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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
22 North Sixth Street Indiana, PA 15701
(Address of principal executive offices) (Zip Code)
724-349-7220
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate a check mark 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 X No .
Number of shares outstanding of issuer's common stock, $1.00 Par Value as
of November 6, 2000 was 58,184,802.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included in Part I of this report: PAGE
First Commonwealth Financial Corporation and
Subsidiaries Consolidated Balance Sheets . . . . . 3
Consolidated Statements of Income. . . . . . . . . 4
Consolidated Statements of Changes in
Shareholders' Equity . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows. . . . . . . 6
Notes to Consolidated Financial Statements . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK . . . . . . . . . . . . . . . . . . . . . . . . 25
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
September 30, December 31,
2000 1999
ASSETS
Cash and due from banks on demand.... $ 81,635 $ 92,673
Interest-bearing deposits with banks. 569 1,218
Federal funds sold .................. -0- 8,700
Securities available for sale, at
market.............................. 1,197,019 1,144,042
Securities held to maturity, at cost,
(Market value $397,946 in 2000 and
$435,000 in 1999).................. 405,021 448,347
Loans................................ 2,496,329 2,503,687
Unearned income.................... (2,342) (3,628)
Allowance for credit losses........ (34,684) (33,539)
Net loans....................... 2,459,303 2,466,520
Property and equipment............... 44,410 43,380
Other real estate owned.............. 1,224 1,707
Other assets......................... 140,220 134,259
TOTAL ASSETS.................... $4,329,401 $4,340,846
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 245,154 $ 251,404
Interest-bearing................... 2,756,817 2,697,425
Total deposits.................. 3,001,971 2,948,829
Short-term borrowings................ 354,401 424,827
Other liabilities.................... 39,997 42,152
Company obligated mandatorily
redeemable capital securities of
subsidiary trust.................... 35,000 35,000
Other long-term debt................. 587,461 603,355
Total long-term debt............ 622,461 638,355
Total liabilities............... 4,018,830 4,054,163
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;
62,525,412 shares issued; 58,184,802
and 58,142,858 shares outstanding at
September 30, 2000 and December 31,
1999, respectively................. 62,525 62,525
Additional paid-in capital........... 67,593 68,330
Retained earnings.................... 269,458 257,773
Accumulated other comprehensive income (28,440) (40,304)
Treasury stock (4,340,610 shares at
September 30, 2000 and 4,382,564 at
December 31, 1999, at cost)........ (54,801) (55,448)
Unearned ESOP shares................. (5,764) (6,193)
Total shareholders' equity......... 310,571 286,683
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $4,329,401 $4,340,846
The accompanying notes are an integral part of these consolidated financial
statements.
3
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands except per share data)
For the Quarter For the 9 Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
Interest Income
Interest and fees on loans....... $52,613 $48,783 $155,678 $144,767
Interest and dividends on
investments:
Taxable interest............... 22,527 22,924 66,860 65,484
Interest exempt from Federal
income taxes.................. 2,399 2,407 7,264 7,004
Dividends...................... 887 797 2,721 2,235
Interest on Federal funds sold... 22 18 145 77
Interest on bank deposits........ 23 10 63 101
Total interest income......... 78,471 74,939 232,731 219,668
Interest Expense
Interest on deposits............. 30,258 25,774 83,967 77,214
Interest on short-term borrowings 5,297 3,456 17,071 8,737
Interest on company obligated
mandatorily redeemable capital
securities of subsidiary trust.. 832 175 2,494 175
Interest on other long-term debt. 8,347 8,749 25,149 25,757
Total interest on long-term
debt......................... 9,179 8,924 27,643 25,932
Total interest expense........ 44,734 38,154 128,681 111,883
Net Interest Income................ 33,737 36,785 104,050 107,785
Provision for credit losses...... 2,505 2,363 7,425 6,913
Net interest income after provision
for credit losses................ 31,232 34,422 96,625 100,872
Other Income
Securities gains................. -0- 2 1,686 565
Trust income..................... 1,327 1,265 4,091 4,288
Service charges on deposit
accounts........................ 2,704 2,880 7,840 7,866
Gain on sale of loans............ 89 122 162 5,024
Other income..................... 4,122 3,209 11,761 9,272
Total other income............ 8,242 7,478 25,540 27,015
Other Expenses
Salaries and employee benefits... 13,044 12,039 39,885 37,637
Net occupancy expense............ 1,577 1,583 4,897 4,948
Furniture and equipment expense.. 2,081 1,748 5,889 5,543
Data processing expense.......... 745 886 2,436 2,648
Pennsylvania shares tax expense.. 817 882 2,627 2,612
Other operating expenses......... 6,445 6,206 19,173 18,640
Total other expenses.......... 24,709 23,344 74,907 72,028
Income before income taxes......... 14,765 18,556 47,258 55,859
Applicable income taxes.......... 3,209 4,804 11,161 15,276
Net income......................... $11,556 $13,752 $36,097 $40,583
Average Shares Outstanding(a)......57,565,411 61,290,374 57,529,015 61,215,994
Average Shares Outstanding
Assuming Dilution(a).............57,601,162 61,491,946 57,591,432 61,434,034
Per Share Data(a):
Basic earnings per share......... $ 0.20 $ 0.22 $ 0.63 $ 0.66
Diluted earnings per share....... $ 0.20 $ 0.22 $ 0.63 $ 0.66
Cash dividends per share......... $ 0.140 $ 0.130 $ 0.420 $ 0.375
(a) Share amounts have been restated to reflect the two-for-one stock split
effected in the form of a 100% stock dividend declared on October 19, 1999.
