<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1997 commission file number 0-11242
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1428528
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
22 NORTH SIXTH STREET INDIANA, PA 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (724) 349-7220
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XX No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
TITLE OF CLASS OUTSTANDING AT March 23, 1998
Common Stock, $1 Par Value 22,261,060 Shares
The aggregate market value of the voting common stock, par value $1 per
share, held by non-affiliates of the registrant (Based upon the closing sale
price on March 23, 1998), was approximately $583,503,976.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement related to the annual meeting of
security holders to be held April 27, 1998 are incorporated by reference
into Part III.<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
First Commonwealth Financial Corporation
FORM 10-K
INDEX
PART I PAGE
ITEM 1. Business
Description of business.......................... 2
Competition...................................... 4
Supervision and regulation....................... 4
ITEM 2. Properties....................................... 7
ITEM 3. Legal Proceedings................................ 7
ITEM 4. Submission of Matters to a Vote of Security
Holders......................................... 7
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Security Holder Matters......................... 8
ITEM 6. Selected Financial Data.......................... 9
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.............. 10
ITEM 8. Financial Statements and Supplementary Data...... 27
ITEM 9. Disagreements on Accounting and Financial
Disclosures..................................... 58
PART III
ITEM 10. Directors and Executive Officers of the
Registrant..................................... 58
ITEM 11. Management Renumeration and Transactions........ 59
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management................................. 59
ITEM 13. Certain Relationships and Related Transactions.. 59
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................ 60
Signatures..................................... 62
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business
Description of Business
First Commonwealth Financial Corporation (the "Corporation") was
incorporated as a Pennsylvania business corporation on November 15, 1982 and
is registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended. After its incorporation it became affiliated as a
result of statutory mergers with the following: On April 29, 1983 it
affiliated with National Bank of the Commonwealth ("NBOC"), a national bank
in Indiana, Indiana County; on March 19, 1984 with Deposit Bank ("Deposit"),
a Pennsylvania-chartered bank and trust company in DuBois, Clearfield
County; on August 16, 1985 with Dale, a national bank in Dale (Johnstown),
Cambria County; and on December 14, 1985 with the First National Bank of
Leechburg ("Leechburg"), a national bank in Leechburg, Armstrong County;
December 31, 1986 with CNB CORP, Inc. ("CNB"), a one-bank holding company
and its wholly-owned subsidiary, Citizens National Bank in Windber
("Citizens"). CNB was then combined with the Corporation. Immediately
thereafter, and on the same day, Citizens was combined with Dale and the
resulting entity was named Cenwest National Bank ("Cenwest"). On May 31,
1990 the Corporation affiliated with Peoples Bank and Trust Company ("PBT"),
a Pennsylvania-chartered bank and trust company in Jennerstown, Somerset
County. On April 30, 1992 the Corporation affiliated with Central Bank
("Central"), a Pennsylvania-chartered bank in Hollidaysburg, Blair County.
On December 31, 1993 the Corporation affiliated with Peoples Bank of Western
Pennsylvania ("PBWPA"), a Pennsylvania-chartered commercial bank in New
Castle, Lawrence County. On September 27, 1994 the Corporation affiliated
with United National Bancorporation, ("United"), a bank holding company, and
its wholly-owned subsidiaries. Unitas National Bank ("Unitas Bank") a
national bank headquartered in Chambersburg, Franklin County, Pennsylvania
and Unitas Mortgage Corporation ("Unitas Mortgage") were the only active
subsidiaries of United. Unitas Mortgage engaged in the origination of
mortgages for sale in the secondary mortgage market and is headquartered in
Carlisle, Pennsylvania. Upon merger, United was combined with the
Corporation and its subsidiaries became subsidiaries of the Corporation. On
September 29, 1994 the Corporation affiliated with Reliable Financial
Corporation ("RFC"), a savings and loan holding company and its wholly-owned
subsidiary, Reliable Savings Bank, PaSA ("RSB"), a state-chartered,
federally insured savings bank headquartered in Bridgeville, Pennsylvania.
As a result of the merger, RFC became a wholly-owned subsidiary of the
Corporation, with its principal places of business in Allegheny and
Washington Counties in western Pennsylvania.
Effective at the close of business November 13, 1995 seven wholly-owned
subsidiary banks of the Corporation including NBOC, Cenwest, Leechburg, PBT,
Central, PBWPA and Unitas Bank merged into Deposit, also a wholly-owned
subsidiary, under the Deposit charter. The name of the surviving bank was
immediately changed to First Commonwealth Bank ("FCB"); and the principal
place of business was moved to Indiana, Indiana County, Pennsylvania.
Effective at the close of business September 26, 1997, Reliable Savings Bank
PaSA, an indirect wholly-owned subsidiary of the Corporation merged into
First Commonwealth Bank. The subsidiary banks continue to operate in their
local communities in central and western Pennsylvania, as divisions of First
Commonwealth Bank, doing business under the following names: NBOC Bank,
Deposit Bank, Cenwest Bank, First Bank of Leechburg, Peoples Bank, Central
Bank, Peoples Bank of Western Pennsylvania, Unitas Bank and Reliable Bank.
Commonwealth Systems Corporation ("CSC") was incorporated as a Pennsylvania
business corporation in 1984 by the Corporation to function as its data
processing subsidiary and it has its principal place of business in Indiana,
Pennsylvania. Before August 1984, it had operated as the data processing
department of NBOC. First Commonwealth Trust Company ("FCTC") was
incorporated on January 18, 1991 as a Pennsylvania chartered trust company
to render general trust services. The trust departments of subsidiary banks
were combined to form FCTC, and the corporate headquarters are located in
Indiana, Pennsylvania. On April 1, 1996 the Corporation affiliated with BSI
Financial Services Inc. ("BSI") a Pennsylvania business corporation
headquartered in Titusville, Crawford County. BSI provides mortgage banking
loan servicing and collection services to the Corporation's subsidiary banks
2<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
as well as unaffiliated organizations. First Commonwealth Insurance Agency
("FCIA") was incorporated as a Pennsylvania business corporation with its
principal place of business in Indiana, Pennsylvania. FCIA began operations
in January, 1998 as a wholly-owned subsidiary of FCB and provides a full
range of insurance and annuity products to retail and commercial customers.
The Corporation and its subsidiaries employed approximately 1,158 persons
(full-time equivalents) at December 31, 1997.
Through FCB, the Corporation traces its banking origins to 1866. FCB
conducts business through 83 community banking offices in 54 communities in
the counties of Adams (1 office), Allegheny (2), Armstrong (3), Beaver (1),
Bedford (4), Blair (8), Cambria (11), Centre (4), Clearfield (6), Elk (3),
Franklin (2), Huntingdon (7), Indiana (9), Jefferson (4), Lawrence (6),
Somerset (5), Washington (1) and Westmoreland (6). FCB engages in general
banking business and offers a full range of financial services. FCB offers
such general retail banking services as demand, savings and time deposits;
mortgage, consumer installment and commercial loans; and credit card loans
through MasterCard and VISA.
FCB operates a network of 63 automated teller machines ("ATMs") which
permits customers to conduct routine banking transactions 24 hours a day.
Of the ATMS, 51 are located on the premises of their main or branch offices
and 12 are in remote locations. All the ATMs are part of the MAC network
which consist of over 23,000 ATMs owned by numerous banks, savings and loan
associations and credit unions located throughout 45 states. The ATM's
operated by FCB are also part of the global MasterCard/Cirrus network which
is comprised of more than 300,000 ATMs located in the United States, Canada
and 58 other countries and territories, which services over 365 million card
holders. Such networks allow FCB's customers to withdraw cash and in
certain cases conduct other banking transactions from ATMs of all
participating financial institutions.
In addition to funds access through the use of ATMs, the MAC debit card
offered to FCB's deposit customers may be used at 300,000 point of sale
terminals on the MAC system as well as being used on the global MasterCard
system for the purchase of goods and services. The MAC debit card provides
customers with the almost universal acceptability of a credit card combined
with the convenience of direct debit to the customers checking account.
CSC is the data processing subsidiary of the Corporation. It provides on-
line general ledger accounting services and bookkeeping services for deposit
and loan accounts to the Corporation, First Commonwealth Bank and three
other nonbank subsidiaries. CSC also acts as a centralized purchasing agent
for the purchase of computer hardware and software products by the
Corporation and subsidiaries as well as providing technical support for the
installation and use of these products. It competes, principally with data
processing subsidiaries of other, mostly larger, banks, on the basis of the
price and quality of its services and the speed with which such services are
delivered.
FCTC has five branch offices in the service areas of FCB and offers personal
and corporate trust services, including administration of estates and
trusts, individual and corporate investment management and custody services
and employee benefit trust services.
On June 1, 1989 Commonwealth Trust Credit Life Insurance Company began
operations. The Corporation owns 50% of the voting common stock of the new
company. Commonwealth Trust provides reinsurance for credit life and credit
and health insurance activities sold by the subsidiaries of the two
unrelated holding company owners under a joint venture arrangement whereby
the net income derived from such reinsurance inures proportionally to the
benefit of the holding company selling the underlying insurance to its
banks' customers.
3<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
The Corporation does not engage in any significant business activities other
than holding the stock of its subsidiaries. The Corporation does not at
present have any plans to expand or modify its business or that of its
subsidiaries, other than as described herein. Nevertheless, it will be
receptive to and may actively seek out mergers and acquisitions in the event
opportunities which management considers advantageous to the development of
the Corporation's business arise, and may otherwise expand or modify its
business as management deems necessary to respond to changing market
conditions or the laws and regulations affecting the business of banking.
Competition
FCB, FCTC, BSI and FCIA face intense competition, both from within and
without their service areas, in all aspects of business. FCB competes for
deposits, in such forms as checking, savings and NOW (negotiable order of
withdrawal) accounts, MMDA (money market deposit accounts) and certificates
of deposit, and in making consumer loans and loans to smaller businesses,
with numerous other commercial banks and savings banks doing business within
its service area. With respect to loans to larger businesses FCB also
competes with much larger banks located outside of its service area. FCB
also competes, primarily in making consumer loans and for deposits, with
state and federally chartered savings and loan associations and with credit
unions. In recent years FCB has encountered significant competition for
deposits from money market funds and institutions that offer annuities
located throughout the United States. Money market funds pay dividends to
their shareholders (which are the equivalent of the interest paid by banks
on deposits) and they are able to offer services and conveniences similar to
those offered by FCB. Annuities accumulate interest on the amounts
deposited over a predetermined time period. The depositor is then entitled
to withdraw his funds for a fixed period of time or until death. The effect
of such competition has been to increase the costs of the rest of deposits,
which provide the funds with which loans are made. In addition to savings
and loan associations and credit unions, FCB also competes for consumer
loans with local offices of national finance companies and finance
subsidiaries of automobile manufacturers and with national credit card
companies such as MasterCard and VISA, whose cards, issued through financial
institutions, are held by consumers throughout their service area. FCB
believes that the principal means by which it competes for deposits and
consumer and smaller commercial loans are the number and desirability of the
locations of its offices and ATMs, the sophistication and quality of its
services and the prices (primarily interest rates) of its services.
Additionally, FCB intends to remain competitive by offering financial
services that target specific customer needs. Examples of such specialized
products include the "Sentry CD Watch" which provides certificate of deposit
rates of competitors to members of FCB's "Senior Accent" club, available to
customers age 50 or better, and introduction of the "Too Good To Be True"
mortgage product, available to first time home buyers. Specific customer
needs are also met through an enhanced customer delivery system that
includes telephone banking, which provides convenient access to financial
services and hours of operation that extend past those of FCB's branch
offices.
Supervision and Regulation
The Corporation is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended ("the Bank Holding Company Act") and
is registered such with the Federal Reserve Board. As a registered bank
holding company, it is required to file with the Federal Reserve Board an
annual report and other information. The Federal Reserve Board is also
empowered to make examinations and inspections of the Corporation and its
subsidiaries.
4 <PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation (Continued)
The Bank Holding Company Act and Regulation Y of the Federal Reserve Board
require every bank holding company to obtain the prior approval of the
Federal Reserve Board before it may acquire direct or indirect ownership or
control of more than 5% of the outstanding voting shares or substantially
all of the assets of a bank or merge or consolidate with another bank
holding company. The Federal Reserve Board may not approve acquisitions by
FCFC of such percentage of voting shares or substantially all the assets of
any bank located in any state other than Pennsylvania unless the laws of
such state specifically authorize such an acquisition.
The Bank Holding Company Act generally prohibits a bank holding company from
engaging in a non-banking business or acquiring direct or indirect ownership
or control of more that 5% of the outstanding voting shares of any non-
banking corporation subject to certain exceptions, the principal exception
being where the business activity in question is determined by the Federal
Reserve Board to be closely related to banking or to managing or controlling
banks to be a proper incident thereto. The Bank Holding Company Act does
not place territorial restrictions on the activities of such banking related
subsidiaries of bank holding companies.
Under the Federal Reserve Act, subsidiary banks of a bank holding company
are subject to certain restrictions on extensions of credit to the bank
holding company or any of its subsidiaries, investments in the stock or
other securities thereof, or acceptance of such stock or securities as
collateral for loans to any one borrower. A bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit or the furnishing of property or
services.
Under the Pennsylvania Banking Code, there is no limit on the number of
Pennsylvania banks that may be owned or controlled by a Pennsylvania bank
holding company.
First Commonwealth Bank
FCB is a Pennsylvania-chartered bank and is not a member of the Federal
Reserve System. FCB is subject to the supervision of and regularly examined
by the Pennsylvania Department of Banking and the Federal Deposit Insurance
Corporation ("FDIC"), and subject to certain regulations of the Federal
Reserve Board. The areas of operation subject to regulation by Federal and
Pennsylvania laws, regulations and regulatory agencies include reserves
against deposits, maximum interest rates for specific classes of loans,
truth-in-lending disclosures, permissible types of loans and investments,
trust operations, mergers and acquisitions, issuance of securities, payment
of dividends, Community Reinvestment Act evaluations, mandatory external
audits, establishment of branches and other aspects of operations. Under
the Pennsylvania Banking Code, a state bank located in Pennsylvania may
establish branches anywhere in the state.
5
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Reciprocal Regional Interstate Banking
As already noted, a bank holding company located in one state cannot acquire
a bank or a bank holding company located in another state unless the law of
such other state specifically permits such acquisition. On June 25, 1986,
Pennsylvania passed a law (Act No. 1986-69) which provides that a bank
holding company located in any state or the District of Columbia can acquire
a Pennsylvania bank or bank holding company if the jurisdiction where the
acquiring bank holding company is located has passed an enabling law that
permits a Pennsylvania bank holding company to acquire a bank or a bank
holding company in such jurisdiction. As of December 31, 1997 enabling laws
have been passed so that the required reciprocity presently exists with
approximately 34 states, of which the following 18 are east of the
Mississippi River: Connecticut, Delaware, Illinois, Indiana, Kentucky,
Louisiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New
Jersey, New York, Ohio, Rhode Island, Tennessee, Vermont and West Virginia.
A similar law is applicable to savings associations and savings and loan
holding companies.
It is difficult to determine the precise effects that reciprocal regional
interstate banking will have on the Corporation, but the law has increased,
and as reciprocity becomes effective will increase further, the number of
potential buyers for Pennsylvania banks and bank holding companies. The law
also will permit Pennsylvania bank holding companies and Pennsylvania
savings and loan holding companies that desire to expand outside
Pennsylvania to acquire banks, savings institutions and bank holding
companies located in jurisdictions with which Pennsylvania has reciprocity.
Effects of Governmental Policies
The business and earnings of the Corporation are affected not only by
general economic conditions, but also by the monetary and fiscal policies of
the United States Government and its agencies, including the Federal Reserve
Board. An important function of the Federal Reserve Board is to regulate
the national supply of bank credit. Among the instruments of monetary
policy used by the Federal Reserve Board to implement these objectives are
open market operations in United States government securities, changes in
the discount rate on borrowings by member banks and savings institutions
from the Federal Reserve System and changes in reserve requirements against
bank and savings institution deposits. These instruments, together with
fiscal and economic policies of various governmental entities, influence
overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans, received on investments or paid for
deposits.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of bank holding companies and their
subsidiary banks in the past and are expected to continue to do so in the
future. In view of changing conditions in the national and Pennsylvania
economies and in the money markets, as well as the effect of actions by
monetary and fiscal authorities, including the Federal Reserve Board, no
prediction can be made as to possible future changes in interest rates,
deposit levels and loan demand or the effect of such changes on the business
and earnings the Corporation or its subsidiaries.
