131) -0- (1,131)
--- ------- ------- ------- -------
Balance at June 30, 1993 $15 $13,657 $17,047 $(1,216) $29,503
=== ======= ======= ======= =======
- ---------------------------
Balance at September 30, 1993 $15 $13,657 $17,348 $(1,216) $29,804
Net Income -0- -0- 2,488 -0- 2,488
Treasury stock (reissued -0- -0- (105) 218 113
11,332 shares)
Dividends declared -0- -0- (1,688) -0- (1,688)
--- ------- ------- ----- -------
Balance at June 30, 1994 $15 $13,657 $18,043 $(998) $30,717
=== ======= ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
F-61
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1994 AND 1993
(Unaudited)
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,488 $ 2,364
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 104 102
Net accretion of discounts on
investment securities (10) (5)
Gain on sales of FHLMC stock (1,542) (698)
Net gain on sale of real estate owned - (46)
Unamortized loan fees (145) (336)
Deferred income taxes (370) -
Provision for possible loan losses 150 150
Increase (decrease) in cash due to
changes in assets and liabilities:
Accrued interest receivable (71) (108)
Other assets 27 100
Accrued interest payable (274) (322)
Other liabilities (680) 74
------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,037 1,275
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed
securities - (5,977)
Purchases of investment securities (12,628) (17,530)
Proceeds from sales of FHLMC stock 1,796 1,247
Proceeds from redemptions and
maturities of investment securities 4,000 -
Proceeds from redemption of FHLB stock 74 179
Proceeds from sale of real estate owned 819
Net (increase) decrease in loans (2,250) 13,542
Principal payments on mortgage-backed
securities 881 -
Premises and equipment expenditures - (50)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (8,127) (770)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 1,796 1,767
Net increase in advances from
borrowers for taxes and insurance 1,456 1,446
Purchase of treasury stock - (1,420)
Proceeds from sale of treasury stock 113 113
Dividends paid (1,613) (1,004)
------- -------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,752 902
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,338) (5,593)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 21,616 34,718
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $16,278 $29,125
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid on deposits $ 3,398 $ 3,741
Income taxes paid $ 1,348 $ 1,315
Loans transferred to real estate owned $ - $ 1,138
Investment securities transferred to
FHLMC stock available for sale $ 928 $ -
</TABLE>
See notes to consolidated financial statements.
F-62
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1994 AND 1993
- -------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three- and nine-month periods ended
June 30, 1994, are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30,
1994. The interim consolidated financial statements and the
following discussion should be read in conjunction with the
consolidated financial statements and footnotes thereto included
in the Corporation's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993.
NOTE 2. EARNINGS PER SHARE
Earnings per common share are based on the weighted average
number of common shares outstanding and common share equivalents
in each period. Weighted average shares outstanding include
common share equivalents under the available stock option
plans.
NOTE 3. FHLMC STOCK AVAILABLE FOR SALE
Investment securities to be held for indefinite periods of time
including investment securities that management intends to use
as part of its asset/liability strategy, and that may be sold in
response to changes in interest rates, changes in prepayment
risk, or other similar factors are classified as available for
sale and are recorded at the lower of aggregate cost or market.
Specifically, management has classified only the FHLMC stock as
available for sale.
NOTE 4. INVESTMENT SECURITIES
Investments in debt securities which management has the ability
and intent to hold to maturity or on a long-term basis are
carried at cost. Premiums and discounts are amortized to expense
and accreted to income over the life of the securities using a
method which approximates the level yield method. Gain or loss
on the sale of investment securities, if any, are based on the
specific identification method.
F-63
<PAGE>
RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NINE MONTHS ENDED JUNE 30, 1994 AND 1993
- --------------------------------------------------------------------------------
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement No. 114 "Accounting by Creditors for the Impairment of a
Loan" which effective for fiscal years beginning after December 15,
1994. Statement No. 114 addresses the methods to be used by a creditor
to measure the impairment of a loan and the proper recognition of a
change in the value of an impaired loan. Management believes that the
effect of adopting this statement on Reliable's consolidated financial
statements would not be material.
Also in May 1993, the FASB issued Statement No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" which is effective
for fiscal years beginning after December 15, 1993. Statement No 115
addresses the definition of, accounting for and disclosure of debt and
equity securities. In accordance with this statement, securities will
be classified into and accounted for based on three distinct
categories: securities held to maturity, securities available for sale
and trading securities. Management is currently evaluating the impact
of this statement on Reliable's consolidated financial statements.
NOTE 6. RECLASSIFICATIONS
Certain items previously reported in the September 30, 1993
consolidated financial statements have been reclassified to conform
with the current quarter's classifications. These reclassifications
have no effect on net income.
NOTE 7. PENDING MERGER TRANSACTION
On April 21, 1994, the registrant entered into a definitive agreement
to be acquired by First Commonwealth Financial Corporation ("FCFC") of
Indiana, Pennsylvania. FCFC was incorporated in Pennsylvania in 1982
and is registered as a bank holding company which is currently
affiliated with 7 wholly owned bank subsidiaries. In addition, FCFC
owns a data processing subsidiary and a trust company subsidiary both
headquartered in Indiana, Pennsylvania an FCFC also has joint venture
interest in a credit life insurance company. Through its subsidiary
banking network, FCFC traces its banking origins to 1880 and conducts
its business through 69 community banking offices in 51 communities
throughout 14 countries of central and western Pennsylvania. FCFC has
total assets of approximately $2 billion and employs over 900 persons.
The share of FCFC are traded on New York Stock Exchange under the
symbol "FCF".
The agreement provides for the issuance of 1.6 shares of FCFC's common
stock for each share of the registrant's common stock. It is
anticipated that the acquisition will be accounted for as a pooling of
interests.
F-64
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION made as of April 21, 1994 (the
"Agreement") by FIRST COMMONWEALTH FINANCIAL CORPORATION, a Pennsylvania
business corporation having its principal place of business at Old Courthouse
Square, 22 North Sixth Street, Indiana, Pennsylvania ("FCFC"), and RELIABLE
FINANCIAL CORPORATION, a Delaware corporation having its principal place of
business at 428 Station Street, Bridgeville, Pennsylvania ("Reliable").
W I T N E S S E T H:
FCFC is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"); Reliable is a
savings and loan holding company registered under the Savings and Loan Holding
Company Act, as amended (the "Savings and Loan Holding Company Act"); and the
Boards of Directors of FCFC and Reliable have determined that it is in the best
interests of FCFC and Reliable to become affiliated by means of a merger of
Reliable into a new Pennsylvania business corporation to be created by FCFC for
the purposes of the merger and to be called Interim Reliable, Inc. ("Interim
Reliable"), in which Interim Reliable will become a wholly-owned subsidiary of
FCFC and the shareholders of Reliable will become shareholders of FCFC.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements herein contained and each intending to be legally bound
hereby, covenant and agree as follows:
1. The Reorganization. The reorganization contemplated by this
------------------
Agreement is the merger of Reliable into Interim Reliable (the "Merger")
pursuant to the Plan of Merger substantially in the form attached hereto as
Appendix A (the "Plan of Merger"). As provided in the Plan of Merger, on the
Effective Date (as defined in Section 8(g) hereof) Reliable will be merged into
Interim Reliable, which will be the surviving corporation; each share of Common
Stock, par value $.01 per share, of Reliable (the "Reliable Stock") outstanding
immediately before the Merger becomes effective will be converted into 1.6
shares of Common Stock, par value $1 per share, of FCFC (the "FCFC Stock").
2. Conditions. This Agreement and the consummation of the Merger are
----------
subject to the fulfillment at or before the Closing (as defined in Section 8(a)
hereof) of the following conditions:
(a) Shareholder Approvals. This Agreement and the Plan of Merger
---------------------
shall have been approved by the affirmative votes of the holders of at
least a majority of the issued and outstanding shares of Reliable Stock
A-I-1
<PAGE>
entitled to vote at the Reliable Shareholders' Meeting referred to in
Section 6(b) hereof.
(b) Regulatory Approvals. The Merger shall have been approved by the
--------------------
Pennsylvania Department of Banking under the Pennsylvania Banking Code of
1965, as amended (the "Pennsylvania Banking Code") and the Pennsylvania
Savings Association Code of 1967, as amended (the "Pennsylvania Savings
Association Code"); the Merger shall have been approved by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") under
the Bank Holding Company Act; the Merger shall have been approved by the
Office of Thrift Supervision ("OTS") under the Savings and Loan Holding
Company Act, and any other regulatory approvals necessary to the formation
of Interim Reliable and the consummation of the Merger shall have been
obtained. No action or suit to enjoin or prohibit the Merger shall have
been filed by the United States under the antitrust laws in the periods of
30 days following the dates of the approvals by the Federal Reserve Board
and the OTS.
(c) Federal Tax Opinion. FCFC and Reliable shall have received from
-------------------
Reed Smith Shaw & McClay, special counsel for FCFC and Reliable, an opinion
in form and substance satisfactory to the parties and their respective
counsel to the effect that:
(i) The Merger will constitute a reorganization under the
provisions of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal
Revenue Code of 1986 (the "Code");
(ii) No gain or loss will be recognized to Reliable, Interim
Reliable or FCFC as a result of the Merger;
(iii) No gain or loss will be recognized to the Reliable
shareholders upon the exchange of Reliable Stock for FCFC Stock
(including fractional share interests to which they may be entitled);
(iv) The basis of the FCFC Stock (including fractional share
interests to which they may be entitled) to be received by the
Reliable shareholders will be the same as the basis of the Reliable
Stock surrendered in exchange therefor;
(v) The holding period of the FCFC Stock (including fractional
share interests to which they may be entitled) to be received by the
Reliable shareholders will include the holding period of the Reliable
Stock surrendered in exchange therefor, provided that the Reliable
A-I-2
<PAGE>
Stock was held as a capital asset in the hands of the Reliable
shareholders on the date of the exchange; and
(vi) The payment in cash in lieu of fractional share interests
of FCFC Stock will be treated for federal income tax purposes as if
the fractional shares were distributed as part of the exchange and
then were redeemed by FCFC; these cash payments will be treated as
having been received in full payment in exchange for the shares
redeemed as provided in Section 302(a) of the Code.
(d) Securities Act Registration. The Registration Statement
---------------------------
contemplated by Section 5(e) hereof shall have been filed by FCFC with the
Securities and Exchange Commission (the "SEC") under the Securities Act of
1933, as amended (the "Securities Act"), and shall have been declared
effective before the proxy statement/prospectus contained therein (the
"Proxy Statement/Prospectus") is first mailed to the Reliable shareholders,
and no stop order with respect to the effectiveness
of the Registration Statement shall have been issued or any proceeding
therefor initiated or threatened under the Securities Act. The
Registration Statement, when and as declared effective by the SEC and on
the date of the Reliable Shareholders' Meeting referred to in Section 6(b)
hereof, shall not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which
they are made, not misleading. In addition, the FCFC Stock to be issued
pursuant to the Plan of Merger shall have been duly registered or qualified
under the securities or "blue sky" laws of all states in which such action
is required for purposes of the initial issuance of such stock and its
distribution to the Reliable shareholders entitled to receive it.
(e) Investment Banking Opinion. Reliable shall have received the
--------------------------
fairness opinion of Ryan, Beck & Co., dated as of the date hereof and as of
a date no earlier than five days before the Registration Statement is first
filed with the SEC, to the effect that, as of that date, the terms of the
Merger are fair, from a financial point of view, to Reliable and its
shareholders.