The accompanying notes are an integral part of these consolidated financial
statements.
4
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Total
Common Paid-in Retained Comprehensive Treasury ESOP Shareholders'
Stock Capital Earnings Income Stock Shares Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998......$62,525 $ 68,978 $235,623 $ 2,199 $ (5,913) $(8,007) $355,405
Comprehensive income
Net income...................... -0- -0- 40,583 -0- -0- -0- 40,583
Other comprehensive income, net
of tax: Unrealized holding gains
(losses) on securities arising
during the period.............. -0- -0- -0- (28,671) -0- -0- (28,671)
Less: reclassification adjust-
ment for gains on securities
included in net income....... -0- -0- -0- (366) -0- -0- (366)
Total other comprehensive
income....................... -0- -0- -0- (29,037) -0- -0- (29,037)
Total comprehensive income...... -0- -0- 40,583 (29,037) -0- -0- 11,546
Cash dividends declared......... -0- -0- (22,740) -0- -0- -0- (22,740)
Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 996 996
Discount on dividend reinvestment
plan purchases................ -0- (296) -0- -0- -0- -0- (296)
Treasury stock reissued......... -0- (267) -0- -0- 1,457 -0- 1,190
Balance at September 30, 1999.....$62,525 $ 68,415 $253,466 $(26,838) $ (4,456) $(7,011) $346,101
Balance at December 31, 1999......$62,525 $ 68,330 $257,773 $(40,304) $(55,448) $(6,193) $286,683
Comprehensive income
Net income...................... -0- -0- 36,097 -0- -0- -0- 36,097
Other comprehensive income, net
of tax: Unrealized holding gains
(losses) on securities arising
during the period............ -0- -0- -0- 12,960 -0- -0- 12,960
Less: reclassification adjust-
ment for gains on securities
included in net income....... -0- -0- -0- (1,096) -0- -0- (1,096)
Total other comprehensive
income....................... -0- -0- -0- 11,864 -0- -0- 11,864
Total comprehensive income...... -0- -0- 36,097 11,864 -0- -0- 47,961
Cash dividends declared......... -0- -0- (24,412) -0- -0- -0- (24,412)
Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 429 429
Discount on dividend reinvestment
plan purchases................ -0- (443) -0- -0- -0- -0- (443)
Treasury stock acquired......... -0- -0- -0- -0- (873) -0- (873)
Treasury stock reissued......... -0- (369) -0- -0- 1,520 -0- 1,151
Tax benefit of stock options.... -0- 75 -0- -0- -0- -0- 75
Balance at September 30, 2000.....$62,525 $ 67,593 $269,458 $(28,440) $(54,801) $(5,764) $310,571
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 9 Months
Ended September 30,
2000 1999
Operating Activities
Net income....................................... $36,097 $40,583
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses................... 7,425 6,913
Depreciation and amortization................. 5,415 5,750
Net gains on sales of assets.................. (1,775) (5,266)
Income from increase in cash surrender value
of bank owned life insurance................. (2,565) (1,591)
Decrease (increase) in interest receivable.... 13 (1,722)
Increase (decrease) in interest payable....... 2,475 (1,543)
Increase in income taxes payable.............. 1,089 2,258
Change in deferred taxes...................... 658 (2,041)
Other-net..................................... (1,487) (9,882)
Net cash provided by operating activities... 47,345 33,459
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales........................... -0- -0-
Proceeds from maturities and redemptions...... 52,288 99,549
Purchases..................................... (8,926) (93,151)
Transactions with securities available for sale:
Proceeds from sales........................... 16,358 38,583
Proceeds from maturities and redemptions...... 73,463 156,889
Purchases..................................... (122,896) (374,201)
Proceeds from sales of loans and other assets.... 24,963 94,327
Sale of subsidiary............................... -0- (2,396)
Investment in bank owned life insurance.......... (15,000) (20,000)
Net decrease (increase) in time deposits with
banks......................................... 650 (837)
Net increase in loans............................ (24,036) (156,133)