6<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Effects of Governmental Policies (Continued)
ITEM 2. PROPERTIES
The Corporation's principal office is located in the old Indiana county
Courthouse complex. This certified Pennsylvania and national historic
landmark was built in 1870 and restored by NBOC in the early 1970s. The
Corporation, NBOC and CSC occupy this grand structure, which provides 32,000
square feet of floor space, under a 25-year restoration lease agreement with
Indiana County, which NBOC entered into in 1973 and which contains a renewal
option. Under the lease, NBOC is obligated to pay all taxes, maintenance
and insurance on the building and to restore it in conformity with historic
guidelines. In order to support future expansion needs and centralization
of various functional areas such as loan processing, marketing, and
accounting, the Corporation also owns two additional structures, free of all
liens and encumbrances. These facilities currently provide office space for
the Corporation, CSC, FCTC, FCB and FCIA. FCB has 83 banking facilities of
which 24 are leased and 59 are owned in fee, free of all liens and
encumbrances. All of the facilities utilized by the Corporation and its
subsidiaries are used primarily for banking activities. Management believes
all such facilities to be in good repair and well suited to their uses.
Management presently expects that such facilities will be adequate to meet
the anticipated needs of the Corporation and its subsidiaries for the
immediate future.
ITEM 3. LEGAL PROCEEDINGS
The information appearing in NOTE 18 of the Notes to the Consolidated
Financial Statements included in Item 8 of this filing is incorporated by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
7
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Part II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder
Matters
First Commonwealth Financial Corporation (the "Corporation") is listed on
the New York Stock Exchange under the symbol "FCF." The approximate number
of holders of record of the Corporation's common stock is 9,500. The table
below sets forth the high and low sales prices per share and cash dividends
declared per share for common stock of the Corporation.
Cash
Dividends
Period High Sale Low Sale Per Share
1997
First Quarter $18.875 $17.125 $0.200
Second Quarter $23.000 $17.500 $0.200
Third Quarter $22.000 $19.563 $0.200
Fourth Quarter $35.063 $21.625 $0.220
Cash
Dividends
Period High Sale Low Sale Per Share
1996
First Quarter $19.500 $17.750 $0.180
Second Quarter $19.625 $17.750 $0.180
Third Quarter $19.125 $17.000 $0.180
Fourth Quarter $19.000 $17.500 $0.200
8
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 6. Selected Financial Data (Dollar Amounts in Thousands, except per
share data)
The following selected financial data is not covered by the auditor's report
and should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations, which follows, and with
the consolidated financial statements and related notes. All amounts have
been restated to reflect the poolings of interests.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Interest income....................... $199,811 $182,329 $175,701 $159,644 $154,990
Interest expense...................... 102,753 88,325 82,418 69,102 67,164
Net interest income................. 97,058 94,004 93,283 90,542 87,826
Provision for possible credit losses.. 6,929 4,501 4,125 2,896 2,920
Net interest income after provision
for possible credit losses........ 90,129 89,503 89,158 87,646 84,906
Securities gains (losses)............. 6,686 1,403 (603) 5,536 3,528
Other operating income................ 13,157 12,338 11,007 10,635 10,960
Other operating expenses.............. 65,909 63,589 62,062 60,855 59,405
Income before taxes and cumulative
effect of change in accounting
method......................... 44,063 39,655 37,500 42,962 39,989
Applicable income taxes............... 13,529 12,072 11,974 14,226 12,444
Income before cumulative effect
of change in accounting method. 30,534 27,583 25,526 28,736 27,545
Cumulative effect of change in
accounting method................... -0- -0- -0- -0- 865
Net income............................ $ 30,534 $ 27,583 $ 25,526 $ 28,736 $ 28,410
Per Share Data
Net income before cumulative effect
of change in accounting method..... $1.40 $1.26 $1.16 $1.28 $1.23
Cumulative effect of change in
accounting method.................. 0.00 0.00 0.00 0.00 0.04
Net income.......................... $1.40 $1.26 $1.16 $1.28 $1.27
Dividends declared.................. $0.82 $0.74 $0.66 $0.58 $0.51
Average shares outstanding.......... 21,878,945 21,954,111 22,005,427 22,432,062 22,416,360
Per Share Data Assuming Dilution
Net income before cumulative effect
of change in accounting method..... $1.39 $1.25 $1.16 $1.28 $1.22
Cumulative effect of change in
accounting method.................. 0.00 0.00 0.00 0.00 0.04
Net income.......................... $1.39 $1.25 $1.16 $1.28 $1.26
Dividends declared.................. $0.82 $0.74 $0.66 $0.58 $0.51
Average shares outstanding.......... 21,965,833 21,989,963 22,051,185 22,505,908 22,484,172
At End of Period
Total assets........................ $2,929,315 $2,584,638 $2,364,307 $2,334,921 $2,252,836
Investment securities............... 856,694 704,161 748,702 813,687 909,166
Loans and leases, net of unearned
income............................ 1,920,903 1,747,335 1,487,542 1,377,794 1,211,109
Allowance for possible credit losses 19,766 19,324 18,152 17,337 16,483
Deposits............................ 2,242,478 2,104,783 1,962,760 1,881,060 1,822,085
Long-term debt...................... 193,054 40,880 5,261 7,596 7,363
Shareholders' equity................ 271,834 261,358 252,276 225,135 228,910
Key Ratios
Return on average assets............ 1.13% 1.12% 1.10% 1.26% 1.32%
Return on average equity............ 11.34% 10.69% 10.55% 12.55% 12.86%
Net loans to deposit ratio.......... 84.78% 82.10% 74.86% 72.32% 65.56%
Dividends per share as a percent of
net income per share.............. 58.57% 58.73% 56.90% 45.31% 40.16%
Average equity to average assets
ratio............................. 9.98% 10.47% 10.39% 10.01% 10.23%
</TABLE>
9<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
This discussion and the related financial data are presented to assist in
the understanding and evaluation of the consolidated financial condition and
the results of operations of First Commonwealth Financial Corporation
including its subsidiaries (the "Corporation") for the years ended December
31, 1997, 1996 and 1995 and are intended to supplement, and should be read
in conjunction with, the consolidated financial statements and related
footnotes.
In addition to historical information, this discussion and analysis contains
forward-looking statements. The forward-looking statements contained herein
are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include,
but are not limited to, those discussed in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The
Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise
after the date hereof.
During the fourth quarter of 1997 the Corporation formed First Commonwealth
Insurance Agency ("FCIA") as a subsidiary of the Corporation's commercial
banking subsidiary. This new company will market a wide range of insurance
and annuity products to the Corporation's retail and commercial customers
beginning January 1, 1998. The Corporation acquired BSI Financial Services
Inc. ("BSI") effective April 1, 1996. The BSI merger was accounted for as a
purchase transaction, whereby the results of operations of BSI from the date
of acquisition are included in the Corporation's financial statements.
Results of Operations
Net income in 1997 was $30.5 million, an increase of $3.0 million from the
1996 level of $27.6 million and compared to $25.5 million reported in 1995.
Basic earnings per share increased $0.14 per share in 1997 to $1.40. The
increase in net income and basic earnings per share for 1997 was primarily
the result of increases in net interest income and securities gains which
were partially offset by increases in the provision for possible credit
losses and employee costs when compared to 1996 levels. The increase in
basic earnings per share of $0.10 generated during 1996 reflected increases
in net interest income and securities gains as well as increases due to the
inclusion of BSI income in loan origination and servicing revenue and
increases in charge card user fees. Net income and basic earnings per share
for 1996 were negatively impacted by increases in occupancy and furniture
and equipment costs and equipment maintenance and repairs. Return on
average assets was 1.13% and return on average equity was 11.34% during 1997
compared to 1.12% and 10.69%, respectively for 1996. Return on average
assets was 1.10% during 1995 while return on average equity was 10.55%.
10<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is an analysis of the impact of changes in net income on
earnings per share:
1997 1996
vs. vs.
1996 1995
Net income per share, prior year $1.26 $1.16
Increase (decrease) from changes in:
Net interest income 0.15 0.04
Provision for possible credit losses (0.11) (0.02)
Security transactions 0.24 0.09
Other income 0.04 0.06
Salaries and employee benefits (0.12) (0.01)
Occupancy and equipment costs (0.03) (0.04)
FDIC expense 0.03 0.06
Other expenses 0.01 (0.07)
Provision for income taxes (0.07) (0.01)
Net income per share $1.40 $1.26
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 $97.1 million in 1997
compared to $94.0 million in 1996 and $93.3 million in 1995. 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,
1997.
11<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
<TABLE>
<CAPTION>
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
1997 1996 1995
Average Income/ Yield or Average Income/ Yield or Average Income/ Yield or
Balance Expense Rate(a) Balance Expense Rate(a) Balance Expense Rate(a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Time deposits with banks $ 4,569 $ 230 5.02% $ 7,378 $ 413 5.59% $ 8,552 $ 486 5.69%
Investment securities 736,974 43,893 6.23 738,916 43,177 6.10 769,006 45,600 6.12
Federal funds sold 201 12 6.15 1,712 85 4.97 17,712 1,033 5.83
Loans (b) (c), net of
unearned income 1,830,039 155,676 8.60 1,601,747 138,654 8.74 1,421,004 128,582 9.11
Total interest-
earning assets 2,571,783 199,811 7.92 2,349,753 182,329 7.89 2,216,274 175,701 8.04
Noninterest-earning assets:
Cash 56,092 57,717 53,752
Allowance for credit losses (19,635) (18,951) (17,584)
Other assets 89,509 75,156 77,843
Total noninterest-
earning assets 125,966 113,922 114,011
Total Assets $2,697,749 $2,463,675 $2,330,285
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing
demand deposits (d) $ 230,628 $ 4,553 1.97% $ 212,269 $ 3,434 1.62% $ 208,330 $ 3,108 1.49%
Savings deposits (d) 494,957 15,439 3.12 481,608 13,392 2.78 464,021 11,858 2.56
Time deposits 1,261,461 71,494 5.67 1,145,592 63,886 5.58 1,060,070 58,855 5.55
Short-term borrowings 144,987 7,548 5.21 127,150 6,550 5.15 141,474 8,013 5.66
Long-term debt 65,820 3,719 5.65 18,170 1,063 5.85 7,010 584 8.33
Total interest-
bearing liabilities 2,197,853 102,753 4.68 1,984,789 88,325 4.45 1,880,905 82,418 4.38
Noninterest-bearing
liabilities and capital:
Noninterest-bearing
demand deposits (d) 205,704 197,899 185,889
Other liabilities 24,948 23,033 21,429
Shareholders' equity 269,244 257,954 242,062
Total noninterest-
bearing funding sources 499,896 478,886 449,380
Total Liabilities and
Shareholders' Equity $2,697,749 $2,463,675 $2,330,285
Net Interest Income and
Net Yield On Interest-
earning Assets $ 97,058 3.92% $ 94,004 4.14% $ 93,283 4.32%
(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes net loan fees.
(d) Average balances for 1997 do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand
deposits into savings deposits which were made for regulatory purposes.
</TABLE>
12<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Both interest income and interest expense increased over 1996 levels as
volumes increased. Average interest-earning assets increased $222.0 million
while average interest-bearing liabilities increased $213.1 million in 1997.
Average loans increased $228.3 million in 1997 and were supported by deposit
growth and maturities of investment securities.
Asset yields, on a tax-equivalent basis, increased 3 basis points (0.03%)
during 1997 while asset yields decreased 15 basis points (0.15%) during
1996. The decline in loan yields which began in the fourth quarter of 1995
has continued throughout 1996 and 1997. Loan yields declined 14 basis
points (0.14%) during 1997 to 8.60% from 8.74% reported for 1996 and
compared to 9.11% during 1995. The 1997 period reflected decreased yields
in all loan categories except revolving credit loans which reflected an
increase of 56 basis points (0.56%) over 1996 levels. The 1997 decline in
loan yields included declines of 30 basis points (0.30%) for mortgage loans,
26 basis points (0.26%) for installment loans and 74 basis points (0.74%)
for municipal loans. Municipal loan yields declined as most of the
municipal growth for 1997 was in short-term tax anticipation notes. The
mortgage portfolio continues to be impacted by loans maturing at higher
interest rates than current market rates and innovative loan product
offerings which bear lower introductory interest rates. These loan products
are designed to initiate relationships in the early stages of a customer's
financial life cycle so they may be developed thereafter with more
traditional banking products and services. Any initial earnings reduction
related to new products are expected to produce long-term profitable
relationships and loan yields. Loan yields on products introduced during
the fourth quarter of 1995 began improving in the fourth quarter of 1997 and
are expected to continue improving during 1998. Although loan yields
declined during 1997, interest income on loans increased $17.0 million over
1996 levels as a result of increases due to volume of $19.9 million which
were partially offset by decreases due to rate of $2.9 million.
Interest income on investments increased $716 thousand during 1997 and
reflected increases due to rate of $834 thousand which were partially offset
by decreases due to volume of $118 thousand. The yield on investments of
6.23% for 1997 was an increase of 13 basis point (0.13%) over 1996 yields of
6.10%. The investment rate increases for 1997 occurred primarily in
investments of U.S. Government agency securities. Although prepayments of
mortgage backed securities ("MBS") increased during 1997 over 1996 levels,
these prepayments have not increased beyond acceptable levels. The primary
risk of owning MBS relates to the uncertainty of prepayments of the
underlying mortgages. Interest rate changes have a direct impact on
prepayment speeds. As interest rates increase, prepayment speeds generally
decline, resulting in a longer average life of a MBS. Conversely as
interest rates decline, prepayment speeds increase, resulting in a shorter
average life of a MBS. Using computer simulation models, the Corporation
tests the average life and yield volatility of all MBS's under various
interest rate scenarios on a continuing basis to insure that volatility
falls within acceptable limits. The Corporation holds no "high risk"
securities nor does the Corporation own any securities of a single issuer
exceeding 10% of shareholders' equity other than U.S. Government and Agency
securities.
The cost of funds for 1997 increased 23 basis points (0.23%) over 1996 costs
of 4.45% and compared to costs of 4.38% for 1995. Interest on deposits
increased $10.8 million in 1997 and included increases due to volume of $7.1
million and increases due to rate of $3.6 million. The cost of deposits
increased 21 basis points (0.21%) during 1997, including increases on total
savings deposits of 33 basis points (0.33%) which can primarily be
attributable to increased utilization by customers of new savings products
bearing higher interest rates than standard savings accounts. These new
savings products have been designed to build long-term customer
relationships and are intended to produce a favorable impact on the
Corporation's net interest margin over the long-term. Interest expense on
time deposits increased $7.6 million during 1997 primarily as a result of
volume increases in time deposits with maturities of 2 to 5 years and time
deposits greater than $100 thousand which increased $123.9 million and $76.9
million, respectively over 1996 averages.
13<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Increases in interest expense on short-term borrowings of $998 thousand and
interest expense on long-term debt of $2.7 million during 1997 were
primarily a result of increases in average borrowings of $17.8 million and
$47.7 million respectively over 1996 averages. Borrowings during 1997 were
part of a leveraging strategy intended to create an increase to net interest
margin over the life of the investments.
Net interest margin (net interest income, on a tax-equivalent basis as a
percentage of average earning assets), was 3.92% during 1997 compared to
4.14% in 1996 and 4.32% in 1995. The Corporation's use of computer modeling
to manage interest rate risk is described in the "Interest Sensitivity"
section of this discussion herein.
The following table shows the effect of changes in volumes and rates on
interest income and interest expense.
<TABLE>
<CAPTION>
Analysis of Year-to-Year Changes in Net Interest Income
(Dollar Amounts in Thousands)
1997 Change from 1996 1996 Change from 1995
Total Change Due Change Due Total Change Due Change Due
Change to Volume to Rate Change to Volume to Rate
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Time deposits with banks $ (183) $ (157) $ (26) $ (73) $ (67) $ (6)
Securities 716 (118) 834 (2,423) (1,843) (580)
Federal funds sold (73) (75) 2 (948) (933) (15)
Loans 17,022 19,943 (2,921) 10,072 16,473 (6,401)
Total interest income 17,482 19,593 (2,111) 6,628 13,630 (7,002)
Interest-bearing liabilities:
Deposits 10,774 7,130 3,644 6,891 5,256 1,635
Short-term borrowings 998 919 79 (1,463) (811) (652)
Long-term debt 2,656 2,789 (133) 479 929 (450)
Total interest expense 14,428 10,838 3,590 5,907 5,374 533
Net interest income $ 3,054 $ 8,755 $(5,701) $ 721 $ 8,256 $(7,535)
</TABLE>
The provision for possible credit losses is an amount added to the allowance
against which credit losses are charged. The amount of the provision is
determined by management based upon its assessment of the size and quality
of the loan portfolio and the adequacy of the allowance in relation to the
risks inherent within the loan portfolio. The provision for possible credit
losses was $6.9 million in 1997 compared to $4.5 million in 1996 and $4.1
million in 1995. The provision for possible credit losses increased in 1997
as a result of an increase in charge-offs, combined with growth in the
portfolio as a whole during 1997. Net charge-offs for 1997 reflected
increases in consumer installment and revolving credit loans of $1.6
million, loans secured by residential real estate of $605 thousand and
commercial loans not secured by real estate of $701 thousand. Major
components of the increase in net charge-offs of loans to individuals were
increases in charge-offs of indirect auto loans and unsecured loans. It is
anticipated that charge-offs for these categories will decline in future
periods, but remain above historic levels because of continued growth in
these areas. Net charge-offs against the allowance for possible credit
losses were $6.5 million, or 0.35% of average total loans in 1997. This
compared to $3.3 million in 1996 and 1995. Net charge-offs were 0.21% and
0.23% of average total loans during 1996 and 1995, respectively. Although
the allowance for possible credit losses as a percentage of average loans
outstanding is below peer averages net charge-offs as a percentage of
average loans outstanding has historically been at, or below peer averages.