(f) Representations and Warranties; Performance of Covenants. Except
---------------------------------------------- ---------
for changes approved by the other party or contemplated by this Agreement,
the representations and warranties of the parties contained herein shall be
true and correct on the Closing Date (as defined in Section 8(a) hereof) as
though made on such date, and the parties shall have performed and complied
A-I-3
<PAGE>
with their respective agreements, covenants and conditions contained herein
to be performed or complied with on or before the Closing Date.
(g) NYSE Listing. The shares of FCFC Stock issuable to the Reliable
------------
shareholders pursuant to this Agreement shall have been authorized for
listing on the New York Stock Exchange (the "NYSE") upon official notice of
issuance.
(h) Closing Requirements. All documents required to be exchanged at
--------------------
the Closing shall have been delivered.
(i) Affiliates' Agreements. FCFC shall have received from each of
----------------------
the persons identified by Reliable pursuant to Section 6(g) hereof an
executed counterpart of an affiliate's agreement in the form contemplated
by such Section which will be in full force and effect.
(j) Accountant's Opinion. FCFC shall have received from Jarrett *
--------------------
Stokes & Co., certified public accountants, an opinion in form and
substance satisfactory to FCFC and its counsel to the effect that, as of
the Closing, the Merger meets the requirements for pooling of interests
accounting treatment under generally accepted accounting principles and the
accounting rules of the SEC;
provided, however, that the requirements of paragraphs (i) and (j) shall be
conditions to the consummation of the Merger only if asserted by FCFC.
3. Representations and Warranties of FCFC. FCFC represents and
--------------------------------------
warrants to Reliable that:
(a) Organization. FCFC is a business corporation duly organized,
------------
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania and is duly registered under the Bank Holding Company Act.
FCFC has full corporate power and legal authority (including all licenses,
franchises, permits and other governmental authorizations that are legally
required) to own its assets and to transact the business in which it is
engaged and proposes to engage.
(b) Capitalization. The authorized capital stock of FCFC consists of
--------------
3,000,000 shares of Preferred Stock, par value $1 per share, none of which
has been issued, and 25,000,000 shares of Common Stock, par value $5 per
share, of which 18,642,024 shares are presently issued and outstanding.
The Board of Directors of FCFC has submitted to a vote of its shareholders
at their annual meeting to be held on April 23, 1994 a proposal to amend
its articles of incorporation to increase its authorized Common Stock to
100,000,000 shares and reduce the par value from $5 to $1 per share. If
approved by the shareholders, the amendments are expected to become
effective on or about April 26, 1994. All of such issued shares are, and
A-I-4
<PAGE>
upon consummation of the Merger and issuance thereof the shares of FCFC
Stock to be issued pursuant to the Plan of Merger will be, duly and validly
authorized and issued, fully paid and nonassessable. Other than the
provisions of this Agreement calling for the issuance of FCFC Stock, shares
of FCFC Common Stock that may be issued from time to time under FCFC's
employee stock ownership plan and except as previously disclosed in writing
to Reliable, FCFC is not a party to or bound by any option, call, warrant
or other commitment or agreement obligating FCFC at present or upon the
occurrence of any event to issue or sell any FCFC Stock or other capital
stock of FCFC.
(c) Subsidiaries. FCFC has the following subsidiaries (the
------------
"Subsidiaries"): Central Bank, a Pennsylvania-chartered bank and trust
company having its principal place of business in Hollidaysburg,
Pennsylvania; Cenwest National Bank, a national banking association having
its principal place of business in Johnstown, Pennsylvania; Deposit Bank, a
Pennsylvania-chartered bank and trust company having its principal place of
business in DuBois, Pennsylvania; First National Bank of Leechburg, a
national banking association having its principal place of business in
Leechburg, Pennsylvania; National Bank of the Commonwealth, a national
banking association having its principal place of business in Indiana,
Pennsylvania; Peoples Bank and Trust Company, a Pennsylvania-chartered bank
and trust company having its principal place of business in Jennerstown,
Pennsylvania; Peoples Bank of Western Pennsylvania, a Pennsylvania-
chartered bank having its principal place of business in New Castle,
Pennsylvania; First Commonwealth Trust Company, a Pennsylvania-chartered
trust company having its principal place of business in Indiana,
Pennsylvania and engaged in rendering general trust services; Commonwealth
Systems Corporation, a Pennsylvania business corporation having its
principal place of business in Indiana, Pennsylvania and engaged in
rendering data processing services; and Commonwealth Trust Credit Life
Insurance Company, an Arizona insurance corporation having its principal
place of business in Phoenix, Arizona ("Commonwealth Trust") and engaged as
a reinsurer of credit life and credit accident and health insurance. Each
Subsidiary has full corporate power and legal authority (including all
licenses, franchises, permits and other governmental authorizations that
are legally required) to own its assets and to transact the business in
which it is engaged and proposes to engage. FCFC owns all the issued and
outstanding shares of capital stock of its Subsidiaries free and clear of
any liens, security interests or other encumbrances, except for
Commonwealth Trust which is 50% owned. FCFC has no other direct or
indirect subsidiaries.
A-I-5
<PAGE>
(d) Corporate Authority; Absence of Violation. The Board of
-----------------------------------------
Directors of FCFC has authorized the execution, delivery and performance of
this Agreement and the Plan of Merger and no approval of the FCFC
shareholders is required therefor, FCFC has the full power, authority and
legal right to enter into this Agreement, this Agreement has been duly and
validly executed and delivered by FCFC and this Agreement constitutes a
valid and binding obligation of FCFC enforceable in accordance with its
terms except to the extent enforcement is limited by bankruptcy, insolvency
or other similar laws of general application affecting creditors' rights or
by the application by a court of equitable principles. Neither the
execution or delivery hereof, the consummation of the Merger nor compliance
by FCFC with any of the provisions of this Agreement will violate any
provision of the Articles of Incorporation or By-Laws of FCFC or any of its
Subsidiaries or conflict with or result in a material breach of or material
default under any material agreement, obligation or instrument to which
FCFC or any of its Subsidiaries is a party or by which any is bound, or
violate any order or decree of any court or any statute, rule or regulation
applicable to FCFC or any of its Subsidiaries or the properties or assets
of any of them.
(e) Financial Statements. FCFC has delivered to Reliable FCFC's
--------------------
Annual Reports on Form 10-K for 1989, 1990, 1991, 1992 and 1993 and Annual
Reports to Shareholders for 1989, 1990, 1991, 1992 and 1993, containing
consolidated balance sheets of FCFC at December 31, 1989, 1990, 1991, 1992
and 1993 and consolidated statements of income, changes in shareholders'
equity and cash flows of FCFC for each of the five years in the period
ended December 31, 1993, all audited by Jarrett * Stokes & Co. (or its
predecessor Jarrett & Co.), certified public accountants. All such
financial statements (including the related notes and schedules) have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis and present fairly, in all material respects,
the consolidated financial position of FCFC and its wholly-owned
Subsidiaries and the consolidated results of their operations and cash
flows at their respective dates and for the respective periods then ended.
(f) Absence of Undisclosed Liabilities. Except as reflected or
----------------------------------
reserved against in FCFC's December 31, 1993 consolidated balance sheet and
except as previously disclosed in writing to Reliable, as of December 31,
1993 there was no liability or obligation of FCFC or any of its
Subsidiaries of any nature, due or to become due, absolute, contingent or
otherwise, including liability for or in respect of taxes, required to be
reflected or reserved against therein by generally accepted accounting
principles.
A-I-6
<PAGE>
(g) Absence of Certain Changes. Except as previously disclosed in
--------------------------
writing to Reliable, since December 31, 1993 there has not been:
(i) any material change in the condition, financial or
otherwise, or in the assets, liabilities or business of FCFC or any of
its Subsidiaries, other than changes in the ordinary course of
business which do not in the aggregate materially and adversely affect
the business of FCFC and its Subsidiaries;
(ii) any damage to or destruction or loss of property of FCFC or
any of its Subsidiaries (whether or not insured) which has had or may
be reasonably expected to have a material adverse effect on the
business of FCFC and its Subsidiaries; or
(iii) any sale or transfer of any assets or any cancellation of
any debts or claims of FCFC or any of its Subsidiaries except in the
ordinary course of business or any mortgage, pledge or subjection to
lien, charge or encumbrance of any kind of any material assets of any
of them other than statutory liens for obligations not yet delinquent.
(h) Taxes. The Federal income tax returns of FCFC and its
-----
Subsidiaries have either been audited by the IRS or closed by statute for
all periods ending on or before December 31, 1990. All taxes,
deficiencies, interest and penalties which are reflected as due under such
returns or which have been assessed as a result of such audits have been
paid in full, and there are no outstanding agreements to extend periods
during which additional assessments may be made. Federal income tax
returns required for all periods beginning after December 31, 1990 and all
returns in respect of all other Federal, state and local taxes of any kind
required to be filed by FCFC and its Subsidiaries have been timely filed,
and all taxes, interest and penalties due in respect of such periods have
been paid. To the best of FCFC's knowledge there is no proposed
deficiency, assessment, penalty or delinquency with respect to any of such
returns or any of the taxes reflected as due and payable thereby.
(i) Properties. Except as previously disclosed in writing to
----------
Reliable, FCFC and its Subsidiaries have good and marketable title to all
of their real estate and assets (including those reflected in FCFC's
December 31, 1993 consolidated balance sheet except such as have been
disposed of in the ordinary course of business) free of any mortgage,
encumbrance, lien or security interest, except pledges of assets to secure
public deposits and minor imperfections in title and encumbrances which do
not materially detract from the value or impair the use of the properties
A-I-7
<PAGE>
affected thereby. All material leases under which FCFC or any of its
Subsidiaries leases real or personal property, as lessee, are valid and
effective in accordance with their terms, and there is no material existing
default by FCFC or any of its Subsidiaries under such leases or any event
which with notice or the lapse of time or both would constitute such a
material default.
(j) Compliance with Laws. To the best of FCFC's knowledge, FCFC and
--------------------
its Subsidiaries are in substantial compliance with all laws, rules,
regulations and other legal requirements applicable to them.
(k) Litigation and Administrative Proceedings. Except as previously
-----------------------------------------
disclosed in writing to Reliable, there is no action, suit, arbitration or
administrative proceeding or investigation to which FCFC or any of its
Subsidiaries is or may be a party or subject which is pending, or to FCFC's
knowledge threatened, in which there could be a judgment, order, decree,
liability, fine, penalty, injunction or cease-and-desist order which would
have a material adverse effect on its condition, financial or otherwise, or
the conduct of its business.
(l) Employee Benefit Plans. All retirement and employee benefit or
----------------------
welfare plans of FCFC or its Subsidiaries have been maintained and operated
in accordance with their terms, and all such plans which are subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), have
been maintained and operated in material compliance with all applicable
provisions of ERISA and the regulations thereunder and are not subject to
any accumulated funding deficiency within the meaning of ERISA and the
regulations thereunder or to any outstanding liability to the Pension
Benefit Guaranty Corporation. No "prohibited transaction" has occurred and
is continuing with respect to any such plan, nor has any "reportable event"
occurred with respect thereof, as such terms are defined in ERISA and the
regulations thereunder, and no such plan is a "Multiemployer Plan" or a
"Multiple Employer Plan", as such terms are defined in ERISA and the
regulations thereunder.