Purchases of premises and equipment.............. (5,848) (3,736)
Net cash used by investing activities....... (8,984) (261,106)
Financing Activities
Repayments of other long-term debt............... (50,365) (204)
Proceeds from issuance of other long-term debt... 34,900 9,000
Proceeds from issuance of company obligated
mandatorily redeemable capital securities of
subsidiary trust............................... -0- 35,000
Discount on dividend reinvestment plan purchases. (443) (296)
Dividends paid................................... (24,407) (20,256)
Net increase in Federal funds purchased.......... 8,025 39,025
Net increase (decrease) in other short-term
borrowings..................................... (78,452) 151,389
Net increase in deposits......................... 53,143 7,196
Stock option tax benefit......................... 75 -0-
Purchase of treasury stock....................... (873) -0-
Proceeds from sale of treasury stock............. 298 1,190
Net cash provided (used) by financing
activities................................. (58,099) 222,044
Net decrease in cash and cash equivalents... (19,738) (5,603)
Cash and cash equivalents at January 1............. 101,373 97,615
Cash and cash equivalents at September 30.......... $81,635 $ 92,012
The accompanying notes are an integral part of these consolidated financial
statements.
6
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 1 Management Representation
In the opinion of management, the unaudited interim consolidated
financial statements include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair statement of
financial position as of September 30, 2000 and the results of
operations for the three month and nine month periods ended
September 30, 2000 and 1999, and statements of cash flows and
changes in shareholders' equity for the nine month periods ended
September 30, 2000 and 1999. The results of the three and nine
months ended September 30, 2000 and 1999 are not necessarily
indicative of the results to be expected for the entire year.
The interim consolidated financial statements should be read in
conjunction with the annual consolidated financial statements of
First Commonwealth Financial Corporation and Subsidiaries,
including the notes thereto.
NOTE 2 Financial Statement Reclassifications
Amounts in prior periods have been reclassified to conform to the
presentation format used in 2000. The reclassifications had no
effect on the Corporation's financial condition or results of
operations.
NOTE 3 Cash Flow Disclosures (dollar amounts in thousands)
2000 1999
Cash paid during the first nine
months of the year for:
Interest $126,206 $113,426
Income Taxes $ 9,410 $ 14,850
Noncash investing and financing
activities:
ESOP loan reductions $ 429 $ 996
Loans transferred to other real
estate owned and repossessed
assets $ 4,733 $ 3,351
Gross increase (decrease) in
market value adjustment to
securities available for sale $ 18,252 $(44,673)
Treasury stock reissued for
insurance agency interest
acquired $ 852 $ -0-
7
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 4 Comprehensive Income Disclosures
The following table identifies the related tax effects allocated
to each component of other comprehensive income in the Statements
of Changes in Shareholders' Equity: (dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
Tax Net of Tax Net of
Pre-tax (Expense) Tax Pre-tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $19,938 $(6,978) $12,960 $(44,110) $15,439 $(28,671)
Less: reclassification adjustment for
gains realized in net income (1,686) 590 (1,096) (563) 197 (366)
Net unrealized gains (losses) 18,252 (6,388) 11,864 (44,673) 15,636 (29,037)
Other comprehensive income $18,252 $(6,388) $11,864 $(44,673) $15,636 $(29,037)
</TABLE>
NOTE 5 Joint Venture Buy-Out For Insurance Agency
When the Corporation formed First Commonwealth Insurance Agency
("FCIA"), its wholly-owned subsidiary, it entered into a joint
venture agreement with a partner to assist FCIA in establishing
itself as a full service insurance agency in exchange for an
undivided 50% interest in FCIA's expiring list of policy holders.