The peer group was defined using the Uniform Bank Performance Report
published by the Federal Financial Institutions Examination Council. For an
analysis of credit quality, see the "Credit Review" section of this
discussion.
14<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The following table presents an analysis of the consolidated allowance for
possible credit losses for the five years ended December 31, 1997 (dollars
in thousands):
<TABLE>
<CAPTION>
Summary of Loan Loss Experience
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of year $1,920,903 $1,747,335 $1,487,542 $1,377,794 $1,211,109
Average loans outstanding $1,830,039 $1,601,747 $1,421,004 $1,283,866 $1,187,236
Allowance for possible credit losses:
Balance, beginning of year $ 19,324 $ 18,152 $ 17,337 $ 16,483 $ 15,828
Loans charged off:
Commercial, financial and agricultural 1,166 571 1,161 1,246 774
Loans to individuals 4,737 3,023 2,316 1,676 1,825
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial 664 440 218 23 791
Real estate-residential 751 174 423 179 357
Lease financing receivables -0- 26 52 52 106
Total loans charged off 7,318 4,234 4,170 3,176 3,853
Recoveries of loans previously charged off:
Commercial, financial and agricultural 148 254 132 254 563
Loans to individuals 604 482 518 563 565
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial 13 83 56 249 276
Real estate-residential 53 81 55 61 177
Lease financing receivables 13 5 99 7 7
Total recoveries 831 905 860 1,134 1,588
Net loans charged off 6,487 3,329 3,310 2,042 2,265
Provision charged to expense 6,929 4,501 4,125 2,896 2,920
Balance, end of year $ 19,766 $ 19,324 $ 18,152 $ 17,337 $ 16,483
Ratios:
Net charge-offs as a percentage
of average loans outstanding 0.35% 0.21% 0.23% 0.16% 0.19%
Allowance for possible credit losses
as a percentage of average loans
outstanding 1.08% 1.21% 1.28% 1.35% 1.39%
</TABLE>
Total other operating income increased $6.1 million in 1997 to $19.8 million
from $13.7 million reported in 1996 compared to $10.4 million in 1995. Net
securities gains were $6.7 million in 1997 compared to securities gains of
$1.4 million during 1996 and securities losses of $603 thousand in 1995.
The securities gains during 1997 and 1996 resulted primarily from the sale
of investments in Pennsylvania bank stocks classified as equity securities
"available for sale." These equity securities had book values of $17.4
million and $6.8 million and were sold for gains of $6.7 million and $1.5
million during 1997 and 1996 respectively. The securities losses during
1995 resulted from the sale of $77.6 million of securities, primarily U.S.
Treasury securities classified as "available for sale" having an average
yield of 4.91% and an average remaining life of about 17 months. The
proceeds from the sale of these U.S. Treasury securities were used to pay
off short-term borrowings costing 6.00%. This transaction resulted in a net
improvement in net interest income over the remaining life of the securities
in excess of the net loss on the sale.
Trust income reflected an increase in 1997 of $506 thousand over 1996 levels
as the book value of assets managed continued to increase. The 1997
increase in trust income occurred primarily in fees from employee benefit
accounts, estates and agency/custodial accounts. Service charges on
deposits decreased by $51 thousand during 1997 but are expected to increase
during 1998 as standardized fee schedules implemented during 1997 generate
results. Service charges on deposits increased during 1996, primarily as a
result of increased average total deposits.
15<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Other income increased $364 thousand in 1997 to $4.7 million from $4.4
million reported in 1996 and can be compared to $3.2 million in 1995. Other
revenue continued to be favorably impacted by charge card user fees which
increased $298 thousand during 1997 and $607 thousand during 1996. These
fee increases resulted from the introduction of redesigned charge card
products during 1996 which generated over a fifty percent increase in the
number of accounts and balances outstanding during 1996 and continued to
show strong growth during 1997. Charges for non-customer use of the
Corporation's ATMs instituted in November of 1997 increased other income for
1997 by $91 thousand and are anticipated to generate additional increases
for 1998. Other income for 1997 also included an increase in the cash
surrender value of bank owned life insurance of $204 thousand related to the
last two months of the year. Other revenue for 1998 will reflect increases
from insurance commissions as FCIA begins operations in January. Other
revenue for 1997 included decreases of $167 thousand in gains on sale of
assets. The inclusion of BSI income on loan origination and servicing for
1996, increased other income by $527 thousand.
Total other operating expenses increased $2.3 million to $65.9 million in
1997 and compared to $63.6 million and $62.1 million in 1996 and 1995,
respectively. Employee costs during 1997 were $35.8 million, an increase of
$2.5 million over the 1996 level of $33.3 million. Decreases in deferred
loan origination costs increased employee costs for 1997 by $339 thousand
while changes in unemployment compensation resulted in increases of $97
thousand. Inclusion of BSI for twelve months of 1997 increased employee
costs by $261 thousand during 1997 while inclusion of BSI for eight months
in the 1996 period resulted in an increase of $602 thousand during 1996.
Included in employee costs for 1995 were early retirement settlements and
other benefit adjustments of $1.3 million. The 1996 period also reflected
an increase in the employer's matching contribution for the Corporation's
401(k) plan to 80% of the amount contributed by the employee, up from 60% in
1995. Conversion to a managed health care plan effective January 1, 1996
resulted in decreases of $375 thousand for 1996 compared to 1995 levels and
reflected minimal increases for 1997 of 2% after excluding the effect of BSI
on the 1997 period. Health insurance costs are expected to experience a
rate increase during 1998. Although employee costs in dollars increased,
employee costs as a percentage of average assets declined to 1.33% for 1997
from 1.35% in 1996 and 1.42% in 1995. Salary levels are generally
maintained through attrition management programs.
Net occupancy and furniture and equipment costs increased $657 thousand
during 1997 and $786 thousand during 1996. Net occupancy and furniture and
equipment expense reflected increases in building rental expense, building
repairs, and depreciation during 1997. These increases were primarily the
result of the construction of new branches during 1996 and 1997 as well as
remodeling of existing branches. The cost of equipment maintenance
contracts and equipment repairs decreased $178 thousand during 1997 and
increased $485 thousand during 1996. Net occupancy expense and furniture
and equipment increased $360 thousand in 1995 as a result of increased
utilization of leased equipment during the redesign of various operational
areas of the organization such as loan processing.
FDIC expenses decreased for all periods presented including decreases of
$740 thousand for 1997 and $1.3 million for 1996. Both the 1996 and 1995
periods include adjustments to the Corporation's Federal Deposit Insurance
costs. The 1996 period includes an additional one-time assessment against
the Corporation's thrift deposits of $768 thousand to replenish the Savings
and Loan Insurance Fund (SAIF). The 1995 related period includes a rebate
of $1.1 million of deposit insurance costs to the Corporation's commercial
banking subsidiaries as a result of the Federal Deposit Insurance
Corporation's Bank Insurance Fund (BIF) reaching its regulatory cap. The
merger of Corporation's thrift subsidiary and the Corporation's commercial
banking subsidiary during 1997 will result in a tiered FDIC rate for
deposits in future periods, as the SAIF rate will apply to deposits of the
savings bank at the merger date and BIF rates will apply to new deposits of
all partner banks. It is anticipated that beginning in the year 2000 that
the tiered rate structure will disappear when banks and thrifts pay on equal
rate.
16<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Other operating expenses remained stable for 1997 with a reduction of $134
thousand from $20.0 million reported in 1996 and can be compared to $18.2
million in 1995. The inclusion of BSI accounted for $296 thousand of the
increase for 1996. Telephone costs continued to increase reflecting
increases of $142 thousand for 1997 and $392 thousand for 1996. These cost
increases may continue as high speed data lines are installed to facilitate
efficient access to centralized information by the Corporation's partner
banks. Centralized cost control efforts during 1997 were partially
responsible for the reduction in outside data processing, printing and
insurance costs of $262 thousand, $117 thousand and $259 thousand
respectively. Continued strong growth in the loan portfolio during 1997 was
the primary cause of increases in filing and recording fees of $73 thousand,
charge card interchange fees of $170 thousand and collection and
repossession expenses of $117 thousand. Marketing expenses remained stable
for 1997 while aggressive marketing of innovative new products and services
resulted in increases of $274 thousand in advertising expenses during 1996.
Additional cost increases during 1996 occurred in stationery and supplies,
filing and recording fees and Pennsylvania shares tax expenses which
incurred increases of $187 thousand, $226 thousand and $337 thousand
respectively. Other professional fees decreased $406 thousand during 1997
after an increase of $277 thousand for 1996 as a result of the use of
outside consultants to help analyze and implement standardized fee schedules
in the 1996 period.
Income tax expense was $13.5 million during 1997 representing an increase of
$1.4 million over the 1996 total of $12.1 million and compared to $12.0
million in 1995. Taxable income increased $3.3 million and $772 thousand
during 1997 and 1996 respectively, while taxable income decreased $6.4
million during 1995. The Corporation's effective tax rate increased to
30.7% in 1997 from 30.4% in 1996 and compares to 31.9% in 1995.
Liquidity
Liquidity is a measure of the Corporation's ability to efficiently meet
normal cash flow requirements of both borrowers and depositors. In the
ordinary course of business, funds are generated from deposits (primary
source) and the maturity or repayment of earning assets, such as securities
and loans. As an additional secondary source, short-term liquidity needs
may be provided through the use of overnight Federal funds purchased,
borrowings through the use of lines available for repurchase agreements, and
borrowings from the Federal Reserve Bank. Additionally, the banking
subsidiary is a member of the Federal Home Loan Bank and may borrow under
overnight and term borrowing arrangements. The sale of earning assets may
also provide an additional source of liquidity.
17<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The Corporation's long-term liquidity source is a large core deposit base
and a strong capital position. Core deposits are the most stable source of
liquidity a bank can have due to the long-term relationship with a deposit
customer. Increased competition from nonbanking sources such as mutual
funds may require banks to shift to alternative funding from other
borrowings. Although this is not significant at the end of 1997, it could
become more consequential in the future. Deposits increased $137.7 million
in 1997 and included $96.6 million in core deposits. Non-core deposits,
which are time deposits in denominations of $100 thousand or more
represented 13.46% of total deposits at December 31, 1997, up from 12.39% of
total deposits at December 31, 1996. Non-core deposits increased by $41.1
million in 1997 and $93.4 million in 1996 primarily as a result of an
increase in public funds. Time deposits of $100 thousand or more at
December 31, 1997, 1996 and 1995 had remaining maturities as follows:
<TABLE>
<CAPTION>
Maturity Distribution of
Large Certificates of Deposit
(Dollar Amounts in Thousands)
1997 1996 1995
Amount Percent Amount Percent Amount Percent
Remaining Maturity:
<S> <C> <C> <C> <C> <C> <C>
3 months or less $ 80,446 27% $ 87,467 33% $ 40,377 24%
Over 3 months through 6 months 62,397 21 38,714 15 26,331 16
Over 6 months through 12 months 46,368 15 43,115 17 32,357 19
Over 12 months 112,660 37 91,447 35 68,241 41
Total $301,871 100% $260,743 100% $167,306 100%
</TABLE>
Net loans increased $173.1 million during 1997 primarily in the categories
of commercial and industrial loans secured by real estate, consumer leases
and real estate loans secured by residential properties. In combination
these categories represented over 78% of the loan growth during 1997 with
59% of the total loan growth being generated in residential real estate
loans. The growth in residential mortgages can partially be attributed to
the outstanding customer response to the Corporation's innovative mortgage
product designed for first time home buyers which was introduced during the
fourth quarter of 1995. The growth in consumer leases during 1997 can
partially be attributed to continued growth in the Corporation's Dealer
Services Programs which began in May 1996 and offers in addition to indirect
loans, a competitive FlexLease product. Below is a schedule of loans by
classification for the five years ended December 31, 1997.
<TABLE>
<CAPTION>
Loans by Classification
(Dollar Amounts in Thousands)
1997 1996 1995 1994 1993
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial,
agricultural and
other $ 290,298 15% $ 252,798 14% $ 192,530 13% $ 180,373 13% $ 179,227 14%
Real estate-construction 17,873 1 24,111 2 22,969 1 23,131 2 12,980 1
Real estate-commercial 305,887 16 287,318 16 293,095 19 268,417 19 238,864 19
Real estate-residential 854,894 44 752,562 42 616,661 40 587,734 41 511,889 41
Loans to individuals 417,547 21 425,012 24 381,729 25 332,167 23 279,357 23
Net leases 51,245 3 36,329 2 24,190 2 30,498 2 26,617 2
Gross loans and
leases 1,937,744 100% 1,778,130 100% 1,531,174 100% 1,422,320 100% 1,248,934 100%
Unearned income (16,841) (30,795) (43,632) (44,526) (37,825)
Total loans, and leases
net of unearned income $1,920,903 $1,747,335 $1,487,542 $1,377,794 $1,211,109
</TABLE>
An additional source of liquidity are marketable securities that the
Corporation holds in its investment portfolio. These securities are
classified as "securities available for sale." While the Corporation does
not have specific intentions to sell these securities, they have been
designated as "available for sale" because they may be sold for the purpose
of obtaining future liquidity, for management of interest rate risk or as
part of the implementation of tax management strategies. As of December 31,
1997, securities available for sale had an amortized cost of $393.9 million
18<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
and an approximate fair value of $396.6 million. Gross unrealized gains
were $3.4 million and gross unrealized losses were $715 thousand. Based
upon the Corporation's historical ability to fund liquidity needs from other
sources, the current available for sale portfolio is deemed more than
adequate, as the Corporation does not anticipate a need to liquidate the
investments until maturity. Below is a schedule of the contractual maturity
distribution of securities held to maturity and securities available for
sale at December 31, 1997.
<TABLE>
<CAPTION>
Maturity Distribution of Securities Held to Maturity
(Dollar Amounts in Thousands)
States and Total Weighted
U.S. Government Agencies Political Other Amortized Average
and Corporations Subdivisions Securities Cost Yield*
<S> <C> <C> <C>
Within 1 year $ 48,913 $ 3,345 $ 60 $ 52,318 5.41%
After 1 but within 5 years 50,664 16,820 2,097 69,581 3.20
After 5 but within 10 years 206,372 30,403 358 237,133 6.27
After 10 years 64,766 36,265 -0- 101,031 6.43
Total $370,715 $86,833 $ 2,515 $460,063 6.22%
</TABLE>
<TABLE>
<CAPTION>
Maturity Distribution of Securities Available for Sale
At Amortized Cost
(Dollar Amounts in Thousands)
U.S. Treasury, and other States and Total Weighted
U.S. Government Agencies Political Other Amortized Average
and Corporations Subdivisions Securities Cost Yield*
<S> <C> <C> <C> <C> <C>
Within 1 year $ 42,615 $ 387 $ -0- $ 43,002 5.62%
After 1 but within 5 years 67,696 -0- 532 68,228 6.10
After 5 but within 10 years 24,510 -0- -0- 24,510 6.93
After 10 years 238,303 -0- 19,858 258,161 6.96
Total $373,124 $ 387 $20,390 $393,901 6.66%
*Yields are calculated on a tax-equivalent basis.
</TABLE>
Interest Sensitivity
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks
associated with maximizing income through interest sensitivity imbalances.
While no single number can accurately describe the impact of changes in
interest rates on net interest income, interest rate sensitivity positions,
or "gaps" when measured over a variety of time periods may be helpful.
An asset or liability is considered to be interest-sensitive if the rate it
yields or bears is subject to change within a predetermined time period. If
interest-sensitive assets ("ISA") exceeds interest-sensitive liabilities
("ISL") during a prescribed time period, a positive gap results.
Conversely, when ISL exceeds ISA during a time period, a negative gap
results.