(m) Registration Statement. The Registration Statement will not
----------------------
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are
made, not misleading at the time the Registration Statement is declared
effective by the SEC, at the time the Proxy Statement/Prospectus is
distributed to the Reliable shareholders or at the time of the Reliable
Shareholders' Meeting, except that no representation or warranty is made
A-I-8
<PAGE>
with respect to the information furnished by Reliable specifically for
inclusion therein.
4. Representations and Warranties of Reliable. Reliable represents
------------------------------------------
and warrants to FCFC that:
(a) Organization. Reliable is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware and
is duly registered under the Savings and Loan Holding Company Act.
Reliable has full corporate power and legal authority (including all
licenses, franchises, permits and other governmental authorizations that
are legally required) to own its assets and to transact the business in
which it is engaged and proposes to engage.
(b) Capitalization. The authorized capital stock of Reliable
--------------
consists of 1,000,000 shares of Preferred Stock, par value $.01 per share,
none of which has been issued, and 4,000,000 shares of Common Stock, par
value $.01 per share, of which 1,410,194 shares are presently issued and
outstanding, 50,048 shares are held as treasury shares and 11,336 shares
are covered by outstanding stock options. All of such issued shares have
been duly authorized and are duly and validly issued, fully paid and
nonassessable. Except for shares of Reliable Common Stock that may be
issued upon exercise of the foregoing stock options, Reliable is not a
party to or bound by any option, call, warrant or other commitment or
agreement obligating Reliable at present or upon the occurrence of any
event to issue or sell any Reliable Stock or other capital stock of
Reliable.
(c) Subsidiaries. Reliable has the following subsidiary (the
------------
"Subsidiary"): Reliable Savings and Loan Association of Bridgeville, PA,
trading and doing business as Reliable Savings Bank, PaSA ("Reliable
Savings Bank"). Reliable Savings Bank is a permanent reserve fund stock
savings and loan association duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania having its
principal place of business in Bridgeville, Pennsylvania; it is duly
authorized to engage in the savings and loan business as an insured savings
and loan association under the Federal Deposit Insurance Act, as amended;
it is a member in good standing of the Federal Home Loan Bank of
Pittsburgh; and all eligible accounts of depositors issued by Reliable
Savings Bank are insured by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation (the "FDIC") to the fullest extent
permitted by law. The Subsidiary has full corporate power and legal
authority (including all licenses, franchises, permits and other
governmental authorizations that are legally required) to own its assets
and to transact the business in which it is engaged and proposes to engage.
A-I-9
<PAGE>
Reliable owns all the issued and outstanding shares of capital stock of its
Subsidiary free and clear of any liens, security interests or other
encumbrances. Reliable has no other direct or indirect subsidiaries.
(d) Corporate Authority; Absence of Violation. The Board of
-----------------------------------------
Directors of Reliable has authorized the execution and delivery of this
Agreement and the Plan of Merger, has directed or will direct that this
Agreement and the Plan of Merger be submitted to the Reliable shareholders
for their approval and, subject to such approval, has authorized the
performance of this Agreement and the Plan of Merger and the consummation
of the Merger. Reliable has the full power, authority and legal right to
enter into this Agreement and the Plan of Merger, this Agreement has been
duly and validly executed and delivered by Reliable and this Agreement
constitutes and the Plan of Merger when executed and delivered by Reliable
as herein provided will constitute, a valid and binding obligation of
Reliable enforceable in accordance with its terms except to the extent
enforcement is limited by bankruptcy, insolvency or other similar laws of
general application affecting creditors' rights or by the application by a
court of equitable principles. Neither the execution or delivery hereof or
of the Plan of Merger, the consummation of the Merger nor compliance by
Reliable with any of the provisions of this Agreement or the Plan of Merger
will violate any provision of the Articles of Incorporation or By-Laws of
Reliable or its Subsidiary or conflict with or result in a material breach
of or material default under any material agreement, obligation or
instrument to which Reliable or its Subsidiary is a party or by which any
is bound, or violate any order or decree of any court or any statute, rule
or regulation applicable to Reliable or its Subsidiary or the properties or
assets of any of them.
(e) Financial Statements. Reliable has delivered to FCFC (i)
--------------------
Auditors' Reports for the years ended September 30, 1989, 1990 and 1991,
containing consolidated balance sheets of Reliable at September 30, 1989,
1990 and 1991 and consolidated statements of income and retained earnings
and cash flows of Reliable for each of the three years in the period ended
September 30, 1991, all audited by Edwards Leap & Sauer, certified public
accountants, (ii) Reliable's Annual Reports on Form 10-K for the fiscal
years ended September 30, 1992 and 1993 and Annual Reports to Stockholders
for the fiscal years ended September 30, 1992 and 1993, containing
consolidated balance sheets of Reliable at September 30, 1992 and 1993 and
consolidated statements of income, changes in stockholders' equity and
cash flows of Reliable for each of the two years in the period ended
September 30, 1993, all audited by Edwards Leap & Sauer, certified public
accountants, and (iii) Reliable's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1993, containing a consolidated balance sheet
A-I-10
<PAGE>
of Reliable at December 31, 1993 and consolidated statements of income,
changes in stockholders' equity and cash flows for the three-month periods
ended December 31, 1992 and 1993, all unaudited. All of such financial
statements (including the related notes and schedules) have been prepared
in conformity with generally accepted accounting principles applied on a
consistent basis and present fairly, in all material respects, the
consolidated financial position of Reliable and its Subsidiary and the
consolidated results of their operations and cash flows at their
respective dates and for the respective periods then ended.
The total equity capital of Reliable as of December 31, 1993 was not less
than $30,175,000. In the case of the unaudited interim statements, all
normal recurring adjustments and such additional adjustments as are, in the
opinion of management, necessary for a fair statement of the results for
the interim period were made.
(f) Absence of Undisclosed Liabilities. Except as reflected or
----------------------------------
reserved against in Reliable's December 31, 1993 consolidated balance sheet
and except as previously disclosed in writing to FCFC, as of December 31,
1993 there was no liability or obligation of Reliable or its Subsidiary of
any nature, due or to become due, absolute, contingent or otherwise,
including liability for or in respect of taxes, required to be reflected or
reserved against therein by generally accepted accounting principles.
(g) Absence of Certain Changes. Except as previously disclosed in
--------------------------
writing to FCFC, since December 31, 1993 there has not been:
(i) any material change in the condition, financial or
otherwise, or in the assets, liabilities or business of Reliable or
its Subsidiary, other than changes in the ordinary course of business
which do not in the aggregate materially and adversely affect the
business of Reliable and its Subsidiary;
(ii) any damage to or destruction or loss of property of
Reliable or its Subsidiary (whether or not insured) which has had or
may have a material adverse effect on the business of Reliable and its
Subsidiary;
(iii) any sale or transfer of any assets or any cancellation of
any debts or claims of Reliable or its Subsidiary except in the
ordinary course of business or any mortgage, pledge or subjection to
lien, charge or encumbrance of any kind of any material assets of any
of them other than statutory liens for obligations not yet delinquent;
A-I-11
<PAGE>
(iv) any increase in the compensation payable or to become
payable to any of the officers, agents or employees of Reliable or its
Subsidiary or any bonus arrangement with any of them other than merit
increases in accordance with past practices, normal cost-of-living
increases, regular bonuses and normal increases related to promotions
or increased job responsibilities; or any adoption or modification of
any pension, profit sharing or other compensation plan or arrangement;
or
(v) any declaration, payment or setting aside of a dividend or
distribution in respect of Reliable Stock other than as would be
permissible under Section 7(b) hereof or any direct or indirect
purchase of any Reliable Stock.
(h) Taxes. The Federal income tax returns of Reliable and its
-----
Subsidiary have either been audited by the IRS or closed by statute for all
periods ending on or before September 30, 1989. All taxes, deficiencies,
interest and penalties which are reflected as due under such returns or
which have been assessed as a result of such audits have been paid in full,
and there are no outstanding agreements to extend periods during which
additional assessments may be made. Federal income tax returns required
for all periods beginning after September 30, 1989 and all returns in
respect of all other Federal, state and local taxes of any kind required to
be filed by Reliable and its Subsidiary have been timely filed, and all
taxes, interest and penalties due in respect thereof have been paid.
Except as previously disclosed in writing to FCFC, to the best of
Reliable's knowledge there is no proposed deficiency, assessment, penalty
or delinquency with respect to any of such returns or any of the taxes
reflected as due and payable thereby.
(i) Properties. Except as previously disclosed in writing to FCFC,
----------
Reliable and its Subsidiary have good and marketable title to all of their
real estate and assets (including those reflected in Reliable's December
31, 1993 consolidated balance sheet except such as have been disposed of in
the ordinary course of business) free of any mortgage, encumbrance, lien or
security interest, except pledges of assets to secure public deposits and
minor imperfections in title and encumbrances which do not materially
detract from the value or impair the use of the properties affected
thereby. All material leases under which Reliable or its Subsidiary leases
real or personal property, as lessee, are valid and effective in accordance
with their terms, and there is no material existing default by Reliable or
its Subsidiary under such leases or any event which with notice or the
lapse of time or both would constitute such a material default.
A-I-12
<PAGE>
(j) Employment Contracts. Except as previously disclosed in writing
--------------------
to FCFC, neither Reliable nor its Subsidiary is a party or subject to any
contract of employment not terminable at will or any profit sharing,
incentive compensation, bonus, thrift, savings or other employee benefit or
welfare plan providing for employer contributions other than the profit
sharing plan referred to in Section 4(m) hereof or group
insurance or medical plans.
(k) Compliance with Laws. To the best of Reliable's knowledge,
--------------------
Reliable and its Subsidiary are in substantial compliance with all laws,
rules, regulations and other legal requirements applicable to them.
(l) Litigation and Administrative Proceedings. Except as previously
-----------------------------------------
disclosed in writing to FCFC, there is no action, suit, arbitration or
administrative proceeding or investigation to which Reliable or its
Subsidiary is or may be a party or subject which is pending, or to
Reliable's knowledge threatened, in which there could be a judgment, order,
decree, liability, fine, penalty, injunction or cease-and-desist order
which would have a material adverse effect on its condition, financial or
otherwise, or the conduct of its business.
(m) Employee Benefit Plans. Except as previously disclosed in
----------------------
writing to FCFC, neither Reliable nor its Subsidiary has any contract or
plan providing for retirement benefits. All retirement and employee
benefit or welfare plans of Reliable or its Subsidiary have been maintained
and operated in accordance with their terms, and all such plans which are
subject to ERISA have been maintained and operated in material compliance
with all applicable provisions of ERISA and the regulations thereunder and
are not subject to any accumulated funding deficiency within the meaning of
ERISA and the regulations thereunder or to any outstanding liability to the
Pension Benefit Guaranty Corporation. No "prohibited transaction" has
occurred and is continuing with respect to any such plan, nor has any
"reportable event" occurred in respect thereof, as such terms are defined
in ERISA and the regulations thereunder, and no such plan is a
"Multiemployer Plan" or a "Multiple Employer Plan", as such terms are
defined in ERISA and the regulations thereunder.