Effective August 31, 2000 the Corporation acquired the 50%
interest in the policy holders' list owned by its joint venture
partner; thereby becoming the sole owner of such list. In
exchange the joint venture partner received 89,742 shares of the
Corporation's common stock. The net effect of this transaction
is expected to reduce operating expenses by an estimated $100
thousand per quarter.
NOTE 6 New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes
accounting and reporting standards for derivative instruments and
for hedging activities which require that an entity recognize all
derivatives as either assets or liabilities in a balance sheet
and measure those instruments at fair value. Changes in the fair
value of derivatives must be recognized in earnings when they
occur unless the derivative qualifies as a hedge. If a
derivative qualifies as hedge, a company can elect to use hedge
accounting to eliminate or reduce income-statement volatility
that would arise from reporting changes in a derivative's fair
value in income. FAS No. 133 was amended by FASB statement No.
137 which delays the effective date of FAS No. 133 to the first
quarter of years beginning after June 15, 2000. FAS No. 133 was
also amended in June 2000 by FAS No. 138. FAS No. 138 addresses
and clarifies issues causing implementation difficulties for
numerous entities applying FAS No. 133. FAS No. 138 includes
amendments to FAS No. 133 which resulted from decisions made by
the FASB related to the Derivatives Implementation Group ("DIG")
process. The DIG was created by the FASB to facilitate
8
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 6 New Accounting Pronouncements (Continued)
implementation by identifying issues that arise from applying the
requirements of FAS No. 133 and to advise the FASB on how to
resolve those issues. The Corporation currently has no
freestanding derivative or hedging instruments. Management is in
the process of reviewing contracts from various functional areas
of the Corporation to identify potential derivatives embedded
within these contracts. Management's preliminary analysis is
that adoption of FAS No. 133 will not have a material impact on
the Corporation's financial condition or results of operations.
In September 2000, the FASB issued statement No. 140, "Accounting
for Transfer and Servicing of Financial Assets and
Extinquishments of Liabilities" which replaces FASB statement No.
125, issued in June 1996. FAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it
carries over most of the provisions of FAS No. 125. The
statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that
are secured borrowings. FAS No. 140 is effective for transfers
occurring after March 31, 2001 and for disclosures relating to
securitization transactions and collateral for years ending after
December 15, 2000. Implementation of FAS No. 140 should not have
a material impact on the Corporation's financial condition or
results of operations.
9
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Nine Months of 2000 as Compared to the First Nine Months of
1999
This discussion and the related financial data are presented to
assist in the understanding and evaluation of the consolidated
financial condition and results of operations of First
Commonwealth Financial Corporation (the "Corporation") including
its subsidiaries. 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.
Net income in the nine months of 2000 was $36.1 million
reflecting a decrease of $4.5 million over 1999 results of $40.6
million. The decrease in net income for the 2000 period was
primarily the result of gains on the sale of loans which were
realized during the 1999 period. Basic earnings per share and
diluted earnings per share were $0.63 for the nine months of 2000
compared to basic earnings per share and diluted earnings per
share of $0.66 for the nine months of 1999. Basic earnings per
share excluding gains on sale of assets was $0.60 for both the
2000 and 1999 nine month periods. Return on average assets was
1.12% and return on average equity was 16.29% during the 2000
period, compared to 1.29% and 15.18%, respectively during the
same period of 1999.
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
$104.1 million for the nine months of 2000 compared to $107.8
million for the same period of 1999. Net interest margin (net
interest income, on a tax-equivalent basis, as a percentage of
average earning assets) was 3.64% for the nine months of 2000
compared to 3.80% for the nine months of 1999. The reduction in
net interest margin for the 2000 period compared to 1999 was
primarily related to the interest expense on funds borrowed to
acquire treasury shares.
10
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 2000 as Compared to the First Nine Months of
1999 (Continued)
The following table shows the effect of changes in volumes and
rates on interest income and interest expense.