A positive gap tends to indicate that earnings will be impacted favorably if
interest rates rise during the period and negatively when interest rates
fall during the time period. A negative gap tends to indicate that earnings
will be affected inversely to interest rate changes. In other words, as
interest rates fall, a negative gap should tend to produce a positive effect
on earnings and when interest rates rise, a negative gap should tend to
affect earnings negatively.
The primary components of ISA include adjustable rate loans and investments,
loan repayments, investment maturities and money market investments. The
primary components of ISL include maturing certificates of deposit, money
market deposits, savings deposits, NOW accounts and short-term borrowings.
19<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Interest Sensitivity (Continued)
The following table lists the amounts and ratios of assets and liabilities
with rates or yields subject to change within the periods indicated as of
December 31, 1997 and 1996 (Dollar Amounts in Thousands):
<TABLE>
<CAPTION>
1997
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
<S> <C> <C> <C> <C>
Loans $ 799,956 $125,950 $250,725 $1,176,631
Investments 51,528 63,717 102,631 217,876
Other interest-earning assets 130,666 5,214 10,043 145,923
Total interest-sensitive
assets 982,150 194,881 363,399 1,540,430
Certificates of deposit 252,652 161,264 225,113 639,029
Other deposits 804,672 -0- -0- 804,672
Borrowings 207,190 1,441 1,725 210,356
Total interest-sensitive
liabilities 1,264,514 162,705 226,838 1,654,057
Gap $ (282,364) $ 32,176 $136,561 $ (113,627)
ISA/ISL 0.78 1.20 1.60 0.93
Gap/Total assets 9.64% 1.10% 4.66% 3.88%
</TABLE>
<TABLE>
<CAPTION>
1996
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
<S> <C> <C> <C> <C>
Loans $ 669,043 $102,628 $190,064 $ 961,735
Investments 17,574 37,133 84,794 139,501
Other interest-earning assets 97,201 7,346 11,361 115,908
Total interest-sensitive
assets 783,818 147,107 286,219 1,217,144
Certificates of deposit 269,090 154,045 227,381 650,516
Other deposits 700,445 -0- -0- 700,445
Borrowings 179,308 5,621 4,946 189,875
Total interest-sensitive
liabilities 1,148,843 159,666 232,327 1,540,836
Gap $ (365,025) $(12,559) $ 53,892 $ (323,692)
ISA/ISL 0.68 0.92 1.23 0.79
Gap/Total assets 14.12% 0.49% 2.09% 12.52%
</TABLE>
20<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Final loan maturities and rate sensitivity of the loan portfolio excluding
consumer installment and mortgage loans and before unearned income at
December 31, 1997 were as follows (Dollar Amounts in Thousands):
Within One One to After
Year 5 Years 5 Years Total
Commercial and industrial $125,521 $44,273 $ 37,831 $207,625
Financial institutions -0- 77 -0- 77
Real estate-construction 12,514 3,248 2,111 17,873
Real estate-commercial 95,842 41,593 168,452 305,887
Other 37,907 8,463 36,226 82,596
Totals $271,784 $97,654 $244,620 $614,058
Loans at fixed interest rates 77,337 123,292
Loans at variable interest rates 20,317 121,328
Totals $97,654 $244,620
The Corporation has not experienced the kind of earnings volatility
indicated from the gap analysis. This is because assets and liabilities
with similar contractual repricing characteristics may not reprice at the
same time or to the same degree.
Therefore, to more precisely measure the impact of interest rate changes on
the Corporation's net interest margin, management simulates the potential
effects of changing interest rates through computer modeling. Assumptions
regarding the replacement of maturing assets and liabilities are made to
simulate the impact of future changes in rates and/or changes in balance
sheet composition. The Corporation is then better able to implement
strategies which would include an acceleration of a deposit rate reduction
or a lag in a deposit rate increase. The repricing strategies for loans
would be inversely related. The effect of changes in future interest rates
on the mix of assets and liabilities may cause actual results to differ from
simulated results. In addition, certain financial instruments provide
customers with a certain degree of flexibility to respond to economic
changes. This flexibility would enable customers to shift from lower cost
deposit products to higher cost products or to refinance loans as interest
rates decrease. While the Corporation's simulation analysis considers these
factors, the extent to which customers utilize their investment and
borrowing options may cause actual results to differ from the simulation.
The analysis at December 31, 1997, indicated that a 300 basis point movement
in interest rates in either direction would not have a significant impact on
the Corporation's anticipated net interest income over the next twelve
months.
Credit Review
Maintaining a high quality loan portfolio is of great importance to the
Corporation. The Corporation manages the risk characteristics of the loan
portfolio through the use of prudent lending policies and procedures and
monitors risk through a periodic review process provided by internal
auditors, regulatory authorities and our loan review staff. These reviews
include the analysis of credit quality, diversification of industry,
compliance to policies and procedures, and an analysis of current economic
conditions.
In the management of its credit portfolio, the Corporation emphasizes the
importance of the collectibility of loans and leases as well as asset and
earnings diversification. The Corporation immediately recognizes as a loss
all credits judged to be uncollectible and has established an allowance for
possible credit losses that may exist in the portfolio at a point in time,
but have not been specifically identified.
21<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The Corporation's written lending policy requires certain underwriting
standards to be met prior to funding any loan, including requirements for
credit analysis, collateral value coverage, documentation, and terms. The
principal factor used to determine potential borrowers' creditworthiness is
business cash flows or consumer income available to service debt payments.
Secondary sources of repayment, including collateral or guarantees, are
frequently obtained.
The lending policy provides limits for individual and bank committees
lending authorities. In addition to the bank loan approval process,
requests for borrowing relationships which will exceed one million dollars
must also be approved by the Corporation's Credit Committee. This Committee
consists of a minimum of three members of the Corporation's board of
directors.
Commercial and industrial loans are generally granted to small and middle
market customers for operating, expansion or asset acquisition purposes.
Operating cash flows of the business enterprise are identified as the
principal source of repayment, with business assets held as collateral.
Collateral margins and loan terms are based upon the purpose and structure
of the transaction as set forth in loan policy.
Commercial real estate loans are granted for the acquisition or improvement
of real property. Generally, commercial real estate loans do not exceed 75%
of the appraised value of property pledged to secure the transaction.
Repayment of such loans are expected from the operations of the subject real
estate and are carefully analyzed prior to approval.
Real estate construction loans are granted for the purposes of constructing
improvements to real property, both commercial and residential. On-site
inspections are conducted by qualified individuals prior to periodic
permanent project financing, which is generally committed prior to the
commencement of construction financing.
Real estate loans secured by 1-4 family residential housing properties are
granted subject to statutory limits in effect for each bank regarding the
maximum percentage of appraised value of the mortgaged property.
Residential loan terms are normally established in compliance with secondary
market requirements. Residential mortgage portfolio interest rate risk is
controlled by secondary market sales, variable interest rate loans and
balloon maturities.
Loans to individuals represent financing extended to consumers for personal
or household purposes, including automobile financing, education, home
improvement, and personal expenditures. These loans are granted in the form
of installment, credit card, or revolving credit transactions. Consumer
creditworthiness is evaluated on the basis of ability to repay, stability of
income sources, and past credit history.
22<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Since all identified losses are immediately charged off, no portion of the
allowance for possible credit losses is restricted to any individual credit
or groups of credits, and the entire allowance is available to absorb any
and all credit losses. However, for analytical purposes, the following
table sets forth an allocation of the allowance for possible credit losses
at December 31 according to the categories indicated:
<TABLE>
<CAPTION>
Allocation of the Allowance for Possible Credit Losses
(Dollar Amounts in Thousands)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial, industrial, financial,
agricultural and other $ 2,880 $ 2,901 $ 1,800 $ 2,443 $ 2,541
Real estate-construction 214 290 220 215 146
Real estate-commercial 3,882 3,747 3,253 3,328 3,389
Real estate-residential 6,361 5,972 4,334 4,532 4,151
Loans to individuals 2,827 3,188 2,377 2,417 1,978
Lease financing receivables 393 285 162 243 552
Unallocated 3,209 2,941 6,006 4,159 3,726
Total $19,766 $19,324 $18,152 $17,337 $16,483
Allowance as percentage
of average total loans 1.08% 1.21% 1.28% 1.35% 1.39%
</TABLE>
The unallocated portion of the allowance for possible credit losses
increased slightly during 1997 to 16.2% of the total allowance from 15.2% of
the total allowance for 1996. The Corporation has continued to allocate an
amount to provide for loan growth and to adjust the allowance for possible
credit losses based on comparative peer analysis. The Corporation has
defined an adequate base allowance for possible credit losses by comparing
the Corporation's allowance for possible credit losses as a percentage of
average loans outstanding to the peer average and has allocated a portion of
the allowance to reduce the variance to peer. Net charge-offs in both
dollars and as a percentage of average loans has increased on an annual
basis since December 31, 1993, but historically remain below peer averages.
Although the Corporation's historic net charge-offs as a percentage of
average loans remain lower than peer averages, management has deemed it
appropriate to allocate a portion of the allowance for possible credit
losses to provide for a potential change in the Corporation's trend in
credit loss experience equal to peers, rather than continuation of the
historic trend which has been favorable in comparison to peers.
Other than those described below, there are no material credits that
management has serious doubts as to the borrower's ability to comply with
the present loan repayment terms. The following table identifies
nonperforming loans at December 31. A loan is placed in a nonaccrual status
at the time when ultimate collectibility of principal or interest, wholly or
partially, is in doubt. Past due loans are those which were contractually
past due 90 days or more as to interest or principal payments but are well
secured and in the process of collection. Renegotiated loans are those
loans which terms have been renegotiated to provide a reduction or deferral
of principal or interest as a result of the deteriorating financial position
of the borrower.
23<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
<TABLE>
<CAPTION>
Nonperforming and Impaired Assets and Effect on Interest
Income Due to Nonaccrual
(Dollar Amounts in Thousands)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual basis $ 7,952 $ 7,906 $ 7,419 $ 9,575 $ 9,672
Past due loans 12,097 12,044 7,881 6,936 9,106
Renegotiated loans 67 280 803 733 1,413
Total nonperforming loans $20,116 $20,230 $16,103 $17,244 $20,191
Nonperforming loans as a percentage of
total loans 1.05% 1.16% 1.08% 1.25% 1.67%
Allowance as percentage of nonperforming
loans 98.26% 95.52% 112.72% 100.54% 81.64%
Other real estate owned $ 1,788 $ 1,647 $ 1,408 $ 2,269 $ 5,590
Gross income that would have been
recorded at original rates $ 809 $ 726 $ 857 $ 1,085 $ 929
Interest that was reflected in income 124 112 161 164 204
Net reduction to interest income due to
nonaccrual $ 685 $ 614 $ 696 $ 921 $ 725
</TABLE>
The reduction of income due to renegotiated loans was less than $50 thousand
in any year presented.
The Corporation's loan portfolio continues to reflect strong growth during
1997 while the level of nonperforming loans remains stable in dollar amount
when compared to 1996 levels. Nonperforming loans as a percentage of total
loans is currently at its lowest year-end level in over seven years. At
December 31, 1997 the ratio of the reserve for possible credit losses as a
percentage of nonperforming loans remains lower than the Corporation's peers
and although this ratio is an indicator of the strength of the reserve for
possible credit losses it does not in itself measure reserve adequacy.
Other factors to be considered include historical credit losses and
nonperforming loan levels. These measurements were favorable when compared
to peer group levels over the past five years. Management believes that the
reserve for possible credit losses and nonperforming loans remained safely
within acceptable levels.
Capital Resources
Equity capital increased $10.5 million in 1997 to $271.8 million. Dividends
declared decreased equity by $18.1 million, an increase over the 1996 period
as the dividend rate was increased. The retained net income remains in
permanent capital to fund future growth and expansion. Payments by the
Corporation's Employee Stock Ownership Plan ("ESOP") to reduce debt it
incurred to acquire the Corporation's common stock for future distribution
as employee compensation, net of additional advances, and fair value
adjustments to unearned ESOP shares, increased equity capital by $1.2
million. The market value adjustment to securities available for sale
increased capital by $323 thousand. Amounts paid to fund the discount on
reinvested dividends and optional cash payments reduced equity by $630
thousand. The cost of purchasing treasury shares decreased equity by $2.9
million while proceeds from the reissuance of treasury shares to provide for
stock options exercised increased equity capital by $16 thousand during
1997.
24<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Capital Resources (Continued)
A capital base can be considered adequate when it enables the Corporation to
intermediate funds responsibly and provide related services while protecting
against future uncertainties. The evaluation of capital adequacy depends on
a variety of factors, including asset quality, liquidity, earnings history
and prospects, internal controls and management caliber. In consideration
of these factors, management's primary emphasis with respect to the
Corporation's capital position is to maintain an adequate and stable ratio
of equity to assets. See NOTE 20 for an analysis of regulatory capital
guidelines and the Corporation's capital ratios relative to these
measurement standards.
Year 2000 Analysis
The year 2000 issue is the result of computer programs being written whereby
dates have been abbreviated by eliminating the first two digits of the year
under the assumption that these two digits would always be 19. Any computer
systems that have date sensitive programs may recognize a date using "00" as
the year 1900 rather than the year 2000. As the year 2000 approaches such
systems will be unable to accurately process certain date-based information
resulting in potential system failure or miscalculations.
The Corporation's data processing subsidiary, Commonwealth Systems
Corporation, is its greatest asset in minimizing both risks and costs
associated with the year 2000 issue. The technical staff began assessing
the size and complexity of the problem and identifying hardware and software
systems affected by the year 2000 issue in 1995. Based upon this
assessment, the Corporation has determined that it will be required to
modify or replace portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999.
In 1997 the Corporation began an awareness effort to inform the board of
directors, senior management and other staff of the year 2000 problem and
its significance. During 1997 the Corporation also began an inventory
process and developed a plan for addressing the year 2000 issue. Formal
communications have been initiated with software vendors to request year
2000 compliance certification. Where noncompliant systems are identified
the Corporation has identified the cost of replacement or modification of
these softwares. Some testing or validation began in 1997, however the bulk
of the validation will occur in 1998. Mainframe software systems will be
renovated or replaced throughout 1998 as the systems are successfully
tested. The Corporation has a certification date of December 31, 1998,
therefore the majority of the critical mainframe software systems will be
implemented by then.
Other areas of the Corporation utilize a similar framework for evaluating
software systems which are unique as well as evaluating significant
suppliers and outside professional service contractors to determine the
extent to which the Corporation is vulnerable to those parties failure to
remediate their own year 2000 issues.
The Corporation's estimate of total year 2000 project costs and estimated
times for completion are based on presently available information and are
therefore subject to certain risks and uncertainties. The Corporation will
utilize internal resources to reprogram and test software for year 2000
modifications to the extent possible. Internal incremental costs will be
expensed as incurred but are not expected to be material. In addition
certain software and hardware has been identified for replacement. In most
cases the new software and hardware will offer additional benefits in
processing capability or efficiencies gained from modernization in addition
to achieving year 2000 compliance. Spreadsheet and loan origination
25<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Year 2000 Analysis (Continued)
software will be upgraded to more recent software versions and personal
computers will be converted to windows operating systems as part of making
local area networks year 2000 compliant. Mainframe software and hardware
replaced will result in enhancements or features of potential benefit in
serving banking customers or processing financial transactions. These
expenditures will be capitalized as software and hardware is put into
service and the amounts will be amortized over three years for software and
five years for hardware. The cash outlay will be funded through operating
cash flows and will occur primarily during the next two years. As of
December 31, 1997, the Corporation estimates that expenditures for the year
2000 issue will not have a material impact on the Corporation's financial
condition or results of operations.
Inflation and Changing Prices
Management is aware of the impact inflation has on interest rates and
therefore the impact it can have on a bank's performance. The ability of a
financial institution to cope with inflation can only be determined by
analysis and monitoring of its asset and liability structure. The
Corporation monitors its asset and liability position with particular
emphasis on the mix of interest-sensitive assets and liabilities in order to
reduce the effect of inflation upon its performance. However, it must be
remembered that the asset and liability structure of a financial institution
is substantially different from an industrial corporation in that virtually
all assets and liabilities are monetary in nature, meaning that they have
been or will be converted into a fixed number of dollars regardless of
changes in general price levels. Examples of monetary items include cash,
loans and deposits. Nonmonetary items are those assets and liabilities
which do not gain or lose purchasing power solely as a result of general
price level changes. Examples of nonmonetary items are premises and
equipment.
Inflation can have a more direct impact on categories of noninterest
expenses such as salaries and wages, supplies and employee benefit costs.