(n) Proxy Statement/Prospectus. None of the information relating to
--------------------------
Reliable to be included in the Proxy Statement/Prospectus will contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading at
the time the Proxy Statement/Prospectus is distributed to the Reliable
shareholders or at the time of the Reliable Shareholders' Meeting, except
A-I-13
<PAGE>
that no representation or warranty is made with respect to the information
furnished by FCFC specifically for inclusion therein.
5. Covenants and Actions of FCFC Pending the Closing. Between the
-------------------------------------------------
date hereof and the Closing Date:
(a) Formation of Interim Reliable. FCFC shall cause Interim Reliable
-----------------------------
to be incorporated as a business corporation under the Pennsylvania
Business Corporation Law of 1988, as amended (the "Pennsylvania Business
Corporation Law"), and as a wholly-owned subsidiary of FCFC by filing with
the Pennsylvania Department of State Articles of Incorporation of Interim
Reliable in substantially the form attached hereto as Appendix B and by
filing with the Federal Reserve Board an application for approval of the
Merger under the Bank Holding Company Act. FCFC shall take or cause to be
taken all actions (including the payment of all fees in connection
therewith) necessary for such applications to be approved. FCFC shall
contribute to the capital, surplus and expense fund of Interim Reliable
such amounts as may be required by the Pennsylvania Department of Banking
under the Pennsylvania Banking Code to permit Interim Reliable to be
incorporated and to consummate the Merger.
(b) Plan of Merger. After Interim Reliable is incorporated and may
--------------
execute and deliver the Plan of Merger, FCFC will cause Interim Reliable to
execute and deliver the Plan of Merger and will ensure that all issued and
outstanding shares of the capital stock of Interim Reliable are voted to
approve the Merger.
(c) Proxy Statement/Prospectus. FCFC will cooperate with Reliable in
--------------------------
the preparation and filing of the Proxy Statement/Prospectus in accordance
with the requirements of the proxy rules of the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(d) Regulatory Approvals. FCFC will file an application with the
--------------------
Pennsylvania Department of Banking for its approval of the Merger under the
Pennsylvania Banking Code and the Pennsylvania Savings Association Code, an
application with the OTS for its approval of the Merger under the Savings
and Loan Holding Company Act and any other applications with any other
regulatory agencies having jurisdiction that may be necessary for the
consummation of the Merger. FCFC will take all actions necessary for such
applications to be approved and will provide Reliable with copies of all
correspondence and notices to or from such agencies concerning such
applications.
(e) Registration Statement. As soon as practicable after the date
----------------------
hereof, FCFC will prepare and file with the SEC under the Securities Act a
A-I-14
<PAGE>
registration statement on Form S-4, or other appropriate form, for the
registration of the shares of FCFC Stock to be issued pursuant to the Plan
of Merger (the "Registration Statement"), which will include a preliminary
form of the Proxy Statement/Prospectus. FCFC will not be liable for any
untrue statement of a material fact or omission to state a material fact in
the Registration Statement made in reliance upon, and in conformity with,
information furnished to FCFC by Reliable for use therein. FCFC will
provide Reliable with copies of all correspondence, comment letters or
notices to or from the SEC concerning or relating to the Registration
Statement and will advise Reliable promptly after it receives notice
thereof, of the time when the Registration Statement has become effective
or any supplement or amendment thereto has been filed, of the issuance of
any stop order with respect to the effectiveness thereof, of the suspension
of the qualification of the FCFC Stock issuable in connection with the
Merger for offering or sale in any jurisdiction, of the initiation or
threat of any proceeding for any such purpose, or of any request by the SEC
for the amendment or supplement of the Registration Statement or the filing
or submission of additional information.
(f) Stock Exchange Listing. FCFC will use all reasonable efforts to
----------------------
cause the shares of FCFC Stock to be issued in the Merger to be approved
for listing on the NYSE, subject to official notice of issuance, prior to
the Closing Date.
(g) Access to Properties and Records. Between the
--------------------------------
date of this Agreement and the Effective Date, FCFC will give Reliable and
its authorized representatives reasonable access during normal business
hours to the properties, books and records of FCFC and its Subsidiaries and
will cause their officers to furnish such additional financial and
operating data and other information as Reliable may reasonably request,
subject to the obligation of Reliable and its authorized representatives to
maintain the confidentiality of all information concerning FCFC and its
Subsidiaries furnished to Reliable or obtained by Reliable by reason of
such access, whether before or after the date of this Agreement.
(h) Notice of Actions and Proceedings. FCFC will promptly notify
---------------------------------
Reliable of any actions, claims or legal, administrative or arbitration
proceedings or investigations threatened or commenced against FCFC or its
Subsidiaries, which, if pending on the date hereof, would have been
required to be disclosed to Reliable to assure the accuracy of the
representations of FCFC contained in Section 3(k) hereof or which otherwise
relate to, or affect, the business or assets of FCFC or its Subsidiaries in
A-I-15
<PAGE>
any material respect or the consummation of the Merger and the transactions
contemplated hereby.
6. Covenants and Actions of Reliable Pending the Closing. Between the
--------------------------------------------- -------
date hereof and the Closing Date:
(a) Plan of Merger. After Interim Reliable is incorporated and may
--------------
execute and deliver the Plan of Merger, Reliable will execute and deliver
the Plan of Merger.
(b) Shareholders' Meeting. Reliable will take appropriate action to
---------------------
call a meeting of its shareholders (the "Reliable Shareholders' Meeting"),
to be held not more than 45 days following the effective date of the
Registration Statement, to consider approval of this Agreement and the Plan
of Merger. Subject to its continuing fiduciary duties to Reliable's
shareholders, Reliable's Board of Directors will use its best efforts to
secure such approval. In connection with the Reliable Shareholders'
Meeting, Reliable will duly solicit, in compliance with Section 14(a) of
the Exchange Act, the vote of the Reliable shareholders by mailing or
delivering to each such shareholder on the date such Registration Statement
is declared effective by the SEC or as soon thereafter as practicable the
Proxy Statement/Prospectus in the form filed by FCFC with the SEC pursuant
to Rule 424(b) under the Securities Act in connection with the Registration
Statement.
(c) Proxy Statement/Prospectus. Reliable will cooperate with FCFC in
--------------------------
the preparation and filing of the Proxy Statement/Prospectus in accordance
with the requirements of the proxy rules of the SEC under the Exchange Act
and the filing thereof as part of the Registration Statement. Reliable will
not be liable for any untrue statement of a material fact or omission to
state a material fact in the Proxy Statement/Prospectus made in reliance
upon, and in conformity with, information furnished to Reliable by FCFC for
use therein.
(d) Regulatory Approvals. Reliable will cooperate with FCFC in the
--------------------
preparation and filing of an application with the OTS for its approval of
the Merger under the Savings and Loan Holding Company Act and any other
applications with any other regulatory agencies having jurisdiction that
may be necessary for the consummation of the Merger. Reliable will publish
all notices in connection with such applications, supply all information
reasonably requested by FCFC or any such regulatory agency in connection
with such applications and take any other actions required on the part of
Reliable for such applications to be approved.
(e) Access to Properties and Records. Between the date of this
--------------------------------
Agreement and the Effective Date, Reliable will give FCFC and its
A-I-16
<PAGE>
authorized representatives reasonable access during normal business hours
to the properties, books and records of Reliable and its Subsidiary and
will cause their officers to furnish such additional financial and
operating data and other information as FCFC may reasonably request,
subject to the obligation of FCFC and its authorized representatives to
maintain the confidentiality of all information concerning Reliable and its
Subsidiary furnished to FCFC or obtained by FCFC by reason of such access,
whether before or after the date of this Agreement.
(f) Notice of Actions and Proceedings. Reliable will promptly notify
---------------------------------
FCFC of any actions, claims or legal, administrative or arbitration
proceedings or investigations threatened or commenced against Reliable or
its Subsidiary, which, if pending on the date hereof, would have been
required to be disclosed to FCFC to assure the accuracy of the
representations of Reliable contained in Section 4(1) hereof or which
otherwise relate to, or affect, the business or assets of Reliable or its
Subsidiary in any material respect or the consummation of the Merger and
the transactions contemplated hereby.
(g) Reliable Affiliates. Reliable will furnish FCFC with a schedule
-------------------
of all holders of Reliable Stock and other persons who on the date of the
Reliable Shareholders' Meeting may be deemed to be affiliates of Reliable
within the meaning of Rule 145 under the Securities Act and will use its
best efforts to assist FCFC in obtaining from each of such persons an
executed affiliate's agreement in a form reasonably satisfactory to counsel
for FCFC and counsel for Reliable. To permit the Merger to be accounted
for as a pooling of interests, each affiliate's agreement will include an
undertaking that the affiliate will not sell, assign, pledge, transfer or
otherwise dispose of any of his Reliable Stock or any of the FCFC Stock to
be received by the affiliate in the Merger, except at such time and in such
quantities as are permitted in Section 201.01 of the SEC's Codification of
Financial Reporting Polices and Staff Accounting Bulletin Nos. 65 and 76.
7. Covenants and Actions of FCFC and Reliable Pending the Closing.
--------------------------------------------------------------
Between the date hereof and the Closing Date:
(a) Conduct of Business in Ordinary Course. Pending the Merger, the
--------------------------------------
business and operations of each of FCFC and Reliable and their Subsidiaries
will be conducted only in the ordinary course, and each will use its best
efforts, and will cause each of its Subsidiaries to use its best efforts,
to preserve its business organization intact and to preserve its goodwill
with its customers and others having business relations with it, and
neither FCFC nor Reliable will, without the prior written consent of the
A-I-17
<PAGE>
other or except as expressly contemplated herein or previously disclosed in
writing to the other:
(i) amend its Articles of Incorporation or its By-Laws;
(ii) issue, sell, purchase, acquire or redeem, or grant options
or rights to purchase, any shares of its capital stock or other
securities other than, in the case of FCFC, transactions in connection
with its employee stock ownership plan and, in the case of Reliable,
shares issued upon proper exercise of any of the options described in
Section 4(b) hereof; or
(iii) take any action which if taken prior to the date hereof
would have constituted a breach of any representation or warranty
contained herein or permit any of its Subsidiaries to do so.
(b) Reliable Dividends. Reliable will not declare, pay or set aside
------------------
a dividend or other distribution in respect of its capital stock other than
cash dividends declared prior to the date hereof and regular quarterly cash
dividends each in an amount no greater than $.40 per share and each having
both a record date and a payment date the same as the regular quarterly
cash dividend of FCFC.
(c) Satisfaction of Conditions. Each party will exercise its best
--------------------------
efforts to assure that all conditions to the obligations of the other party
under this Agreement are fulfilled.
8. Closing and Effective Date.
--------------------------
(a) Closing Date. The transactions contemplated hereby will be
------------
consummated at a closing (the "Closing") to be held at the offices of
Reliable, 428 Station Street, Bridgeville, Pennsylvania, at 10:00 A.M.,
local time, on September 26, 1994, on such earlier date as the parties may
agree or, in the event all conditions to the consummation of the Merger
other than the Closing shall not have been satisfied prior to September 26,
1994, on the earliest practicable date following satisfaction of such
conditions (the "Closing Date"). At the Closing the parties will exchange
the certificates and other documents provided for in this Section.
(b) Closing Certificate of FCFC. At the Closing, FCFC will deliver
---------------------------
to Reliable a certificate dated the Closing Date of its chief executive
officer, its chief financial officer and its Secretary to the effect that:
A-I-18
<PAGE>
(i) except for changes approved by Reliable or contemplated
hereby, the representations and warranties of FCFC contained herein
are true and correct in all material respects on the Closing Date as
if made on such date;
(ii) FCFC has performed and complied with all agreements,
covenants and conditions to be performed or complied with by FCFC
hereunder on or before the Closing Date;
(iii) Interim Reliable has been duly organized under the
Pennsylvania Business Corporation Law;
(iv) the Merger has been approved by the Pennsylvania Department
of Banking under the Pennsylvania Banking Code and the Pennsylvania
Savings Association Code;
(v) the Merger has been approved by the OTS under the Savings
and Loan Holding Company Act;
(vi) the Merger has been approved by the Federal Reserve Board
under the Bank Holding Company Act;
(vii) periods of 30 days have expired since the dates of the
approvals by the OTS and the Federal Reserve Board referred to in (v)
and (vi) above without a stay of effectiveness of either such approval
by reason of the filing of an action by the United States under the
antitrust laws during that period; and
(viii) the Registration Statement has been declared effective by
the SEC by an order, and that, to the best knowledge of such officers
after due inquiry, no stop order with respect to the effectiveness of
the Registration Statement has been issued nor any proceeding therefor
initiated or threatened under the Securities Act.
(c) Closing Certificate of Reliable. At the Closing, Reliable will
-------------------------------
deliver to FCFC a certificate dated the Closing Date of its chief executive
officer, its chief financial officer and its Secretary to the effect that:
(i) except for changes approved by FCFC or contemplated hereby,
the representations and warranties of Reliable contained herein are
true and correct in all material respects on the Closing Date as if
made on such date;
(ii) Reliable has performed and complied with all agreements,
covenants and conditions to be performed or complied with by Reliable
hereunder on or before the Closing Date;
A-I-19
<PAGE>
(iii) the holders of the requisite number of shares of Reliable
Stock have approved this Agreement and the Plan of Merger; and
(iv) lists submitted to FCFC contain the names of all holders of
Reliable Stock who voted in favor of the Merger and the number of
shares owned by each such shareholder.
(d) Opinion of Counsel for FCFC. Reliable will receive from counsel
---------------------------
for FCFC, an opinion or opinions, dated the Effective Date and in form and
substance satisfactory to Reliable and its counsel, with respect to the
validity of the Merger, the due authorization and issuance of the FCFC
Stock to be issued in connection with the Merger and such other matters
related thereto as may be agreed upon by FCFC and Reliable.
In rendering such opinions, such counsel may rely as to matters of
fact, to the extent such counsel deems such reliance necessary or
appropriate, upon certificates of public officials and of responsible
officers of FCFC, provided that the extent of such reliance is specified in
the opinion and executed counterparts of such certificates have been
furnished to Reliable.
(e) Opinion of Counsel for Reliable. FCFC will receive from counsel
-------------------------------
for Reliable, an opinion or opinions, dated the Effective Date and in form
and substance satisfactory to FCFC and its counsel, with respect to the
validity of the Merger and such other matters related thereto as may be
agreed upon by FCFC and Reliable.
In rendering such opinions, such counsel may rely as to matters of
fact, to the extent such counsel deems such reliance necessary or
appropriate, upon certificates of public officials and responsible officers
of Reliable, provided that the extent of such reliance is specified in the
opinion and executed counterparts of such certificates have been furnished
to FCFC.
(f) Additional Documents. At or before the Closing, each party shall
--------------------
have received from the other such certified or other copies of such
documents and proceedings in connection with the transactions contemplated
hereby as such party or its counsel may reasonably request.
(g) Effective Date of Merger. Upon the delivery of all documents to
------------------------
be delivered at the Closing, FCFC and Reliable will file with the Delaware
Secretary of State and the Pennsylvania Department of State the Certificate
A-I-20
<PAGE>
of Merger and Articles of Merger, respectively, provided for in the Plan of
Merger, specifying that the Merger will be effective as of the close of
business on the last day of the month in which the Closing occurs or such
other date and time as the parties may agree (the "Effective Date").
9. Board of Directors of Reliable Savings Bank Following Effective
---------------------------------------------------------------
Date. Upon the Merger becoming effective and without the necessity of any
- ----
further corporate action by Reliable Savings Bank, the number of directors of
Reliable Savings Bank shall be increased by two and such vacancies shall be
filled by E. James Trimarchi and Joseph E. O'Dell, who shall hold office until
the 1995 and 1997 annual meetings of the Reliable Savings Bank shareholders,
respectively, and until their respective successors have been duly elected and
qualified.
10. Other Agreements of FCFC and Reliable.
-------------------------------------
(a) FCFC covenants that it will issue to the former holders of
Reliable Stock the shares of FCFC Stock to which they are entitled in
accordance with the provisions of the Plan of Merger and that it will
perform all other obligations of FCFC under the Plan of Merger.
(b) FCFC covenants that it will advance funds to Interim Reliable to
make any required payments to the holders of Reliable Stock.
11. Termination.
-----------
(a) Mutual Consent. FCFC and Reliable may terminate this Agreement
--------------
and the Plan of Merger by written mutual consent of their respective Boards
of Directors at any time before the Effective Date, without liability of
any party, notwithstanding prior approval by the Reliable shareholders, and
such consent shall not be unreasonably withheld by FCFC or Reliable.
(b) Failure of Conditions. Notwithstanding prior approval by the
---------------------
Reliable shareholders, either FCFC or Reliable may, without liability of
any party, terminate this Agreement and the Plan of Merger by written
notice to the other in the event of a failure to satisfy before June 30,
1995 any of the conditions to its obligations under this Agreement, if such
failure occurred despite the good faith effort of the party electing to
terminate to perform all agreements and covenants and to satisfy all
conditions required to be performed or satisfied by it.
A-I-21
<PAGE>
12. Miscellaneous.
-------------
(a) Brokers. FCFC and Reliable each represents and warrants that
-------
except as previously disclosed in writing to the other party, it is not
obligated to pay any brokerage commissions, finder's fees or other like
payments in connection with the transactions contemplated hereby. Each
party agrees to pay or discharge and to indemnify and hold the other
harmless from and against any and all claims or liabilities for brokerage
commissions, finder's fees and other like payments incurred by such party
in connection with the transactions contemplated hereby.
(b) Expenses. The fees and expenses of Reed Smith Shaw & McClay
--------
related to this Agreement and the Plan of Merger, the federal tax opinion
referred to in Section 2(c) hereof, the Proxy Statement/Prospectus and the
consummation of the Merger shall be borne equally by the parties hereto.
The fees and expenses of Reed Smith Shaw & McClay related to the regulatory
approvals referred to in Section 2(b) hereof shall be borne by FCFC. Each
party shall bear its own other expenses incurred in connection with this
Agreement, the Merger and all related transactions, including fees of
accountants, attorneys and investment advisors. The obligations of the
parties under this Section 12(b) shall survive any termination of this
Agreement.
(c) Further Assurances. Each party shall execute and deliver such
------------------
instruments and take such other actions as the other party hereto may
reasonably request in order to carry out the intent and purposes hereof and
the Plan of Merger.
(d) Survival. Except for those contained in Sections 3(m) and 4(n)
--------
hereof, the representations and warranties of the parties contained herein
or in any schedule or certificate delivered in connection herewith shall
not survive the Closing and Effective Date but expire with and be
terminated and extinguished by the consummation of the Merger contemplated
hereby.
(e) Amendment and Waiver. Subject to applicable law, this Agreement
--------------------
may be amended in any respect by an instrument in writing signed by an
authorized officer of each of FCFC and Reliable, whether before or after
the Reliable Shareholders' Meeting, at any time before the Effective Date,
except that no such amendment after such Shareholders' Meeting shall affect
the rates of exchange of FCFC Stock for Reliable Stock provided in the Plan
of Merger, alter or change any term of the certificate of incorporation of
the surviving corporation to be effected by the Merger, or alter or change
any of the terms and conditions of this Agreement if such alteration or
change would adversely affect the holder of any class or series thereof
A-I-22
<PAGE>
of Reliable or Interim Reliable. FCFC or Reliable may (i) extend the time
for the performance of any of the obligations of the other party,
(ii) waive any inaccuracies in the representations and warranties of the
other party, (iii) waive compliance by the other party with any of the
covenants or agreements contained herein and the performance of any
obligations of the other party and (iv) waive the fulfillment of any
condition (other than Sections 2(a), (b), (d) and (g) hereof) that is
precedent to the performance by it of any of its obligations under this
Agreement, all of the above to the fullest extent permitted by law.
(f) Communications. All notices and other communications hereunder
--------------
shall be in writing and shall be deemed to have been given if delivered by
hand or mailed, first-class, registered or certified mail, postage prepaid,
addressed as follows:
If to FCFC:
First Commonwealth Financial Corporation
Old Courthouse Square
P.O. Box 400
Indiana, Pennsylvania 15701-0400
Attention: E. James Trimarchi, Chairman
With a copy to:
Tomb and Tomb
402 Indiana Theatre Building
Indiana, Pennsylvania 15701
Attention: David R. Tomb, Jr., Esquire
If to Reliable:
Reliable Financial Corporation
428 Station Street
Bridgeville, Pennsylvania 15017-2002
Attention: Stephen Grippi, President
With a copy to:
Raymond J. Gustini, Esquire
Kelley Drye & Warren
2300 M Street, N.W.
Washington, D.C. 20037
or at such other address or addresses as may hereafter be furnished by the
addressee party.
A-I-23
<PAGE>
(g) Counterparts; Headings. This Agreement may be executed in
----------------------
several counterparts, each of which will constitute an original. The
headings and captions contained herein are for reference purposes only and
do not constitute a part hereof.
(h) Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the law of the Commonwealth of Pennsylvania
and, to the extent applicable, the law of the United States.
(i) Entire Agreement. This Agreement, together with the Plan of
----------------
Merger, sets forth the entire understanding of the parties with respect to
the subject matter hereof and supersedes all previous agreements or
understandings among the parties with respect thereto.
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed this Agreement as of the date first above
written.
Attest: FIRST COMMONWEALTH FINANCIAL
CORPORATION
/s/ David R. Tomb, Jr. By /s/ E. James Trimarchi
- ------------------------------ -----------------------------
David R. Tomb, Jr., Secretary E. James Trimarchi, Chairman
[Corporate Seal]
Attest: RELIABLE FINANCIAL CORPORATION
/s/ Jean L. David By /s/ Stephen Grippi
- ------------------------------ -----------------------------
Jean L. David, Secretary Stephen Grippi, President
[Corporate Seal]
A-I-24
<PAGE>
APPENDIX A
PLAN OF MERGER
PLAN OF MERGER (the "Plan") made by RELIABLE FINANCIAL CORPORATION, a
Delaware corporation having its principal place of business at 428 Station
Street, Bridgeville, Allegheny County, Pennsylvania ("Reliable"), and INTERIM
RELIABLE, INC., a Pennsylvania business corporation having its principal place
of business at 428 Station Street, Bridgeville, Allegheny County, Pennsylvania
("Interim Reliable"). Reliable and Interim Reliable are hereinafter sometimes
referred to as the "Constituent Corporations."