These expenses are very closely monitored by management for both the effects
of inflation and increases relating to such items as staffing levels, usage
of supplies and occupancy costs.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information appearing in Item 7 of this report under the caption "Interest
Sensitivity" is incorporated herein by reference in response to this item.
26
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
(Dollar Amounts in Thousands)
December 31,
1997 1996
Assets
Cash and due from banks.....................$ 60,109 $ 69,406
Interest-bearing bank deposits.............. 4,985 4,199
Federal funds sold.......................... 2,880 -0-
Securities available for sale, at market.... 396,631 244,415
Securities held to maturity, at cost, (market
value $462,086 in 1997 and $457,189 in 1996) 460,063 459,746
Loans....................................... 1,937,744 1,778,130
Unearned income........................... (16,841) (30,795)
Allowance for possible credit losses...... (19,766) (19,324)
Net loans............................ 1,901,137 1,728,011
Property and equipment...................... 32,578 32,590
Other real estate owned..................... 1,788 1,647
Other assets................................ 69,144 44,624
Total assets.........................$2,929,315 $2,584,638
Liabilities
Deposits (All Domestic):
Noninterest-bearing.......................$ 150,426 $ 200,473
Interest-bearing.......................... 2,092,052 1,904,310
Total deposits....................... 2,242,478 2,104,783
Short-term borrowings....................... 193,918 150,330
Other liabilities........................... 28,031 27,287
Long-term debt.............................. 193,054 40,880
Total liabilities.................... 2,657,481 2,323,280
Shareholders' Equity
Preferred stock, $1 par value per
share, 3,000,000 shares authorized,
none issued............................... -0- -0-
Common stock, $1 par value per share,
100,000,000 shares authorized, 22,436,628
shares issued and 22,046,326 shares
outstanding in 1997; 22,436,628 shares
issued and 22,194,426 shares outstanding
in 1996................................... 22,437 22,437
Additional paid-in capital.................. 76,171 76,664
Retained earnings........................... 181,137 168,711
Unrealized gain on securities available
for sale, net of taxes.................... 1,632 1,309
Treasury stock (390,302 and 242,202 shares at
December 31, 1997 and 1996, respectively
at cost).................................. (7,107) (4,289)
Unearned ESOP shares........................ (2,436) (3,474)
Total shareholders' equity........... 271,834 261,358
Total liabilities and
shareholders' equity..........$2,929,315 $2,584,638
The accompanying notes are an integral part of these consolidated
financial statements.
27
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Income
(Dollar Amounts in Thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Interest Income
Interest and fees on loans................ $155,676 $138,654 $128,582
Interest and dividends on investments:
Taxable interest........................ 38,926 38,240 41,775
Interest exempt from Federal
income taxes.......................... 3,766 3,530 2,785
Dividends............................... 1,201 1,407 1,040
Interest on Federal funds sold............ 12 85 1,033
Interest on bank deposits................. 230 413 486
Total interest income................. 199,811 182,329 175,701
Interest Expense
Interest on deposits..................... 91,486 80,712 73,821
Interest on short-term borrowings........ 7,548 6,549 8,013
Interest on long-term debt............... 3,719 1,064 584
Total interest expense............... 102,753 88,325 82,418
Net interest income........................ 97,058 94,004 93,283
Provision for possible credit losses....... 6,929 4,501 4,125
Net interest income after provision for
possible credit losses................... 90,129 89,503 89,158
Other Income
Securities gains (losses)................ 6,686 1,403 (603)
Trust income............................. 2,698 2,192 2,173
Service charges on deposits.............. 5,721 5,772 5,601
Other income............................. 4,738 4,374 3,233
Total other income................... 19,843 13,741 10,404
Other Expenses
Salaries and employee benefits........... 35,824 33,287 33,034
Net occupancy expense.................... 5,156 4,528 4,347
Furniture and equipment expense.......... 4,744 4,715 4,110
FDIC expense............................. 322 1,062 2,373
Other operating expenses................. 19,863 19,997 18,198
Total other expenses................. 65,909 63,589 62,062
Income before income taxes................. 44,063 39,655 37,500
Applicable income taxes.................... 13,529 12,072 11,974
Net Income................................. $30,534 $27,583 $25,526
Average Shares Outstanding................. 21,878,945 21,954,111 22,005,427
Average Shares Outstanding Assuming
Dilution................................. 21,965,833 21,989,963 22,051,185
Earnings per common share:
Net income............................... $1.40 $1.26 $1.16
Earnings per common share assuming dilution:
Net income............................... $1.39 $1.25 $1.16
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Changes in Shareholders' Equity
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on
Additional Securities Unearned Total
Common Paid-in Retained Available ESOP Treasury Shareholders'
Stock Capital Earnings For Sale Shares Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........... $22,437 $77,964 $146,814 $(16,802) $(5,196) $ (82) $225,135
Net income............................ -0- -0- 25,526 -0- -0- -0- 25,526
Cash dividends declared............... -0- -0- (14,764) -0- -0- -0- (14,764)
Change in market value of securities
available for sale, net of tax effect -0- -0- -0- 17,313 -0- -0- 17,313
Decrease in unearned ESOP shares...... -0- 24 -0- -0- 651 -0- 675
Discount on dividend reinvestment
plan purchases....................... -0- (342) -0- -0- -0- -0- (342)
Treasury stock acquired............... -0- -0- -0- -0- -0- (1,583) (1,583)
Treasury stock reissued............... -0- (420) -0- -0- -0- 736 316
Balance at December 31, 1995........... 22,437 77,226 157,576 511 (4,545) (929) 252,276
Net income............................ -0- -0- 27,583 -0- -0- -0- 27,583
Cash dividends declared............... -0- -0- (16,448) -0- -0- -0- (16,448)
Change in market value of securities
available for sale, net of tax effect -0- -0- -0- 798 -0- -0- 798
Decrease in unearned ESOP shares...... -0- 105 -0- -0- 1,071 -0- 1,176
Discount on dividend reinvestment
plan purchases....................... -0- (529) -0- -0- -0- -0- (529)
Treasury stock acquired............... -0- -0- -0- -0- -0- (4,050) (4,050)
Treasury stock reissued............... -0- (138) -0- -0- -0- 690 552
Balance at December 31, 1996........... 22,437 76,664 168,711 1,309 (3,474) (4,289) 261,358
Net income............................ -0- -0- 30,534 -0- -0- -0- 30,534
Cash dividends declared............... -0- -0- (18,108) -0- -0- -0- (18,108)
Change in market value of securities
available for sale, net of tax
effect.............................. -0- -0- -0- 323 -0- -0- 323
Decrease in unearned ESOP shares...... -0- 171 -0- -0- 1,038 -0- 1,209
Discount on dividend reinvestment
plan purchases....................... -0- (630) -0- -0- -0- -0- (630)
Treasury stock acquired............... -0- -0- -0- -0- -0- (2,868) (2,868)
Treasury stock reissued............... -0- (34) -0- -0- -0- 50 16
Balance at December 31, 1997........... $22,437 $76,171 $181,137 $ 1,632 $(2,436) $(7,107) $271,834
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
29
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION> Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Operating Activities
Net income............................................ $ 30,534 $ 27,583 $ 25,526
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible credit losses............... 6,929 4,501 4,125
Depreciation and amortization...................... 5,775 5,155 5,126
Net losses (gains) on sales of assets.............. (6,989) (2,030) 427
Increase in cash surrender of bank owned life
insurance........................................ (204) -0- -0-
Increase in interest receivable.................... (7,915) (1,448) (765)
Increase in interest payable....................... 2,641 2,523 3,349
Increase (decrease) in income taxes payable........ (355) 2,021 (2,168)
Change in deferred taxes........................... 1,515 (683) 863
Other - net........................................ 3,561 (4,082) 544
Net cash provided by operating activities....... 35,492 33,540 37,027
Investing Activities
Transactions with securities held to maturity:
Sales.............................................. -0- -0- -0-
Maturities and redemptions......................... 124,870 87,684 49,859
Purchases of investment securities................. (125,078) (42,576) (38,462)
Transactions with securities available for sale:
Sales.............................................. 29,811 20,240 76,999
Maturities and redemptions......................... 44,411 46,448 46,965
Purchases of investment securities................. (219,364) (64,562) (44,342)
Proceeds from sales of loans and other assets......... 20,674 21,974 21,180
Investment in bank owned life insurance............... (25,000) -0- -0-
Acquisition of affiliate and branch, net of cash
received............................................. -0- 7,836 -0-
Changes net of acquisitions:
Net decrease (increase) in time deposits with banks... (786) 4,090 5,398
Net increase in loans................................. (200,767) (285,160) (132,610)
Purchases of premises and equipment................... (4,019) (6,757) (4,095)
Net cash used by investing activities............... (355,248) (210,783) (19,108)
Financing Activities
Proceeds from issuance of long-term debt.............. 204,842 33,000 -0-
Repayments of long-term debt.......................... (51,630) (8,509) (1,684)
Discount on dividend reinvestment plan purchases...... (630) (529) (342)
Dividends paid........................................ (17,695) (16,037) (14,326)
Net increase (decrease) in Federal funds purchased.... 53,675 23,740 (34,940)
Net increase (decrease) in other short-term borrowings (10,087) 18,015 (45,993)
Changes net of acquisitions:
Acquisition of treasury stock....................... (2,868) (4,050) (1,583)
Reissuance of treasury stock........................ 16 108 316
Net increase in deposits............................ 137,716 133,730 81,759
Net cash provided (used) by financing activities 313,339 179,468 (16,793)
Net increase (decrease) in cash and cash
equivalents................................... (6,417) 2,225 1,126
Cash and cash equivalents at January 1.................. 69,406 67,181 66,055
Cash and cash equivalents at December 31................ $ 62,989 $ 69,406 $ 67,181
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
NOTE 1--Statement of Accounting Policies
General
The following summary of accounting and reporting policies is presented to
aid the reader in obtaining a better understanding of the financial
statements and related financial data of First Commonwealth Financial
Corporation and its subsidiaries (the "Corporation") contained in this
report.
The financial information is presented in accordance with generally accepted
accounting principles and general practice for financial institutions. In
preparing financial statements management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. In addition, these estimates and assumptions affect revenues
and expenses in the financial statements and as such, actual results could
differ from those estimates.
Through its subsidiaries which include a commercial bank, nondepository
trust company, and insurance agency, the Corporation provides a full range
of loan, deposit, trust and insurance services primarily to individuals and
small to middle-market businesses in eighteen counties in central and
western Pennsylvania.
The Corporation and subsidiaries are subject to regulations of certain state
and federal agencies. These regulatory agencies periodically examine the
Corporation and its subsidiaries for adherence to laws and regulations. As
a consequence the cost of doing business may be affected.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Corporation and its wholly-owned subsidiaries. All material
intercompany transactions have been eliminated in consolidation.
As part of the Corporation's long-term strategic plan, Reliable Savings Bank
PaSA merged into First Commonwealth Bank during the third quarter of 1997.
The merger of these wholly-owned subsidiaries was accounted for in a manner
similar to a pooling of interests and accordingly the combined entity was
recorded at historic cost.
Investments of 20 to 50 percent of the outstanding common stock of investees
are accounted for using the equity method of accounting.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income", which requires businesses to disclose comprehensive income and its
component in their general-purpose financial statements. This statement
requires the reporting of all items of comprehensive income in a financial
statement that is displayed with the same prominence as other financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997, with reclassification of comparative financial statements
and is applicable to interim periods. Management is in the process of
evaluating the impact of this statement on the financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which is effective for financial
statements for periods beginning after December 15, 1997. Statement No. 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. Management's preliminary determination is that, under current
conditions, the Corporation will report one business segment.
31<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
NOTE 1--Statement of Accounting Policies (Continued)
Securities
Debt securities that the Corporation has the positive intent and ability to
hold to maturity are classified as securities held-to-maturity and are
reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are to be
classified as trading securities and reported at fair value, with unrealized
gains and losses included in earnings. Debt and equity securities not
classified as either held-to-maturity securities or trading securities are
classified as securities available-for-sale and are reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of deferred taxes.
The Corporation had securities classified as either held-to-maturity or
available-for-sale. The Corporation does not engage in trading activities.
Net gain or loss on the sale of securities was determined by using the
specific identification method.
Loans
Loans are carried at the principal amount outstanding. Unearned income on
installment loans and leases is taken into income on a declining basis which
results in an approximately level rate of return over the life of the loan
or lease. Interest is accrued as earned on nondiscounted loans.
Effective January 1, 1995, the Corporation adopted Financial Accounting
Standards Board Statement No. 114 "Accounting by Creditors for Impairment of
a Loan", as amended by Statement No. 118 "Accounting By Creditors for
Impairment of a Loan-Income Recognition and Disclosures", ("FAS No. 118").
These statements address the accounting by creditors, such as banks, for the
impairment of certain loans. The Corporation considers a loan to be
impaired when, based on current information and events, it is probable that
a creditor will be unable to collect principal or interest due according to
the contractual terms of the loan. Loan impairment is measured based on the
present value of expected cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent.
Payments received on impaired loans are applied against the recorded
investment in the loan. For loans other than those that the Corporation
expects repayment through liquidation of the collateral, when the remaining
recorded investment in the impaired loan is less than or equal to the
present value of the expected cash flows, income is recorded on a cash
basis.
The adoption of FAS No. 118 did not have a material impact on the
Corporation's financial condition or results of operations.
Mortgage Servicing Rights
Effective January 1, 1996, the Corporation adopted the Financial Accounting
Standards Board Statement No. 122 "Accounting for Mortgage Servicing Rights
an amendment of FASB Statement No. 65" (FAS No. 122). When a mortgage
banking enterprise purchases or originates mortgage loans with a definitive
plan to sell or securitize those loans and retain the mortgage servicing
rights, the Corporation must measure the mortgage servicing rights at cost
by allocating the cost of the mortgage loans between the mortgage servicing
rights and the mortgage loans (without the mortgage servicing rights) based
on their relative fair values at the date of purchase or origination. When
the mortgage banking enterprise does not have a definitive plan at the
purchase or origination date and later sells or securitizes the mortgage
loans and retains the mortgage servicing rights, the Corporation must
32<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Mortgage Servicing Rights (Continued)
allocate the amortized cost of the mortgage loans between the mortgage
servicing rights and the mortgage loans (without mortgage servicing rights)
based on their relative fair values at the date of sale. The amount
capitalized as the right to service mortgage loans is recognized as a
separate asset and amortized in proportion to, and over the period of,
estimated net servicing income (servicing revenue in excess of servicing
cost). FAS No. 122 also requires mortgage servicing rights to be
periodically evaluated for impairment based on fair values. The adoption of
FAS No. 122 did not have a material impact on the Corporation's financial
condition or results of operations.
Loan Fees
Loan origination and commitment fees, net of associated direct costs, are
deferred and the net amount is amortized as an adjustment to the related
loan yield on the interest method, generally over the contractual life of
the related loans or commitments.
Other Real Estate Owned
Real estate, other than bank premises, is recorded at the lower of cost or
fair value less selling costs at the time of acquisition. Expenses related
to holding the property, net of rental income, are generally charged against
earnings in the current period.
Allowance for Possible Credit Losses
The allowance for possible credit losses represents management's estimate of
an amount adequate to provide for losses which may be incurred on loans
currently held. Management determines the adequacy of the allowance based
on historical patterns of loan charge-offs and recoveries, the relationship
of the allowance to outstanding loans, industry experience, current economic
trends and other factors relevant to the collectibility of loans currently
in the portfolio.
Bank-Owned Life Insurance
In November 1997, the Corporation purchased insurance on the lives of a
certain group of employees. The policy accumulates asset values to meet
future liabilities including the payment of employee benefits such as health
care. The premium for such coverage was $25,000 and is shown in the
Consolidated Statements of Cash Flows. Increases in the cash surrender
value are recorded as other income in the Consolidated Statements of Income.
The policy was issued by the Hartford Life Insurance Company.
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.
33<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Accounting for the Impairment of Long-Lived Assets
The Corporation adopted the Financial Accounting Standards Board Statement
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of ("FAS No. 121") effective January 1, 1996.
This statement requires long-lived assets, such as premises and equipment
and intangibles to be reviewed for impairment whenever events or changes in
circumstances, such as a significant decrease in the market value of an
asset or the extent or manner in which an asset is used indicate that the
carrying amount of an asset may not be recoverable. If there is an
indication that the carrying amount of an asset may not be recoverable,
future discounted cash flows expected to result from the use of the asset
are estimated. If the sum of the expected cash flows is less than the
carrying value of the asset a loss is recognized for the difference between
the carrying value and fair market value of the asset.
Income Taxes
The Corporation records taxes in accordance with the asset and liability
method utilized by Statement of Financial Accounting Standards No. 109 ("FAS
No. 109"), whereby deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities and
their respective tax bases given the provisions of the enacted tax laws.