W I T N E S S E T H:
WHEREAS, First Commonwealth Financial Corporation, a Pennsylvania
business corporation having its principal place of business at Old Courthouse
Square, 22 North Sixth Street, Indiana, Pennsylvania ("FCFC"), is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended, and
prior to the merger contemplated hereby will be the owner of all the issued and
outstanding capital stock of Interim Reliable; and
WHEREAS, FCFC and Reliable have entered into an Agreement and Plan of
Reorganization dated as of April , 1994 (the "Reorganization Agreement"),
which provides, among other things, for the execution of this Plan and the
acquisition of Reliable by FCFC by means of the merger (the "Merger") of
Reliable into Interim Reliable;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and for the purpose of stating the
method, terms and conditions of the Merger, including the rights of the
shareholders of Reliable and Interim Reliable, and such other details and
provisions as are deemed desirable, the parties hereto, each intending to be
legally bound hereby, agree as follows:
1. The Merger. Subject to the terms and conditions of this Plan and
----------
the Reorganization Agreement, and in accordance with the laws of the State of
Delaware and the Commonwealth of Pennsylvania, on the Effective Date (as defined
in Section 8(g) of the Reorganization Agreement) Reliable shall be merged into
Interim Reliable, which shall be the surviving corporation.
2. Articles of Incorporation and By-Laws. Upon the Merger becoming
-------------------------------------
effective, the Articles of Incorporation and By-Laws of Interim Reliable as in
effect on the Effective Date shall continue in effect without change therein by
reason of the Merger, except that Article 1 of the Articles of Incorporation
shall be changed to and be as follows in its entirety:
App. A-1
<PAGE>
1. The name of the corporation is Reliable Financial Corporation.
3. Directors, Officers, Employees. Upon the Merger becoming
------------------------------
effective, the persons who are then members of the Board of Directors of
Reliable plus E. James Trimarchi and Joseph E. O'Dell shall become the Board of
Directors of the surviving corporation, the persons who are then officers of
Reliable shall become the officers of, and shall hold the same offices with, the
surviving corporation and the persons who are then employees of Reliable shall
become the employees of, and shall hold the same positions with, the surviving
corporation.
4. Conversion of Reliable Shares.
-----------------------------
(a) Subject to the provisions of Section 6 hereof with respect to the
payment of fractional shares in cash, each share of Common Stock, par value $.01
per share, of Reliable ("Reliable Common Stock") issued and outstanding
immediately before the Merger becomes effective shall, by virtue of the Merger
and without any action on the part of the holder thereof, be converted into 1.6
shares of Common Stock, par value $1 per share, of FCFC ("FCFC Common Stock").
(b) Each share of Reliable Common Stock which is issued and owned by
Reliable as treasury stock on the Effective Date shall, by virtue of the merger
and without any action on the part of Reliable, be retired and cancelled.
(c) Each outstanding option to purchase shares of Reliable Common
Stock under Reliable's 1992 Stock Option Plans shall be converted into and
become an option to purchase FCFC Common Stock at the rate of 1.6 shares of FCFC
Common Stock for each share of Reliable Common Stock subject to the option.
Except as provided in the preceding sentence, each such option shall be upon the
same terms and conditions and have the same provisions that were contained
therein immediately before the Merger becomes effective.
5. Surviving Corporation Stock. The number of shares of Common
---------------------------
Stock, par value $1 per share, of the surviving corporation ("Surviving
Corporation Common Stock") issued and outstanding immediately before the Merger
becomes effective, all of which will be owned by FCFC, shall, by virtue of the
Merger and without any action on the part of the holder thereof, be increased to
1,000,000 shares of Surviving Corporation Common Stock, all of which shares
shall be owned by FCFC, and the capital surplus of the surviving corporation
shall by virtue of the Merger be increased to $11,500,000.
6. Surrender and Exchange of Reliable Stock Certificates. Upon the
---------------------------------------- ------------
Merger becoming effective, holders of certificates that represent shares of
Reliable Common Stock outstanding immediately before the Merger becomes
App. A-2
<PAGE>
effective (hereinafter called "Old Certificates") shall cease to be, and shall
have no rights as, shareholders of Reliable. Old Certificates shall be
exchangeable by the holders thereof (upon surrender of such Old Certificates in
the manner provided in the transmittal materials described below) for a
certificate or certificates for that number of shares of FCFC Common Stock equal
to the product of 1.6 times the number of shares of Reliable Common Stock
represented by the Old Certificates so surrendered; provided, however, that each
-------- -------
holder of Old Certificates who would otherwise be entitled to receive a fraction
of a share of FCFC Common Stock (after taking into account all shares of
Reliable Common Stock represented by the Old Certificates then surrendered by
such holder) shall receive from FCFC, in lieu thereof, cash in an amount equal
to such fractional part of a share multiplied by the value of $19 for one whole
share of FCFC Common Stock, which was the price per share that was the basis of
the negotiations between FCFC and Reliable.
As promptly as practicable after the Effective Date, FCFC shall send
or cause to be sent to each holder of record of Reliable Common Stock as of the
close of business on the Effective Date transmittal materials for use in
surrendering Old Certificates in exchange for certificates representing FCFC
Common Stock. The letter of transmittal will contain instructions with
respect to the surrender of Old Certificates.
No interest shall accrue or be payable in respect of any cash payable
upon surrender for exchange of Old Certificates. If any dividend on FCFC Common
Stock is declared by FCFC after the Effective Date, the declaration shall
include dividends on all whole shares of FCFC Common Stock into which shares of
Reliable Common Stock have been converted under this Plan, but no former holder
of record of Reliable Common Stock will be entitled to receive a distribution of
any such dividend until surrender of the shareholder's Old Certificates shall
have been effected in accordance with the instructions furnished by FCFC. Upon
surrender for exchange of a shareholder's Old Certificates, such shareholder
shall be entitled to receive from FCFC an amount equal to all such dividends
declared (without interest thereon and less the amount of taxes, if any, which
may have been imposed or paid thereon), and for which the payment date has
occurred, on the whole shares of FCFC Common Stock into which the shares of
Reliable Common Stock represented by such Old Certificates have been converted.
After the Merger becomes effective, there shall be no transfers on the
stock transfer books of Reliable or FCFC of shares of Reliable Common Stock.
If, after the Effective Date, Old Certificates are presented for transfer, they
shall be cancelled and certificates representing whole shares of FCFC Common
Stock (and cash in lieu of any fractional share) shall be issued or paid in
exchange therefor as provided herein.
App. A-3
<PAGE>
7. No Dissenters' Rights. Under Section 262 of the Delaware General
---------------------
Corporation Law, the rights and remedies of a dissenting shareholder are not
available to a holder of Reliable Common Stock who objects to this Plan.
8. Certificate and Articles of Merger. Upon fulfillment of all
----------------------------------
conditions in Section 2 of the Reorganization Agreement other than completion of
the Closing (as defined in Section 8(a) of the Reorganization Agreement),
Reliable and Interim Reliable will execute a Certificate of Merger in compliance
with the requirements of the Delaware General Corporation Law and Articles of
Merger in compliance with the requirements of the Pennsylvania Business
Corporation Law of 1988, as amended (the "Pennsylvania Business Corporation
Law"), and will deliver them to the Delaware Secretary of State and Pennsylvania
Department of State, respectively, specifying that the Merger shall be effective
as of the close of business on the last day of the month in which the Closing
occurs or such other date and time as the parties may agree.
9. Termination and Amendment. Notwithstanding approval by the
-------------------------
shareholders of Reliable or Interim Reliable or both of them, this Plan shall be
terminated and the Merger shall be abandoned in the event of termination of the
Reorganization Agreement as provided therein. If there is such termination
after delivery of the Certificate of Merger to the Delaware Secretary of State
and Articles of Merger to the Pennsylvania Department of State, such Certificate
of Merger and Articles of Merger shall be withdrawn, terminated and cancelled.
Subject to applicable law, this Plan may be amended in any respect by an
instrument in writing signed by an authorized officer of each of Reliable and
Interim Reliable before or after the shareholders' meeting referred to in
Section 6(b) of the Reorganization Agreement at any time before the Merger
becomes effective, except that no such amendment after such shareholders'
meeting shall affect the rates of exchange provided in Sections 4 and 6 of this
Plan, alter or change any term of the certificate of incorporation of the
surviving corporation to be effected by the Merger, or alter or change any of
the terms and conditions of this Plan if such alteration or change would
adversely affect the holder of any class or series thereof of Reliable or
Interim Reliable.
10. Effect of Merger. On the Effective Date, the separate existence
----------------
of Reliable shall cease, and all of the property (real, personal and mixed),
rights, powers, duties and obligations of Reliable and Interim Reliable shall be
taken and deemed to be transferred to and vested in Interim Reliable, as the
surviving corporation, without further act or deed, all as provided in the
Delaware General Corporation Law and the Pennsylvania Business Corporation Law.
11. Further Assurances. If at any time Interim Reliable shall
------------------
consider or be advised that any further assignments, conveyances or assurances
App. A-4
<PAGE>
in law are necessary or desirable to vest, perfect or confirm of record in
Interim Reliable the title to any property or rights of the Constituent
Corporations, or otherwise to carry out the provisions hereof, the proper
officers and directors of the Constituent Corporations immediately before the
Effective Date shall, on behalf of the Constituent Corporations, execute and
deliver any and all proper deeds, assignments and assurances in law, and do all
things necessary or proper to vest, perfect or confirm title to such property or
rights in Interim Reliable and otherwise to carry out the provisions hereof.
12. Counterparts; Headings. This Plan may be executed in several
----------------------
counterparts, each of which will constitute an original. The headings and
captions contained herein are for reference purposes only and do not constitute
a part hereof.
13. Governing Law. This Plan shall be governed by and construed and
-------------
enforced in accordance with the law of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties have executed this Agreement this 21st
day of April, 1994.
Attest: RELIABLE FINANCIAL CORPORATION
/s/ Jean L. David By /s/ Stephen Grippi
- ----------------------------- -----------------------------
Jean L. David, Secretary Stephen Grippi, President
[Corporate Seal]
Attest: INTERIM RELIABLE, INC.
/s/ David R. Tomb, Jr. By /s/ E. James Trimarchi
- ----------------------------- -----------------------------
David R. Tomb, Jr., Secretary E. James Trimarchi, President
[Corporate Seal]
App. A-5
<PAGE>
APPENDIX B
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
Articles of Incorporation
-------------------------
In compliance with the requirements of (Section)1306 of the Business
Corporation Law of 1988, Act of December 21, 1988 (P.L. 1444, No. 177), as
amended (15 Pa.C.S. (Section)1306), the undersigned, desiring to incorporate a
business corporation, hereby certifies that:
1. Corporate Name. The name of the Corporation is Interim Reliable,
--------------
Inc.
2. Registered Office. The location and post office address of the
-----------------
initial registered office of the Corporation in this Commonwealth is 428 Station
Street, Bridgeville, Allegheny County, Pennsylvania 15017-2002.
3. Business Corporation Law of 1988. The Corporation is incorporated
--------------------------------
under the provisions of the Business Corporation Law of 1988.
4. Capital Stock. The aggregate number of shares that the
-------------
Corporation shall have authority to issue is 10,000,000 shares of Common Stock,
par value $1 per share.
5. No Cumulative Voting. The shareholders of the Corporation shall
--------------------
not be entitled to cumulate their votes for the election of directors.
6. Incorporator. The name and post office address of the
------------
incorporator is Joseph E. O'Dell, 152 Timber Springs Lane, White Township,
Indiana, Pennsylvania 15701.