Deferred tax assets are reduced, if necessary, by the amount of such
benefits that are not expected to be realized based upon available evidence.
Cash Flow Statement
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and Federal funds sold. Generally, Federal
funds are sold for one-day periods.
Supplemental Disclosures
1997 1996 1995
Cash paid during the year for:
Interest $100,128 $85,802 $ 79,069
Income taxes $ 12,375 $10,604 $ 13,266
Noncash investing and financing activities:
ESOP borrowings $ -0- $ -0- $ 500
ESOP loan reductions $ 1,038 $ 1,071 $ 1,151
Gross increase in Market
Value adjustment to
securities available
for sale pursuant to FAS
No. 115 $ 497 $ 1,228 $ 26,635
Net securities available
for sale transferred to
securities held to maturity $ -0- $ -0- $145,723
Loans transferred to
other real estate owned
and repossessed assets $ 5,104 $ 2,964 $ 2,733
34<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128 "Earnings per Share" ("FAS No. 128") which is effective
for financial statements issued after December 15, 1997; earlier adoption is
not permitted. This statement replaces the presentation of primary and
fully diluted earnings per share with a presentation of basic and diluted
earnings per share, respectively. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. FAS No. 128 also requires a
reconciliation of the numerator and denominator of the basic earnings per
share calculation to the numerator and denominator of the diluted earnings
per share calculation. All periods presented have been restated to report
earnings per share in conformity with the provisions of FAS No. 128.
Adoption of this statement did not have a material impact on the disclosure
of earnings per share in the financial statements.
Employee Stock Ownership Plan
In November 1993, the Accounting Standards Division of the American
Institute of Certified Public Accountants issued Statement of Position 93-6
("SOP 93-6") "Employers' Accounting for Employee Stock Ownership Plans."
This statement affects the accounting treatment of the Corporation's
Employee Stock Ownership Plan ("ESOP") described in NOTE 15. The
Corporation prospectively adopted SOP 93-6 for ESOP shares acquired after
December 31, 1992 (new shares). As permitted by the Statement of Position
the Corporation has elected not to adopt this statement for ESOP shares
acquired on or before December 31, 1992 (old shares).
ESOP shares purchased subject to debt guaranteed by the Corporation are
recorded as a reduction of common shareholders' equity by charging unearned
ESOP shares. As shares are committed to be released to the ESOP trust for
allocation to plan participants unearned ESOP shares is credited for the
cost of the shares to the ESOP. Compensation cost recognized for new shares
in accordance with the provisions of SOP 93-6 is based upon the fair market
value of the shares committed to be released. Additional paid-in capital is
charged or credited for the difference between the fair value of the shares
committed to be released and the cost of those shares to the ESOP.
Compensation cost recognized for old shares committed to be released is
recorded at the cost of those shares to the ESOP.
Dividends on both old and new unallocated ESOP shares are used for debt
service and are reported as a reduction of debt and accrued interest
payable. Dividends on allocated ESOP shares are charged to retained
earnings and allocated to the plan participants' accounts. The average
number of common shares outstanding used in calculating earnings per share
excludes all unallocated ESOP shares.
Employee Stock Option Plan
The Corporation adopted the Financial Accounting Standards Board Statement
No. 123 "Accounting for Stock Based Compensation" ("FAS No. 123") effective
January 1, 1996. This statement defines a method of measuring stock based
compensation, such as stock options granted, at an estimated fair value.
FAS No. 123 also permits the continued measurement of stock based
compensation under provisions of the Accounting Practice Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25").
35<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Employee Stock Option Plan (Continued)
As permitted under FAS No. 123 the Corporation has elected to use the
intrinsic value method to measure stock based compensation under APB 25 and
to disclose in a footnote to the financial statements, net income and
earnings per share determined as if the fair value methodology of FAS No.
123 was implemented (see NOTE 17). The adoption of FAS No. 123 did not have
a material impact on the Corporation's financial condition or results of
operations.
NOTE 2--Business Combinations
Effective April 1, 1996, the Corporation acquired all of the outstanding
common stock of BSI Financial Services Inc. ("BSI"), headquartered in
Titusville, PA for cash and stock consideration aggregating $1.2 million.
BSI provides mortgage banking, loan servicing and collection services to the
Corporation's subsidiary banks as well as unaffiliated organizations. The
acquisition was accounted for as a purchase transaction, whereby the
identifiable tangible and intangible assets and liabilities of BSI were
recorded at their fair values on the acquisition date. Under the purchase
method of accounting, the results of operations of BSI from the date of
acquisition are included in the Corporation's financial statements.
NOTE 3--Cash and Due From Banks on Demand
Regulations of the Board of Governors of the Federal Reserve System impose
uniform reserve requirements on all depository institutions with transaction
accounts (checking accounts, NOW accounts, etc.). Reserves are maintained
in the form of vault cash or a noninterest-bearing balance held with the
Federal Reserve Bank. The subsidiary bank maintained with the Federal
Reserve Bank average balances of $11,341 during 1997 and $12,119 during
1996.
36<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 4--Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of
securities available for sale at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
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 $ 70,766 $ 732 $ (26) $ 71,472 $ 57,706 $ 97 $ -0- $ 57,803
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities 237,841 2,374 (102) 240,113 105,656 231 (81) 105,806
Other 64,517 339 (131) 64,725 45,627 17 (358) 45,286
Obligations of States and
Political Subdivisions 387 -0- -0- 387 2 -0- -0- 2
Debt Securities Issued
by Foreign Governments 460 -0- -0- 460 710 -0- -0- 710
Corporate Securities 1,301 -0- (28) 1,273 1,984 -0- (32) 1,952
Other Mortgage Backed
Securities -0- -0- -0- -0- -0- -0- -0- -0-
Total Debt Securities 375,272 3,445 (287) 378,430 211,685 345 (471) 211,559
Equities 18,629 -0- (428) 18,201 30,394 2,906 (444) 32,856
Total Securities
Available for Sale $393,901 $3,445 $(715) $396,631 $242,079 $3,251 $(915) $244,415
</TABLE>
Mortgage backed securities include mortgage backed obligations of U.S.
Government agencies and corporations, mortgage backed securities issued by
other organizations and other asset backed securities. These obligations
have contractual maturities ranging from less than one year to 30 years and
have an anticipated average life to maturity ranging from less than one year
to 20 years. All mortgage backed securities contain a certain amount of
risk related to the uncertainty of prepayments of the underlying mortgages.
Interest rate changes have a direct impact upon prepayment speeds, therefore
the Corporation uses computer simulation models to test the average life and
yield volatility of all mortgage backed securities under various interest
rate scenarios to insure that volatility falls within acceptable limits. At
December 31, 1997 and 1996, the Corporation owned no high risk mortgage
backed securities as defined by the Federal Financial Institutions
Examination Council's Supervisory Policy Statement on Securities Activities.
37<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 4--Securities Available For Sale (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or repay obligations with or without call or
prepayment penalties.
Approximate
Amortized Fair
Cost Value
Due within 1 year $ 43,003 $ 42,968
Due after 1 but within 5 years 68,861 69,579
Due after 5 but within 10 years 25,567 25,770
Due after 10 years -0- -0-
137,431 138,317
Mortgage backed securities 237,841 240,113
Total debt securities $375,272 $378,430
Proceeds from the sales of securities available for sale were $29,811,
$20,240 and $76,999 during 1997, 1996 and 1995 respectively. Gross gains of
$6,682, $1,624 and $136 and gross losses of $2, $239 and $739 were realized
on those sales during 1997, 1996 and 1995 respectively.
Securities available for sale with a book value of $94,035 and $88,649 were
pledged at December 31, 1997 and 1996, respectively to secure public
deposits and for other purposes required or permitted by law.
38<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 5--Securities Held to Maturity
Below is an analysis of the amortized cost and approximate fair values of
debt securities held to maturity at December 31:
<TABLE>
<CAPTION>
1997 1996
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>
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities $230,777 $ 599 $(656) $230,720 $285,576 $-0- $(1,720) $283,856
Other 139,938 792 (98) 140,632 87,906 -0- (478) 87,428
Obligations of States and
Political Subdivisions 86,833 1,436 (50) 88,219 79,429 9 (390) 79,048
Debt Securities Issued By
Foreign Governments 360 -0- -0- 360 113 -0- -0- 113
Corporate Securities -0- -0- -0- -0- 1,490 4 -0- 1,494
Other Mortgage Backed
Securities 2,155 1 (1) 2,155 5,232 18 -0- 5,250
Total Debt Securities $460,063 $2,828 $(805) $462,086 $459,746 $ 31 $(2,588) $457,189
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or repay obligations with or without call or
prepayment penalties.
Approximate
Amortized Fair
Cost Value
Due within 1 year $ 51,562 $ 51,472
Due after 1 but within 5 years 46,783 47,127
Due after 5 but within 10 years 92,521 93,485
Due after 10 years 36,265 37,127
227,131 229,211
Mortgage backed securities 232,932 232,875
Total debt securities $460,063 $462,086
39<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 5--Securities Held to Maturity (Continued)
There were no sales of securities held to maturity in 1997, 1996 or 1995.
Securities held to maturity with a book value of $302,695 and $232,648 were
pledged at December 31, 1997 and 1996, respectively, to secure public
deposits and for other purposes required or permitted by law.
NOTE 6--Loans (all domestic)
Loans at year end were divided among these general categories:
December 31,
1997 1996
Commercial, financial,
agricultural and other $ 290,298 $ 252,798
Real estate loans:
Construction and land
development 17,873 24,111
1-4 Family dwellings 854,894 752,562
Other real estate loans 305,887 287,318
Loans to individuals for household,
family and other personal
expenditures 417,547 425,012
Leases, net of unearned income 51,245 36,329
Subtotal 1,937,744 1,778,130
Unearned income (16,841) (30,795)
Total loans and leases $1,920,903 $1,747,335
Most of the Corporation's business activity was with customers located
within Pennsylvania. The portfolio is well diversified, and as of
December 31, 1997 and 1996, there were no significant concentrations of
credit.
The Federal Home Loan Bank had a security interest in qualifying
residential mortgage loans with an aggregate estimated fair value of
$237,789 at December 31, 1997 and $45,862 at December 31, 1996 as
collateral for long-term debt by the Corporation's banking subsidiaries.
NOTE 7--Allowance for Possible Credit Losses
Description of changes:
1997 1996 1995
Allowance at January 1 $19,324 $18,152 $17,337
Additions:
Recoveries of previously
charged off loans 831 905 860
Provision charged to operating
expense 6,929 4,501 4,125
Deductions:
Loans charged off 7,318 4,234 4,170
Allowance at December 31 $19,766 $19,324 $18,152
40<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 7--Allowance for Possible Credit Losses (Continued)
1997 1996
Recorded investment in impaired loans
at end of period $7,952 $8,186
Average balance of impaired loans for
the year $8,188 $6,123
Allowance for possible credit losses
related to impaired loans $1,985 $1,639
Impaired loans with an allocation
of the allowance for possible
credit losses $4,284 $4,485
Impaired loans with no allocation
of the allowance for possible
credit losses $3,668 $3,701
Income recorded on impaired loans
on a cash basis $ 123 $ 112
NOTE 8--Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers. These financial instruments include commitments to extend
credit, standby letters of credit and commercial letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The
contract or notional amount of those instruments reflects the extent of
involvement the Corporation has in particular classes of financial
instruments.
As of December 31, 1997 and 1996, the Corporation did not own or trade any
other financial instruments with significant off-balance-sheet risk
including derivatives such as futures, forwards, interest rate swaps, option
contracts and the like, although such instruments may be appropriate to use
in the future to manage interest rate risk.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party of the financial instrument for commitments to extend
credit, standby letters of credit and commercial letters of credit written
is represented by the contract or notional amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The
following table identifies the notional amount of those instruments at
December 31, 1997 and 1996.
1997 1996
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $377,824 $305,744
Standby letters of credit $ 23,775 $ 20,747
Commercial letters of credit $ -0- $ 483
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
counter-party. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, residential and income-producing
commercial properties.
41<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 8--Financial Instruments with Off-Balance-Sheet Risk (Continued)
Standby letters of credit and commercial letters of credit written are
conditional commitments issued by the Corporation to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
NOTE 9--Premises and Equipment
Premises and equipment are described as follows:
Estimated
Useful Life 1997 1996
Land Indefinite $ 4,437 $ 4,378
Buildings and improvements 5 - 50 Years 32,293 31,555
Leasehold improvements 5 - 39 Years 5,841 5,371
Furniture and equipment 3 - 25 Years 32,191 30,072
Subtotal 74,762 71,376
Less accumulated depreciation
and amortization 42,184 38,786
Total premises and
equipment $32,578 $32,590
Depreciation and amortization related to premises and equipment was $3,972
in 1997, $3,657 and $3,536 in 1996 and 1995, respectively.
NOTE 10--Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
1997 1996
NOW and Super NOW accounts $ 56,058 $ 205,090
Savings and MMDA accounts 748,614 495,355
Time deposits 1,287,380 1,203,865
Total interest-bearing deposits $2,092,052 $1,904,310
Interest-bearing deposits at December 31, 1997 include reallocations from
demand deposits of $60,717 and reallocations from NOW and Super NOW accounts
of $201,023 into Savings and MMDA accounts. These reallocations are based
on a formula approved by the regulatory authorities and have been made to
reduce the Corporation's reserve requirement.
Included in time deposits at December 31, 1997 and 1996, were certificates
of deposit in denominations of $100 or more of $301,871 and $260,743
respectively.
Interest expense related to $100 or greater certificates of deposit amounted
to $16,107 in 1997, $11,040 in 1996, and $9,643 in 1995.
Included in time deposits at December 31, 1997, were certificates of deposit
with the following scheduled maturities:
1998 $ 601,439
1999 439,853
2000 100,417
2001 73,312
2002 and thereafter 72,111
$1,287,132
42<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 11--Short-term Borrowings
Short-term borrowings at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Federal funds
purchased $108,650 $ 60,892 5.66% $ 54,975 $ 34,536 5.54%
Borrowings from
FHLB -0- 69 5.73% -0- 6,832 5.48%
Securities sold
under agreements
to repurchase 79,016 72,627 4.82% 79,023 73,766 4.91%
Treasury, tax and
loan note option 6,252 11,399 5.22% 16,332 12,015 5.31%
Total $193,918 $144,987 5.21% $150,330 $127,149 5.15%
Maximum total at
any month-end $193,918 $188,232
</TABLE>
At December 31, 1997 and 1996, the Corporation had approved but unused
borrowing capacity with the FHLB of $165,308 and $173,217, respectively.
Interest expense on short-term borrowings for the years ended December 31 is
detailed below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal funds purchased $3,446 $1,915 $2,259
Borrowings from FHLB 4 374 1,583
Securities sold under agreements to
repurchase 3,502 3,622 3,653
Treasury, tax and loan note option 596 638 518
Total interest on
short-term borrowings $7,548 $6,549 $8,013
</TABLE>
NOTE 12--Long-term Debt
Long-term debt at December 31, follows:
<TABLE>
<CAPTION>
1997 1996
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Bank subordinated notes due September, 1997 $ -0- $ 716 8.38%
ESOP loan due March, 2004 2,436 Libor +1% 3,474 Libor +1%
Borrowings from FHLB due:
March, 1998 43 7.22% 165 7.22%
March, 1998 8,000 7.22% 8,000 7.22%
March, 1998 10,000 5.99% -0-
May, 1998 733 5.94% -0-
August, 1998 188 6.43% 425 6.43%
December, 2001 -0- 25,000 4.92%
August, 2002 25,000 5.36% -0-
November, 2002 50,000 5.82% -0-
November, 2002 25,000 5.33% -0-
December, 2002 50,000 5.71% -0-
March, 2007 1,204 6.51% -0-
July, 2007 3,903 6.29% -0-
August, 2007 1,719 6.57% -0-
January, 2009 2,775 6.27% 3,100 6.18%
July, 2017 4,007 6.52% -0-
December, 2017 7,659 6.17% -0-
Mortgage loan due July, 2012 188 2.00% -0-
Mortgage loan due January, 2013 199 4.50% -0-
$193,054 $40,880
</TABLE>
43<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands, except per share data)
NOTE 12--Long-Term Debt (Continued)
Scheduled loan payments are summarized below:
1998 1999 2000 2001 2002 Thereafter
Loan payments $20,707 $1,816 $1,890 $1,685 $151,677 $15,279
NOTE 13--Common Share Commitments
At December 31, 1997, the Corporation had 100,000,000 common shares
authorized and 22,046,326 shares outstanding. Outstanding shares were
reduced by 390,302 shares of treasury stock at December 31, 1997 and 242,202
shares at December 31, 1996. The Corporation may be required to issue
additional shares to satisfy common share purchases related to the employee
stock ownership plan described in NOTE 15. The dilutive effect of stock
options outstanding on average shares outstanding in the diluted earning per
share reported on the income statement in accordance with FAS No. 128 were
86,888, 35,852 and 45,758 shares at December 31, 1997, 1996 and 1995
respectively.