7. Personal Liability of Directors.
-------------------------------
(a) Elimination of Liability. To the fullest extent that the laws of
------------------------
the Commonwealth of Pennsylvania, as now in effect or as hereafter amended,
permit elimination or limitation of the liability of directors, no director of
App. B-1
<PAGE>
the Corporation shall be personally liable for monetary damages as such for any
action taken, or any failure to take any action, as a director.
(b) Nature and Extent of Rights. The provisions of this Article
---------------------------
shall be deemed to be a contract with each director of the Corporation who
serves as such at any time while this Article is in effect and each such
director shall be deemed to be so serving in reliance on the provisions of this
Article. Any amendment or repeal of this Article or adoption of any By-Law or
provision of the Articles of the Corporation which has the effect of increasing
director liability shall operate prospectively only and shall not have any
effect with respect to any action taken, or any failure to act, by a director
prior thereto.
8. By-Laws. The power to make, alter, amend and repeal the By-Laws
-------
of the Corporation is expressly vested in the Board of Directors, subject,
however, to the power of the shareholders of the Corporation to change such
action.
IN WITNESS WHEREOF, the Incorporator has signed and sealed these
Articles of Incorporation this 18th day of April, 1994.
/s/ Joseph E. O'Dell (Seal)
--------------------------
Joseph E. O'Dell
App. B-2
<PAGE>
ANNEX II
June 29, 1994
The Board of Directors
Reliable Financial Corporation
428 Station Street
Bridgeville, PA 15017-2002
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to Reliable Financial Corporation ("RESB") and its shareholders of the
proposed merger ("Proposed Merger") between RESB and First Commonwealth
Financial Corporation ("FCF").
The terms of the Agreement and Plan of Merger dated April 21, 1994 by and
between RESB and FCF ("the Agreement"), indicate that the consummation of the
Proposed Merger is subject to receipt of approvals from the shareholders of
RESB and from various regulatory agencies, and is further subject to the
satisfaction of certain other conditions. As provided for in the Agreement,
RESB will merge with a subsidiary of FCF. Under the terms of the Agreement,
each of the outstanding shares of RESB will be converted into and become the
right to receive 1.6 shares of FCF common stock. No adjustment in this
specified rate will be made as of the Closing Date to compensate for any change
in the market value of the shares of common stock of either FCF or RESB between
June 29, 1994 and the Closing Date.
Ryan, Beck & Co., Inc., as a customary part of its investment banking business,
is engaged in the valuation of banking and thrift institutions and their
securities in connection with mergers and acquisitions. In conducting our
investigation and analysis of this transaction, we have met separately with
senior management of FCF, RESB and United National Bankcorporation ("UNB") to
discuss their respective operations, financial statements, and future
prospects, and have reviewed and analyzed material prepared in connection with
the Proposed Merger, including, among other things, the following: (1) the RESB
Agreement; (2) the Agreement and Plan of Reorganization by and between FCF and
UNB dated March 25, 1994 concerning the proposed merger (the "UNB Merger") of
UNB with and into FCF (the "UNB Agreement"); (3) the Joint Proxy
Statement/Prospectus and Registration Statement on Form S-4 concerning the
Proposed Merger
A-II-1
<PAGE>
and the UNB merger; (4) FCF's Annual Reports to Shareholders for the years
ended December 31, 1991 through December 31, 1993 and Annual Reports on Form
10-K for the years ended December 31, 1991 through December 31, 1993 and
Quarterly Report on Form 10-Q for the period ended March 31, 1994; (5) RESB's
Annual Reports to Shareholders and Annual Reports on Form 10-K for the fiscal
years ended September 30, 1991 through September 30, 1993, and Quarterly
Reports on Form 10-Q for the periods ended March 31, 1994 and December 31,
1993; (6) UNB's Annual Reports to Shareholders and Annual Reports on Form 10-K
for the fiscal years ended December 31, 1991 through December 31, 1993, and
Quarterly Report on Form 10-Q for the period ended March 31, 1994; (7) certain
operating and financial information, provided to us by the management FCF, RESB
and UNB relating to their respective businesses and prospects; (8) the
historical stock prices and trading volume of the common shares of RESB and
FCF; (9) the publicly-available financial data and stock market performance
data of publicly-traded banking institutions and savings institutions which we
deemed generally comparable to FCF and RESB; (10) the terms of recent
acquisitions of savings institutions which we deemed generally comparable to
RESB; and (11) other such studies, analyses, inquiries and examinations as we
deemed appropriate. We also met separately with the management of RESB, FCF and
UNB to discuss their respective past and current business, operations,
financial condition and future prospects. While we have taken care in our
investigation and analyses, we have relied upon and assumed the accuracy,
completeness and fairness of the financial and other information provided to us
by the respective institutions or publicly available, and have not attempted to
verify such information. We have also relied upon the managements of RESB, UNB
and FCF as to the reasonableness and achievability of the prospects for their
respective institutions indicated to us. We also did not independently verify
and have relied on and assumed that the allowances for loan losses set forth in
the balance sheets of FCF, RESB and UNB at March 31, 1994 were adequate and
complied fully with applicable law, regulatory policy and sound banking
practice as of the date of such financial statements. We also assumed that the
Proposed Merger and the UNB Merger in all respects is, and will be in
compliance with all laws and regulations applicable to FCF, RESB and UNB. We
have not made or obtained any independent evaluations or appraisals of the
assets or liabilities of either UNB, RESB or FCF or their respective
subsidiaries.
In conducting our analysis and arriving at our opinion as expressed herein, we
have considered such financial and other factors as we have deemed appropriate
in the circumstances. In
A-II-2
<PAGE>
rendering our opinion, we have assumed that in the course of obtaining the
necessary regulatory approvals for the Proposed Merger and in preparation of
the final Joint Proxy Statement/Prospectus, no conditions will be imposed that
will have a material adverse effect on the contemplated benefits of the
Proposed Merger to either RESB or, on a pro forma basis, to FCF. Our opinion is
based upon conditions and projections as they exist and can be evaluated on the
date hereof.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that the terms of the Proposed Merger as provided and described in the
Agreement are fair, from a financial point of view, to RESB and its
shareholders.
Very truly yours,
RYAN, BECK & CO., INC.
A-II-3
<PAGE>
RELIABLE FINANCIAL CORPORATION
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE
HELD ON JULY __, 1994
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
KNOW ALL MEN BY THESE PRESENTS that the undersigned shareholder of Reliable
Financial Corporation ("Reliable") does hereby nominate, constitute and
appoint Stephen Grippi and S.A. Russo, or each of them acting individually, the
true and lawful attorney(s) and proxy (proxies) of the undersigned with full
power of substitution, for the undersigned and in the name, place and stead of
the undersigned to vote all the shares of Reliable Common Stock standing in the
name of the undersigned on Reliable's books at the close of business on June
30, 1994, at the Special Meeting of Reliable's Shareholders to be held in the
Norwood Party House, 316 Station Street, Bridgeville, Pennsylvania at 10:30
A.M., local time, or at any adjournment or adjournments thereof, with all the
powers the undersigned would possess if personally present as follows:
(1) FOR |_| AGAINST |_| ABSTAIN |_|
the proposal to approve the (i) Agreement and Plan of
Reorganization and (ii) the Plan of Merger which are attached as
Annex I and as Appendix A to said Annex I, respectively, to, and
are described in, the Proxy Statement/Prospectus dated July __,
1994.
(2) Upon such other matters as may properly come before the
Special Meeting or any adjournment or adjournments thereof in
their discretion.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" NO. 1.
UNLESS OTHERWISE SPECIFIED BY THE UNDERSIGNED, THIS PROXY WILL BE VOTED FOR
NO. 1.
Any other proxy heretofore given by the undersigned to vote shares of
Reliable Common Stock which the undersigned would be entitled to vote if
personally present at said Special Meeting or any adjournment or adjournments
thereof is hereby expressly revoked. This proxy may be revoked at any time
prior to the voting hereof. The undersigned hereby acknowledges receipt of the
Notice of Special Meeting of Shareholders of Reliable and the Proxy
Statement/Prospectus dated July __, 1994.
<PAGE>
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
his seal this _____ day of __________, 1994.
_____________________________ (SEAL)
_____________________________ (SEAL)
Please date and sign exactly as
name appears hereon. When
signing as attorney, executor,
administrator, trustee,
guardian, etc., full title as
such should be shown. For joint
accounts, each joint owner must
sign. If more than one trustee,
all should sign.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers.
Pennsylvania Business Corporation Law of 1988. Section 1741 of the
Pennsylvania Business Corporation Law of 1988 (the "BCL") provides that
unless otherwise restricted in its bylaws, a business corporation shall
(subject to the limitations described below) have the power to indemnify any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation), by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
domestic or foreign corporation for profit or not-for-profit, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action or
proceeding, if such person acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation,
and, with respect to any criminal proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action or proceeding
by judgment, order, settlement or conviction or upon a plea of nolo contendere
or its equivalent shall not, of itself, create a presumption that such person
did not act in good faith and in a manner which he reasonably believed to be
in, or not opposed to, the best interests of the corporation and, with respect
to any criminal proceeding, had reasonable cause to believe that his conduct
was unlawful.
Section 1742 of the BCL provides that unless otherwise restricted in its
bylaws, a corporation shall (subject to the limitations described below) have
the power to indemnify any person who was or is a party, or is threatened to be
made a party, to any threatened, pending or completed action by or in the right
of the corporation to procure a judgment in its favor by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another domestic or foreign corporation
for profit or not-for-profit, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action if such person acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation.
Indemnification shall not be made under Section 1742 in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
to the corporation unless, and only to the
II-1
<PAGE>
extent that, the court of common pleas of the judicial district embracing the
county in which the registered office of the corporation is located or the
court in which such action was brought determines upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the court of common pleas or such other court shall deem proper.
Section 1744 of the BCL provides that unless ordered by a court, any
indemnification under Section 1741 or 1742 shall be made by the business
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because the indemnitee has met the applicable standard of conduct
set forth in the relevant section. Such determination shall be made:
(1) By the board of directors of the corporation by a majority vote of a
quorum consisting of directors who were not parties to the action or
proceeding; or
(2) If such a quorum is not obtainable, or, if obtainable and a majority
vote of a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion; or
(3) By the shareholders.
Notwithstanding the above, Section 1743 of the BCL provides that, to the
extent that a director, officer, employee or agent of a business corporation
has been successful on the merits or otherwise in defense of any action or
proceeding referred to above, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
Section 1745 of the BCL provides that expenses (including attorneys' fees)
incurred in defending any action or proceeding may be paid by a business
corporation in advance of the final disposition of the action or proceeding
upon receipt of an undertaking by or on behalf of the director, officer,
employee or agent to repay such amount if it is ultimately determined that such
person is not entitled to be indemnified by the corporation.
Section 1746 of the BCL provides that the indemnification and advancement of
expenses provided by or granted pursuant to the subchapter on indemnification
shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise, both
as to action in such person's official capacity and as to action in another
capacity while
II-2
<PAGE>
holding such office. Section 1746 also provides that indemnification may not be
made in any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful misconduct
or recklessness. The articles of incorporation may not provide for
indemnification in the case of willful misconduct or recklessness.
Section 1747 of the BCL provides that, unless otherwise restricted in its
bylaws, a business corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another domestic or
foreign corporation for profit or not-for-profit, partnership, joint venture,
trust or other enterprise, against any liability asserted against such person
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify the director,
officer, employee or agent against such liability under the provisions of the
subchapter governing indemnification. Section 1747 declares such insurance to
be consistent with the public policy of the Commonwealth of Pennsylvania.
Section 1750 of the BCL provides that the indemnification and advancement of
expenses provided by, or granted pursuant to, the subchapter governing
indemnification shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent of the corporation and shall inure to the benefit of the heirs and
personal representatives of such director, officer, employee or agent.
FCFC By-Laws. Article 23 of the By-Laws of the FCFC provides that FCFC shall
indemnify any director, officer and/or employee or any former director, officer
and/or employee who was or is a party to, or is threatened to be made a party
to, or is called as a witness in connection with, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that such person is or was a director,
officer and/or employee of FCFC, or is or was serving at the request of FCFC as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. In the case of an action or suit by
or in the right of the registrant, no indemnification shall be made in respect
of a claim, issue or matter as to which such person shall have been adjudged to
be liable for misconduct in the performance of his duty to the registrant.
Article 23 further provides that, except as may be otherwise ordered by a
court, there shall be a presumption that any officer, director and/or employee
is entitled to indemnification in the foregoing circumstances unless either a
majority of the directors not involved in the proceedings or, if there are less
than three such directors, then the holders of one-third of the outstanding
shares of FCFC, determine that the person is not entitled to such
II-3
<PAGE>
presumption. In the event of any such determination, a written opinion as to
whether or not the parties involved are entitled to indemnification shall be
requested from independent counsel.
Section 12.3 of the By-Laws of FCFC further provides that except as
specifically provided by law, a director of FCFC will not be personally liable
for monetary damages with respect to any action taken, or any failure to act,
unless such director has breached or failed to perform the duties of his office
under Pennsylvania law relating to standard of care and justifiable reliance
and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. Any amendment or repeal of Section 12.3 which has
the effect of increasing director liability shall operate prospectively only
and shall not affect any action taken, or any failure to act, prior to the
adoption of such amendment.
FCFC maintains directors' and officers' liability insurance covering its
directors and officers with respect to liabilities, including liabilities under
the Securities Act of 1933, which they may incur in connection with their
serving in such capacity. Under the provisions of this insurance policy, FCFC
received reimbursement for amounts as to which the directors and officers are
indemnified by FCFC under the indemnification provisions of Article 23 of the
By-Laws of FCFC. Such insurance also provides certain additional coverage for
the directors and officers against certain liabilities even though such
liabilities may not be covered by the indemnification provisions described
above.
ITEM 21. Exhibits.
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Reorganization dated as of Arpil 21,
1994 between First Commonwealth Financial Corporation and
Reliable Financial Corporation and Plan of Merger dated as of
April 21, 1994 between Interim Reliable, Inc. and Reliable
Financial Corporation (filed herewith as Annex I and Appendix A
to Annex I, respectively, to the Proxy Statement/Prospectus
constituting part of this Registration Statement).
3.1* Articles of Incorporation of First Commonwealth Financial
Corporation, as amended (filed as Exhibit 3(i) to the
Registrant's quarterly report on Form 10-Q for the quarter ended
March 31, 1994 and incorporated herein by reference thereto).
II-4
<PAGE>
3.2* By-Laws of First Commonwealth Financial Corporation, as
amended (filed as Exhibit 3.2 to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-50611), filed with the
Securities and Exchange Commission on October 15, 1993 and
incorporated herein by reference thereto).
5.1** Opinion of Tomb and Tomb regarding the legality of the shares
of Common Stock of First Commonwealth Financial Corporation being
registered.
8.1** Opinion of Reed Smith Shaw & McClay as to certain tax matters.
10.1* Employment Agreement between Cenwest and Ronald C. Geiser
(filed as Exhibit 10.2 to the Registrant's Form SE filed
November 28, 1983 and incorporated herein by reference thereto).
10.2* Employment Agreement between Central and Sumner E. Brumbaugh
(filed as Exhibit 10.2 to the Registrant's Registration Statement
on Form S-4 (Reg. No. 33-50611), filed with the Securities and
Exchange Commission on October 15, 1993 and incorporated herein
by reference thereto).
10.3* Employment Agreement between Peoples and Robert F. Koslow,
including Amendment No. 1 thereto (filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-4 (Reg.
No. 33-50611), filed with the Securities and Exchange Commission
on October 15, 1993 and incorporated herein by reference
thereto).
10.4* Employment Agreement between Reliable Savings Bank and
Stephen Grippi (filed as Exhibit 10.1 to Reliable's Pre-Effective
Amendment No. 1 to Form S-1 (Reg. No. 33-44517) filed with the
Securities and Exchange Commission on January 29, 1992 and
incorporated herein by referenced thereto).
10.5* Reliable Savings Bank, PaSA Recognition and Retention Plan
and Trust (filed as Exhibit 10.2 to Reliable's Annual Report on
Form 10-K for the fiscal year ended September 30, 1992 and
incorporated herein by reference thereto).
10.6* Reliable Financial Corporation 1992 Incentive Stock Option
Plan (filed as Exhibit 10.3 to Reliable's Annual Report on
Form 10-K for the fiscal year ended September 30, 1992 and
incorporated herein by reference thereto).
10.7* Reliable Financial Corporation 1992 Incentive Stock Option
Plan for Nonemployee Directors (filed as
II-5
<PAGE>
Exhibit 10.4 to Reliable's Annual Report on Form 10-K for the fiscal year
ended September 30, 1992 and incorporated herein by reference thereto).
10.8* Agreement and Plan of Reorganization dated as of March 25,
1994 between First Commonwealth Financial Corporation and United
National Bancorporation and Plan of Merger dated as of March 25,
1994 between First Commonwealth Financial Corporation and United
National Bancorporation (filed as Exhibit 2.1 to Registrant's
Registration Statement on Form S-4 (Reg. No. 33-54193) filed with
the Securities and Exchange Commission on June 17, 1994 and
incorporated herein by reference thereto).
21.1* List of subsidiaries of the Registrant (filed as Exhibit 21.1 to the
Registrant's annual report on Form 10-K for the year ended December 31,
1993 and incorporated herein by reference thereto).
23.1 Consent of Jarrett * Stokes & Co., independent certified
public accountants.
23.2 Consent of Ernst & Young, independent certified public
accountants.
23.3 Consent of Edwards Leap & Sauer, independent certified
public accountants.
23.4* Consent of Tomb and Tomb (contained in their opinion filed
as Exhibit 5.1 hereto).
23.5* Consent of Reed Smith Shaw & McClay (contained in their
opinion filed as Exhibit 8.1 hereto).
24.1**Powers of Attorney.
99.1 Preliminary copy of letter to shareholders of Reliable
Financial Corporation appears as a part of the Proxy
Statement/Prospectus constituting part of this Registration
Statement.
99.2 Preliminary copy of Notice of Special Meeting of Shareholders
of Reliable Financial Corporation appears as a part of the Proxy
Statement/Prospectus constituting part of this Registration
Statement.
99.3 Preliminary copy of form of proxy for use by shareholders of
Reliable Financial Corporation appears as a part of the Proxy
Statement/Prospectus constituting part of this Registration
Statement.
- ----------------
II-6
<PAGE>
* Incorporated herein by reference.
** Previously filed.
II-7
<PAGE>
ITEM 22. Undertakings.
(1) The undersigned registrant hereby undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the information
set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration
statement;
(2) The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to remove from registration
by means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(5) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415 (Section 230.415 of this
chapter), will be filed as a part of an amendment to the registration statement
and will not be used until such amendment
II-8
<PAGE>
is effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(7) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(8) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN INDIANA,
PENNSYLVANIA, ON THE 10TH DAY OF AUGUST, 1994.
First Commonwealth Financial
Corporation
/s/ E. James Trimarchi
By
--------------------------------
E. JAMES TRIMARCHI PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THE 10TH DAY OF AUGUST, 1994.
SIGNATURE AND CAPACITY
----------------------
/s/ E. James Trimarchi
- -------------------------------------
E. JAMES TRIMARCHI, PRESIDENT AND
PRINCIPAL EXECUTIVE OFFICER AND
DIRECTOR
*
- -------------------------------------
SUMNER E. BRUMBAUGH, DIRECTOR
*
- -------------------------------------
E.H. BRUBAKER, DIRECTOR
*
- -------------------------------------
EDWARD T. COTE, DIRECTOR
*
- -------------------------------------
THOMAS L. DELANEY, DIRECTOR
*
- -------------------------------------
CLAYTON C. DOVEY, JR., DIRECTOR
*
- -------------------------------------
RONALD C. GEISER, DIRECTOR
*
- -------------------------------------
JOHNSTON A. GLASS, DIRECTOR
*
- -------------------------------------
A.B. HALLSTROM, DIRECTOR
II-10
<PAGE>
SIGNATURE AND CAPACITY
----------------------
*
- -------------------------------------
THOMAS J. HANFORD, DIRECTOR
*
- -------------------------------------
H.H. HEILMAN, JR., DIRECTOR
*
- -------------------------------------
DAVID F. IRVIN, DIRECTOR
*
- -------------------------------------
DAVID L. JOHNSON, DIRECTOR
*
- -------------------------------------
ROBERT F. KOSLOW, DIRECTOR
*
- -------------------------------------
DALE P. LATIMER, DIRECTOR
*
- -------------------------------------
JOSEPH W. PROSKE, DIRECTOR
*
- -------------------------------------
CHARLES J. SZEWCZYK, DIRECTOR
*
- -------------------------------------
DAVID R. TOMB, JR., DIRECTOR
*
- -------------------------------------
JOHN I. WHALLEY, JR., DIRECTOR
*
- -------------------------------------
JOHN J. DOLAN, SENIOR VICE
PRESIDENT, PRINCIPAL FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING
OFFICER
/s/ E. James Trimarchi
*By _________________________________
E. JAMES TRIMARCHI
ATTORNEY-IN-FACT
II-11
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in this Amendment No. 1 to Registration
Statement on Form S-4 of our report dated March 2, 1994, on our audits of the
consolidated financial statements of First Commonwealth Financial Corporation
and subsidiaries, and to the references to our firm under the captions "Experts"
and "Relationships with Independent Public Accountants" in the Proxy
Statement/Prospectus.
JARRETT * STOKES & CO.
Indiana, Pennsylvania
August 10, 1994
<PAGE>
Exhibit 23.2
Consent of Ernst & Young, Independent Auditors
We consent to the reference to our firm under the captions "Experts" and to
the use of our report dated January 14, 1994, with respect to the financial
statements of United National Bancorporation included in the Amendment No. 1 to
Registration Statement (Form S-4) and related Prospectus of First Commonwealth
Financial Corporation dated August 10, 1994.
ERNST & YOUNG LLP
Harrisburg, Pennsylvania
August 8, 1994
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in this Amendment No. 1 to Registration
Statement on Form S-4 of our report dated November 5, 1993, on our audits of the
consolidated financial statements of Reliable Financial Corporation and
subsidiary, and to the references to our firm under the captions "Experts" and
"Relationships with Independent Public Accountants" in the Proxy
Statement/Prospectus.
EDWARDS LEAP & SAUER
Pittsburgh, Pennsylvania
August 10, 1994