During 1997 and 1996, 150,900 and 217,294 shares of treasury stock were
acquired at an average price per share of $19.01 and $18.64 respectively,
for the purpose of funding stock options upon exercise. Treasury shares
consisting of 2,800 and 16,694 were reissued during 1997 and 1996 upon
exercise of various stock option plans assumed by the Corporation in the
merger transactions with Reliable and United. In addition 23,400 treasury
shares were reissued during 1996 to fund the BSI acquisition.
NOTE 14--Income Taxes
The income tax provision consists of:
1997 1996 1995
Current tax provision for income
exclusive of securities
transactions:
Federal $12,466 $12,129 $11,309
State 238 135 15
Securities transactions 2,340 491 (213)
Total current tax
provision 15,044 12,755 11,111
Deferred tax provision (benefit) (1,515) (683) 863
Total tax provision $13,529 $12,072 $11,974
44<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 14--Income Taxes (Continued)
Temporary differences between financial statement carrying amounts and tax
bases of assets and liabilities that represent significant portions of the
deferred tax assets (liabilities) at December 31, 1997 and 1996, were as
follows:
1997 1996
Deferred tax assets:
Allowance for possible credit
losses $ 6,692 $ 6,136
Alternative minimum tax
carry forward -0- 116
Other 316 290
Deferred tax liabilities:
Accumulated accretion
of bond discount (534) (440)
Unrealized gain on securities
available for sale (879) (705)
Lease financing deduction (5,704) (3,837)
Loan origination fees and costs (923) (756)
Accumulated depreciation (240) (238)
Basis difference in assets acquired (1,356) (1,561)
Other (223) (167)
Net deferred tax liability $(2,851) $(1,162)
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>
1997 1996 1995
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $15,422 35.0 $13,879 35.0 $13,125 35.0
Increase (decrease)
resulting from:
Effect of
nontaxable
interest (2,157) (4.9) (1,924) (4.9) (1,408) (3.8)
State income taxes 238 0.5 135 0.3 13 0.0
Other 26 0.1 (18) 0.0 244 0.7
Total tax
provision $13,529 30.7 $12,072 30.4 $11,974 31.9
</TABLE>
45
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 15--Retirement Plans
All employees with at least one year of service are eligible to participate
in the employee stock ownership plan ("ESOP"). Contributions to the plan
are determined by the board of directors, and are based upon a prescribed
percentage of the annual compensation of all participants. The ESOP
acquired 36,880 shares of the Corporation's common stock in 1995, at a
corresponding cost of $500, which the Corporation borrowed and concurrently
loaned these amounts to the ESOP. These amounts represent leveraged and
unallocated shares, and accordingly have been recorded as long-term debt and
the offset as a reduction of the common shareholders' equity. Compensation
costs related to the plan were $1,032 in 1997, $1,224 in 1996 and $1,908 in
1995. (See NOTE 16).
The Corporation also has a savings plan pursuant to the provisions of
section 401(k) of the Internal Revenue Code. Under the terms of the plan,
each participant will receive an automatic employer contribution to the plan
in an amount equal to 3% of compensation. Each participating employee may
contribute up to 5% of compensation to the plan which is matched by the
employer's contribution equal to 80% of the employee's contribution. Prior
to January 1, 1996, the employer's matching contribution was 60% of the
employee's contribution. The 401(k) plan expense was $1,715 in 1997, $1,638
in 1996 and $1,294 in 1995.
NOTE 16--Unearned ESOP Shares
The Corporation had borrowed amounts which were concurrently loaned to the
First Commonwealth Financial Corporation Employee Stock Ownership Plan Trust
("ESOP") on the same terms. The combined balances of the ESOP related loans
were $2,436 at December 31, 1997 and $3,474 at December 31, 1996.
The loans have been recorded as long-term debt on the Corporation's
consolidated balance sheets. A like amount of unearned ESOP shares was
recorded as a reduction of common shareholders' equity. Unearned ESOP
shares, included as a component of shareholders' equity, represents the
Corporation's prepayment of future compensation expense. The shares
acquired by the ESOP are held in a suspense account and will be released to
the ESOP for allocation to the plan participants as the loan is reduced.
Repayment of the loans are scheduled to occur over a nine year period from
contributions to the ESOP by the Corporation and dividends on unallocated
ESOP shares.
The following is an analysis of ESOP shares held in suspense:
(See NOTE 1 for the definition of "old" and "new shares").
Old New
Total Shares Shares
Shares in suspense December 31, 1995 329,068 194,459 134,609
Shares allocated during 1996 (82,980) (49,036) (33,944)
Shares in suspense December 31, 1996 246,088 145,423 100,665
Shares allocated during 1997 (74,837) (44,224) (30,613)
Shares in suspense December 31, 1997 171,251 101,199 70,052
The fair market value of the new shares remaining in suspense was
approximately $2,456 and $1,875 at December 31, 1997 and 1996 respectively.
Interest on ESOP loans was $211 in 1997, $313 in 1996 and $434 in 1995.
During 1997, 1996 and 1995 dividends on unallocated shares in the amount of
$213, $256 and $285 respectively were used for debt service while all
dividends on allocated shares were allocated to the participants.
46<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands,except share data)
NOTE 17--Stock Option Plan
At December 31, 1997, the Corporation had a stock-based compensation plan,
which is described below. The plan permits the executive compensation
committee to grant options for up to one million shares of the Corporation's
common stock through October 15, 2005. Although the vesting requirements
and term of future options granted are at the discretion of the executive
compensation committee, all options granted during 1996 require a three year
vesting period and expire ten years from the grant date and all options
granted during 1997 become vested at December 31, 1997 and expire ten years
from the grant date. The Corporation has elected, as permitted by FAS No.
123, to apply APB Opinion 25 and related Interpretations in accounting for
its plan. Accordingly, no compensation cost has been recognized for its
stock options outstanding. Had compensation cost for the Corporation's
stock option plan been determined based upon the fair value at the grant
dates for awards under the plan consistent with the method of FASB Statement
123, the Corporation's net income and earnings per share would have been
reduced to the pro forma amounts shown below:
<TABLE>
<CAPTION>
1997 1996
As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C>
Net Income $30,534 $24,592 $27,583 $27,548
Basic earnings per share $ 1.40 $ 1.12 $ 1.26 $ 1.25
Diluted earnings per share $ 1.39 $ 1.12 $ 1.25 $ 1.25
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes options pricing model with the following weighted
average assumptions used:
1997 1996
Dividend yield 2.5% per annum 3.0% per annum
Expected volatility 28.0% 10.0%
Risk-free interest rate 5.6% 6.7%
Expected option life 5.7 years 9.3 years
Under the Corporation's 1995 Stock Option Plan, the Corporation may grant
options to its executives for up to one million shares of common stock. The
Corporation also assumed the Stock Options of United National Bank
Corporation ("Unitas") and Reliable Financial Corporation ("RFC") upon the
merger of these financial institutions into the Corporation in 1994.
Options for 45,508 shares of the Corporation's common stock assumed from
mergers were unexercised at December 31, 1997.
A summary of the status of the Corporation's outstanding stock options as of
December 31, 1997 and 1996 and changes for the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1997 1996
Weighted-Average Exercise Weighted-Average Exercise
Shares Price Per Share Shares Price Per Share
<S> <C> <C> <C> <C>
Outstanding at beginning of year 233,308 $16.10 58,134 $ 6.47
Granted 312,280 $18.50 195,048 $18.375
Exercised (2,800) $ 6.44 (9,140) $ 6.44
Forfeited (16,514) $18.44 (10,734) $13.38
Outstanding at end of year 526,274 $17.49 233,308 $16.10
</TABLE>
47
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 17--Stock Option Plans (Continued)
At December 31, 1996, 44,374 stock options were exercisable with a weighted-
average exercise price of $6.47.
The following table summarizes information about the stock options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-Average
Range of Number Outstanding Remaining Contract Weighted-Average Number Exercisable Weighted-Average
Exercise Prices at 12/31/97 Life Exercise Price at 12/31/97 Exercise Price
<S> <C> <C> <C> <C> <C>
$5.00-5.99 26,874 3.8 $ 5.46 26,874 $ 5.53
$6.00-8.99 18,634 5.2 $ 7.78 18,634 $ 8.07
$18.375-18.50 480,766 9.0 $18.46 299,511 $18.50
526,274 345,019 $16.93
</TABLE>
NOTE 18--Commitments and Contingent Liabilities
There are no material legal proceedings to which the Corporation or its
subsidiaries are a party, or of which any of their property is the subject,
except proceedings which arise in the normal course of business and, in the
opinion of management, will not have any material adverse effect on the
consolidated operations or financial position of the Corporation and its
subsidiaries.
NOTE 19--Related Party Transactions
Some of the Corporation's or its subsidiaries' directors, executive
officers, principal shareholders and their related interests, had
transactions with the subsidiary banks in the ordinary course of business.
All loans and commitments to loans in such transactions were made on
substantially the same terms, including collateral and interest rates, as
those prevailing at the time for comparable transactions. In the opinion of
management, these transactions do not involve more than the normal risk of
collectibility nor do they present other unfavorable features. It is
anticipated that further such extensions of credit will be made in the
future.
The following is an analysis of loans to those parties whose aggregate loan
balances exceeded $60 during 1997.
Balances December 31, 1996 $11,113
Advances 8,130
Repayments (11,376)
Other (2,076)
Balances December 31, 1997 $ 5,791
"Other" primarily reflects the change in those classified as a "related
party" as a result of mergers, resignations and retirements.
NOTE 20--Regulatory Restrictions and Capital Adequacy
The amount of funds available to the parent from its subsidiary banks is
limited by restrictions imposed on all financial institutions by banking
regulators. At December 31, 1997, dividends from subsidiary banks were
restricted not to exceed $43,499. These restrictions have not had, and are
not expected to have, a significant impact on the Corporation's ability to
meet its cash obligations.
48<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 20--Regulatory Restrictions and Capital Adequacy (Continued)
The Corporation is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific
capital guidelines that involve quantitative measures of the Corporation's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of total and
Tier I capital (common and certain other "core" equity capital) to risk
weighted assets, and of Tier I capital to average assets. As of
December 31, 1997, the Corporation and its banking subsidiaries meet all
capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notifications from the Federal
Reserve Board and Federal Deposit Insurance Corporation categorized First
Commonwealth Bank as well capitalized under the regulatory framework for
prompt corrective action. To be considered as well capitalized, First
Commonwealth Bank must maintain minimum total risk-based capital, Tier I
risk-based capital and Tier I leverage ratios as set forth in the table
below. There are no conditions or events since that notification that
management believes have changed the institution's category.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Actual Regulatory Minimum Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S>
As of December 31, 1997 <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $279,184 15.1% $147,913 8.0% Not Applicable Not Applicable
First Commonwealth Bank $252,457 13.8% $146,276 8.0% $182,845 10.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $259,418 14.0% $ 73,957 4.0% Not Applicable Not Applicable
First Commonwealth Bank $232,691 12.7% $ 73,138 4.0% $109,707 6.0%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $259,418 9.2% $112,669 4.0% Not Applicable Not Applicable
First Commonwealth Bank $232,691 8.3% $111,772 4.0% $139,715 5.0%
As of December 31, 1996
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $266,999 15.3% $139,303 8.0% Not Applicable Not Applicable
First Commonwealth Bank $225,903 13.7% $131,642 8.0% $164,553 10.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $247,531 14.2% $ 69,651 4.0% Not Applicable Not Applicable
First Commonwealth Bank $207,437 12.6% $ 65,821 4.0% $ 98,732 6.0%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $247,531 9.7% $102,061 4.0% Not Applicable Not Applicable
First Commonwealth Bank $207,437 8.7% $ 95,067 4.0% $118,833 5.0%
</TABLE
49<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only)
Balance Sheets
December 31,
1997 1996
Assets
Cash $ 7,725 $ 5,762
Securities available for sale 3,502 2,148
Loans to affiliated parties 469 517
Investment in subsidiaries 254,182 250,023
Investment in jointly-owned company 2,622 2,214
Premises and equipment 4,507 4,050
Dividends receivable from subsidiaries 4,924 3,571
Receivable from related parties 810 922
Other assets 1,634 1,561
Total assets $280,375 $270,768
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 1,254 $ 1,496
Dividends payable 4,851 4,440
Loans payable 2,436 3,474
Shareholders' equity 271,834 261,358
Total liabilities and
shareholders' equity $280,375 $270,768
Statements of Income
Years Ended December 31,
1997 1996 1995
Interest and dividends $ 94 $ 129 $ 160
Dividends from subsidiaries 29,739 23,873 30,260
Net securities gains (losses) 382 (169) -0-
Other revenue 16 92 2
Operating expenses (8,427) (8,513) (8,940)
Income before taxes and equity
in undistributed earnings of
subsidiaries 21,804 15,412 21,482
Applicable income tax benefits 2,593 2,788 2,782
Income before equity in
undistributed earnings of
subsidiaries 24,397 18,200 24,264
Equity in undistributed
earnings of subsidiaries 6,137 9,383 1,262
Net income $30,534 $27,583 $25,526
50<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only) (Continued)
Statements of Cash Flows
Years Ended December 31,
1997 1996 1995
Operating Activities
Net income $ 30,534 $ 27,583 $ 25,526
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 1,522 1,198 1,223
Net (gains) losses on sale of
assets (381) 167 2
Decrease (Increase) in prepaid
income taxes 229 69 (156)
Undistributed equity in
subsidiaries (6,137) (9,383) (1,262)
Other - net (400) (1,031) 210
Net cash provided by
operating activities 25,367 18,603 25,543
Investing Activities
Transactions with securities
available for sale:
Purchases of investment
securities (6,689) (317) (2,133)
Sales of investment
securities 5,419 3,331 -0-
Net change in loans to
affiliated parties 48 (236) (281)
Purchases of premises and
equipment (1,005) (1,714) (931)
Acquisition of and additional
investment in subsidiary,
net of cash received -0- (1,913) -0-
Net cash used by
investing activities (2,227) (849) (3,345)
Financing Activities
Repayment of long-term debt -0- -0- (1,500)
Discount on dividend reinvestment
plan purchases (630) (529) (342)
Treasury stock acquired (2,868) (4,050) (1,583)
Treasury stock reissued 16 108 316
Cash dividends paid (17,695) (16,037) (14,326)
Net cash used by
financing activities (21,177) (20,508) (17,435)
Net increase (decrease) in cash 1,963 (2,754) 4,763
Cash at beginning of year 5,762 8,516 3,753
Cash at end of year $ 7,725 $ 5,762 $ 8,516
51<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 21--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only) (Continued)
Supplemental schedule of noncash investing and financing activities
The Corporation borrowed $500 in 1995 and concurrently loaned this amount to
the ESOP on identical terms. The loan was recorded as long-term debt and
the offset was recorded as a reduction of the common shareholders' equity.
Loan payments in the amount of $1,038 in 1997, $1,176 in 1996 and $1,151 in
1995 were made by the ESOP thereby reducing the outstanding amount related
to unearned ESOP shares to $2,436 at December 31, 1997.
NOTE 22--Fair Values of Financial Instruments
Below are various estimated fair values at December 31, 1997 and 1996, as
required by Statement of Financial Accounting Standards No. 107 ("FAS No.
107"). Such information, which pertains to the Corporation's financial
instruments, is based on the requirements set forth in FAS No. 107 and does
not purport to represent the aggregate net fair value of the Corporation.
It is the Corporation's general practice and intent to hold its financial
instruments to maturity, except for certain securities designated as
securities available for sale, and not to engage in trading activities. Many
of the financial instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Therefore, the Corporation had to use significant estimations
and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and the methodologies in absence of
active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
The following methods and assumptions were used by the Corporation in
estimating financial instrument fair values:
Cash and short-term instruments: The balance sheet carrying amounts for
cash and short-term instruments approximate the estimated fair values of
such assets.
Securities: Fair values for securities held to maturity and securities
available for sale are based on quoted market prices, if available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments. The carrying value of
nonmarketable equity securities, such as Federal Home Loan Bank stock, is
considered a reasonable estimate of fair value.
52<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 22--Fair Values of Financial Instruments (Continued)
Loans receivable: Fair values of variable rate loans subject to frequent
repricing and which entail no significant credit risk are based on the
carrying values. The estimated fair values of other loans are estimated by
discounting the future cash flows using interest rates currently offered for
loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest is considered a reasonable estimate of
fair value.
Off-balance-sheet instruments: Many of the Corporation's off-balance-sheet
instruments, primarily loan commitments and standby letters of credit, are
expected to expire without being drawn upon, therefore the commitment
amounts do not necessarily represent future cash requirements. Management
has determined that due to the uncertainties of cash flows and difficulty in
predicting the timing of such cash flows, fair values were not estimated for
these instruments.
Deposit liabilities: For deposits which are payable on demand at the
reporting date, representing all deposits other than time deposits,
management estimates that the carrying value of such deposits is a
reasonable estimate of fair value. The carrying amounts of variable rate
time deposit accounts and certificates of deposit approximate their fair
values at the report date. Fair values of fixed rate time deposits are
estimated by discounting the future cash flows using interest rates
currently being offered and a schedule of aggregated expected maturities.
The carrying amount of accrued interest approximates its fair value.
Short-term borrowings: The carrying amounts of short-term borrowings such
as Federal funds purchased, securities sold under agreements to repurchase,
borrowings from the Federal Home Loan Bank and treasury, tax and loan notes
approximate their fair values.
Long-term debt: The carrying amounts of variable rate debt approximate
their fair values at the report date. Fair values of fixed rate debt are
estimated by discounting the future cash flows using the Corporation's
estimated incremental borrowing rate for similar types of borrowing
arrangements.
53<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(Dollar Amounts in Thousands)
NOTE 22--Fair Values of Financial Instruments (Continued)
The following table presents carrying amounts and estimated fair values of
the Corporation's financial instruments at December 31, 1997 and 1996.
1997 1996
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and due from banks $ 60,109 $ 60,109 $ 69,406 $ 69,406
Interest-bearing deposits with
banks 4,985 4,985 4,199 4,199
Federal funds sold 2,880 2,880 -0- -0-
Securities available for sale 396,631 396,631 244,415 244,415
Investments held to maturity 460,063 462,086 459,746 457,189
Loans, net of allowance 1,901,137 1,952,672 1,728,011 1,766,390
Financial liabilities
Deposits 2,242,478 2,254,035 2,104,783 2,114,561
Short-term borrowings 193,918 193,918 150,330 150,330
Long-term debt 193,056 189,134 40,880 39,022
54<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
First Commonwealth Financial Corporation
We have audited the accompanying consolidated balance sheet of First
Commonwealth Financial Corporation and subsidiaries (the Corporation) as of
December 31, 1997, and the related consolidated statement of income, changes
in shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements
based on our audit. The financial statements of the Corporation for the
years ended December 31, 1996 and 1995, were audited by other auditors whose
report, dated January 17, 1997, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 1997 consolidated financial statements present fairly,
in all material respects, the financial position of First Commonwealth
Financial Corporation at December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/S/DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
January 30, 1998
55<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Commonwealth Financial Corporation
We have audited the accompanying consolidated balance sheet of First
Commonwealth Financial Corporation and Subsidiaries as of December 31, 1996
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the two years in the period ended December 31, 1996.
These consolidated financial statements are the responsibility of First
Commonwealth Financial Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
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 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 consolidated financial
position of First Commonwealth Financial Corporation and Subsidiaries as of
December 31, 1996, and the consolidated results of their operations and
their consolidated cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
/S/Grant Thornton, LLP
Philadelphia, Pennsylvania
January 17, 1997
56<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Quarterly Summary of Financial Data - Unaudited
(Dollar Amounts in Thousands, except per share data)
The unaudited quarterly results of operations for the years ended
December 31, 1997 and 1996 are as follows:
</TABLE>
<TABLE>
<CAPTION>
1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income.............................. $47,746 $48,996 $50,993 $52,076
Interest expense............................. 23,656 24,838 26,505 27,754
Net interest income..................... 24,090 24,158 24,488 24,322
Provision for possible credit losses......... 1,241 1,390 1,791 2,507
Net interest income after provision for
possible credit losses..................... 22,849 22,768 22,697 21,815
Securities gains............................. 1,758 1,039 3,193 696
Other operating income....................... 2,993 3,313 3,341 3,510
Other operating expenses..................... 16,506 16,639 16,531 16,233
Income before income taxes.............. 11,094 10,481 12,700 9,788
Applicable income taxes...................... 3,419 3,277 3,989 2,844
Net income.............................. $ 7,675 $ 7,204 $ 8,711 $ 6,944
Basic earnings per share..................... $ 0.35 $ 0.33 $ 0.40 $ 0.32
Diluted earnings per share................... $ 0.35 $ 0.33 $ 0.40 $ 0.32
Average shares outstanding..................21,946,450 21,875,647 21,840,434 21,854,681
Average shares outstanding assuming
dilution.................................21,977,681 21,932,510 21,928,117 22,024,918
</TABLE>
<TABLE>
<CAPTION>
1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income.............................. $44,270 $44,694 $45,550 $47,815
Interest expense............................. 20,845 21,281 22,653 23,546
Net interest income..................... 23,425 23,413 22,897 24,269
Provision for possible credit losses......... 900 1,050 1,200 1,351
Net interest income after provision for
possible credit losses..................... 22,525 22,363 21,697 22,918
Securities gains (losses).................... 8 (57) 1 1,451
Other operating income....................... 2,933 2,992 3,267 3,146
Other operating expenses..................... 14,993 15,428 16,734 16,434
Income before income taxes.............. 10,473 9,870 8,231 11,081
Applicable income taxes...................... 3,360 2,982 2,369 3,361
Net income.............................. $ 7,113 $ 6,888 $ 5,862 $ 7,720
Basic earnings per share..................... $ 0.32 $ 0.31 $ 0.27 $ 0.35
Diluted earnings per share................... $ 0.32 $ 0.31 $ 0.27 $ 0.35
Average shares outstanding..................22,004,857 21,925,789 21,947,468 21,943,790
Average shares outstanding assuming
dilution.................................22,044,810 21,965,930 21,979,507 21,975,157
</TABLE>
57
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Information appearing in the definitive Proxy Statement related to
the annual meeting of security holders to be held April 27, 1998
is incorporated herein by reference in response to the listing of
directors.
The table below lists the current executive officers of the Corporation.
Name Age Positions Held During the Past Five Years
E. James Trimarchi 75 Chairman of the Board of the Corporation,
Chairman of the Board of FCTC, CSC, and
FCB; Director of CTCLIC, FCIA and New
Mexico Banquest Investors Corp.; Former
President and Chief Executive Officer of
the Corporation
Joseph E. O'Dell 52 President, Chief Executive Officer and
director of the Corporation; Director of
FCB, FCTC, BSI and FCIA; Vice Chairman of
the Board of CSC; Former Senior Executive
Vice President and Chief Operating
Officer of the Corporation; former
President and Chief Executive Officer of
FCB
Gerard M. Thomchick 42 Senior Executive Vice President and Chief
Operating Officer of the Corporation;
President, Chief Executive Officer and
Director of CTCLIC; Director of FCB,
FCTC, BSI and FCIA
David R. Tomb, Jr. 66 Senior Vice President, Secretary,
Treasurer and Director of the
Corporation; Secretary and Cashier of
FCB; Secretary of FCIA, FCTC and CSC;
Director of FCB, CSC, FCTC, BSI, FCIA and
CTCLIC
John J. Dolan 41 Senior Vice President and Chief
Financial Officer of the Corporation;
Chief Financial Officer of FCB; Chief
Financial Officer, Comptroller of
CTCLIC;, Treasurer and Assistant
Secretary of FCTC; Comptroller and Chief
Financial Officer of BSI; Treasurer of
FCIA
William R. Jarrett 63 Senior Vice President of the Corporation,
Former managing partner of Jarrett Stokes
& Co. Certified Public Accountants, until
his employment by the Corporation on
April 15, 1994.
R. John Previte 48 Senior Vice President, Investments of the
Corporation
Rosemary Krolick 44 Senior Vice President and Chief
Information Officer of the Corporation;
President, Chief Executive Officer and
director of CSC
58<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT (Continued)
Each of the officers identified above has held the position indicated above
or other executive positions with the same entity (or a subsidiary thereof)
for at least the past five years except where noted.
Executive officers of the Corporation serve at the pleasure of the Board of
Directors of the Corporation and for a term of office extending through the
election and qualification of their successors.
ITEM 11 - MANAGEMENT RENUMERATION
Information appearing in the definitive Proxy Statement related to
the annual meeting of security holders to be held April 27, 1998
is incorporated herein by reference in response to this item.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information appearing in the definitive Proxy Statement related to
the annual meeting of security holders to be held April 27, 1998
is incorporated herein by reference in response to this item.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing in the definitive Proxy Statement related to
the annual meeting of security holders to be held April 27, 1998
is incorporated herein by reference in response to this item.
59<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K
(A) Documents Filed as Part of this Report
1) Financial Statements
All financial statements of the registrant as set forth under
Item 8 of this Report on Form 10-K.
2) Financial Statement Schedules
Schedule
Number Description Page
I Indebtedness to Related Parties N/A
II Guarantees of Securities of Other Issuers N/A
Page Number or
Exhibit Incorporated by
3) Number Description Reference to
3.1 Articles of Incorporation Exhibit 3(i) to the
Corporation's quarterly
report on Form 10Q for the
quarter ended March 31,
1994
3.2 By-Laws of Registrant Exhibit 3.2 to Form S-4
filed October 15, 1993
10.1 Employment Contract Exhibit 10.2 to Form S-4
Sumner E. Brumbaugh Filed October 15, 1993
10.2 Employment Contract Exhibit 10.3 to Form S-4
Robert F. Koslow filed October 15, 1993
10.3 Employment Contract Exhibit 10.4 to Form S-4
Robert C. Williams filed June 17, 1994
10.4 Change in Control Exhibit 10.4 to Form 10-K
Agreement dated filed March 21, 1996
October 27, 1995
Joseph E. O'Dell
10.5 Change in Control Exhibit 10.5 to Form 10-K
Agreement dated filed March 21, 1996
October 27, 1995
Gerard M. Thomchick
10.6 Change in Control Exhibit 10.6 to Form 10-K
Agreement dated filed March 21, 1996
October 30, 1995, entered
into between First Commonwealth
Financial Corporation and
John J. Dolan, together with a
schedule listing substantially
identical Change in Control
Agreements with the following
individuals: George E. Dash,
William R. Jarrett, R. John Previte,
David L. Dawson, Johnston A. Glass,
Rosemary Krolick, William Miksich,
Domenic P. Rocco, Timothy P. Sissler,
Robert C. Wagner and C. Dean Wingard.
21.1 Subsidiaries of the
Registrant
60<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K
PART IV (Continued)
23.1 Consent of Deloitte & Touche LLP
Certified Public Accountant
23.2 Consent of Grant Thornton LLP
Certified Public Accountants
24.1 Power of Attorney
27.1 Financial Data Schedule
(B) Report on Form 8-K
None
61
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in Indiana,
Pennsylvania, on the 24th day of March 1998.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
/S/JOSEPH E. O'DELL
Joseph E. O'Dell, President and Chief Executive Officer
62
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
Exhibit 21.1 - SUBSIDIARIES OF FIRST COMMONWEALTH FINANCIAL
CORPORATION
Percent Ownership
By Registrant
First Commonwealth Bank 100%
22 North Sixth Street
Indiana, PA 15701
Unitas Mortgage Corporation 100%
17 East High Street
Carlisle, PA 17013
Unitas Financial Corporation 100%
PO Box 777
Chambersburg, PA 17201
Commonwealth Systems Corporation 100%
22 North Sixth Street
Indiana, PA 15701
Incorporated under the laws of Pennsylvania
First Commonwealth Trust Company 100%
614 Philadelphia Street
Indiana, PA 15701
Incorporated under the laws of Pennsylvania
BSI Financial Services Inc. 100%
101 North Second Street
Titusville, PA 16354
Commonwealth Trust Credit Life Insurance Company 50%
100 West Clarendon, Suite 800
Phoenix, AZ 85013
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
Exhibit 23.1 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in Registration Statement
No. 33-55687 of First Commonwealth Financial Corporation on Form S-8 of our
report dated January 30, 1998, appearing in this Annual Report on Form 10-K of
First Commonwealth Financial Corporation for the year ended December 31, 1997.
/S/Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 24, 1998
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
Exhibit 23.2 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 17, 1997, accompanying the
consolidated financial statements incorporated by reference in the Annual
Report of First Commonwealth Financial Corporation and Subsidiaries on Form
10K for the year ended December 31, 1997. We hereby consent to the
incorporation by reference of said report in the Registration Statement of
First Commonwealth Financial Corporation and Subsidiaries on Form S-8
(File No. 33-55687 effective September 29, 1994).
/S/Grant Thornton LLP
Philadelphia, Pennsylvania
March 24, 1998
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
Exhibit 24.1 - POWER OF ATTORNEY
KNOWN ALL ME BY THESE PRESENT - that each person whose signature appears
below constitutes and appoints Joseph E. O'Dell and David R. Tomb, Jr., and
each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to do done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or either of them, or
their or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE AND CAPACITY DATE
/S/JOHN J. DOLAN March 19, 1998
John J. Dolan, Sr. Vice President & CFO (1)
/S/JOHNSTON A. GLASS March 17, 1998
Johnston A. Glass, Director
/S/CHARLES J. SHEFTIC March 17, 1998
Charles J. Sheftic, Director
/S/DAVID R. TOMB, JR. March 17, 1998
David R. Tomb, Jr., Senior Vice President,
Secretary and Treasurer and Director
/S/RONALD C. GEISER March 17, 1998
Ronald C. Geiser, Director
/S/JOSEPH E. O'DELL March 17, 1998
Joseph E. O'Dell, President and CEO
and Director
/S/THOMAS L. DELANEY March 17, 1998
Thomas L. Delaney, Director
/S/SUMNER E. BRUMBAUGH March 17, 1998
Sumner E. Brumbaugh, Director
/S/E. H. BRUBAKER March 17, 1998
E. H. Brubaker, Director
/S/H. H. HEILMAN, JR. March 17, 1998
H. H. Heilman, Jr., Director
/S/DAVID L. JOHNSON March 19, 1998
David L. Johnson, Director
/S/EDWARD T. COTE March 19, 1998
Edward T. Cote, Director
(1) Also Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 60,109 69,406 62,381
<INT-BEARING-DEPOSITS> 4,985 4,199 8,288
<FED-FUNDS-SOLD> 2,880 0 4,800
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 396,631 244,415 244,193
<INVESTMENTS-CARRYING> 460,063 459,746 504,509
<INVESTMENTS-MARKET> 462,086 457,189 503,568
<LOANS> 1,937,744 1,778,130 1,531,174
<ALLOWANCE> 19,766 19,324 18,152
<TOTAL-ASSETS> 2,929,315 2,584,638 2,364,307
<DEPOSITS> 2,242,478 2,104,783 1,962,760
<SHORT-TERM> 193,918 15,030 120,774
<LIABILITIES-OTHER> 28,031 27,287 23,236
<LONG-TERM> 193,054 40,880 5,261
0 0 0
0 0 0
<COMMON> 22,437 22,437 22,437
<OTHER-SE> 249,397 238,921 229,839
<TOTAL-LIABILITIES-AND-EQUITY> 2,929,315 2,584,638 2,364,307
<INTEREST-LOAN> 155,676 138,654 128,582
<INTEREST-INVEST> 43,893 43,177 45,600
<INTEREST-OTHER> 242 498 1,519
<INTEREST-TOTAL> 199,811 182,629 175,701
<INTEREST-DEPOSIT> 91,486 80,712 73,821
<INTEREST-EXPENSE> 102,753 88,325 82,418
<INTEREST-INCOME-NET> 97,058 94,004 93,283
<LOAN-LOSSES> 6,929 4,501 4,125
<SECURITIES-GAINS> 6,686 1,403 (603)
<EXPENSE-OTHER> 65,909 63,589 62,062
<INCOME-PRETAX> 44,063 39,655 37,500
<INCOME-PRE-EXTRAORDINARY> 30,534 27,583 25,526
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 30,534 27,583 25,526
<EPS-PRIMARY> 1.40 1.26 1.16
<EPS-DILUTED> 1.39 1.25 1.16
<YIELD-ACTUAL> 7.92 7.89 8.04
<LOANS-NON> 7,952 7,906 7,419
<LOANS-PAST> 12,097 12,044 7,881
<LOANS-TROUBLED> 67 280 803
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 19,324 18,152 17,337
<CHARGE-OFFS> 7,318 4,234 4,170
<RECOVERIES> 831 905 860
<ALLOWANCE-CLOSE> 19,766 19,324 18,152
<ALLOWANCE-DOMESTIC> 16,557 16,383 12,146
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 3,209 2,941 6,006
</TABLE>