Analysis of Changes in Net Interest Income
(dollar amounts in thousands)
2000 Change from 1999
Total Change Due Change Due
Change To Volume To Rate
Interest-earning assets:
Time deposits with banks $ (38) $ (31) $ (7)
Securities 2,122 (1,636) 3,758
Federal funds sold 68 40 28
Loans 10,911 6,835 4,076
Total interest income 13,063 5,208 7,855
Interest-bearing liabilities:
Deposits 6,753 1,037 5,716
Short-term borrowings 8,334 5,804 2,530
Long-term debt 1,711 (25) 1,736
Total interest expense 16,798 6,816 9,982
Net interest income $(3,735) $(1,608) $(2,127)
Interest and fees on loans increased $10.9 million for 2000 over
1999 levels, primarily as a result of volume increases and rate
increases for commercial loans. Average loans for the nine
months of 2000 increased $117.4 million compared to averages for
the nine months of 1999 and included increases in commercial
loans and municipal loans which were partially offset by
decreases in average consumer loans. The decrease in consumer
loans for the 2000 period resulted from the sale of $42.2 million
of 1-4 family residential mortgage loans in the first quarter of
1999 and the sale of $20.4 million of consumer credit card loans
during the second quarter of 1999. The total yield on loans for
the first nine months of 2000 was 8.46% representing an increase
of 24 basis points (0.24%) compared to the same period of 1999.
Interest income on investments increased $2.1 million for the
nine months of 2000 compared to the corresponding period of 1999
and included increases due to rate for U.S. government agency
securities and increases due to volume for corporate bonds.
Yields on U.S. government agency securities increased 30 basis
points (0.30%) for the nine months of 2000 compared to the nine
months of 1999. Average balances of corporate bonds increased
$65.7 million for the nine months of 2000 compared to averages
for the corresponding period of 1999. Yields on investments for
the first nine months of 2000 were 6.89% compared to 6.52% for
the first nine months of 1999.
11
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 2000 as Compared to the First Nine Months of
1999 (Continued)
Interest on deposits increased $6.8 million for the 2000 period
compared to 1999, as interest on time deposits increased $6.5
million for the nine months of 2000 compared to 1999. Average
time deposits increased $68.2 million for the nine months of 2000
compared to 1999 averages resulting in an increase in interest
expense due to volume of $2.1 million. The cost of time deposits
for the nine months of 2000 increased by 33 basis points (0.33%)
compared to 1999 costs of 5.16% resulting in an increase in
interest expense due to rate of $4.4 million.
Interest expense on short-term borrowings increased $8.3 million
for the nine months of 2000 compared to the nine months of 1999
as the average balance of repurchase agreements increased $178.5
million over 1999 averages. The cost of short-term borrowings
for the 2000 period also increased by 113 basis points (1.13%)
compared to 1999 costs of 4.78%.
Interest expense on long-term debt increased $1.7 million for
2000 compared to the 1999 period. The long-term debt increase
for 2000 resulted primarily from the funding of the repurchase of
3.8 million shares of the Corporation's common stock through a
"modified Dutch Auction" tender offer during 1999. The aggregate
amount of $49.7 million paid by the Corporation in connection
with the repurchase of common shares was funded through the
issuance of capital securities and the issuance of a bank loan
from an unrelated financial institution. Capital securities
borrowings in the amount of $35 million were issued during the
third quarter of 1999 bearing an interest rate of 9.50% and
maturing in thirty years.
The provision for credit losses was $7.4 million for the nine
months of 2000 compared to $6.9 million during the 1999 period.
Net charge-offs against the allowance for credit losses were $6.3
million in the 2000 period compared to $5.0 million in the 1999
period, reflecting an increase of $1.3 million. The 2000
increase in net charge-offs included increases in net charge-offs
for commercial loans not secured by real estate of $1.8 million
compared to 1999 net charge-offs. The increase in net charge-
offs for commercial loans not secured by real estate was
partially offset by decreases in net charge-offs for consumer
loans in the 2000 period compared to 1999. See the "Credit
Review" section for an analysis of the quality of the loan
portfolio.
12
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 2000 as Compared to the First Nine Months of
1999 (Continued)
Below is an analysis of the consolidated allowance for credit
losses for the nine month periods ended September 30, 2000 and
1999.
2000 1999
(Amounts in thousands)
Balance January 1, $33,539 $32,304
Loans charged off:
Commercial, financial and
agricultural 2,304 447
Real estate-construction -0- -0-
Real estate-commercial 43 212
Real estate-residential 491 763
Loans to individuals 4,171 4,651
Lease financing receivables 297 78
Total loans charged off 7,306 6,151
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 344 264
Real estate-construction -0- -0-
Real estate-commercial -0- -0-
Real estate-residential 28 26
Loans to individuals 629 841
Lease financing receivables 25 -0-
Total recoveries 1,026 1,131
Net charge offs 6,280 5,020
Provision charged to operations 7,425 6,913
Balance September 30, $34,684 $34,197
Net securities gains increased $1.1 million during the 2000
period from $565 thousand reported in 1999. The securities gains
during 2000 resulted primarily from the sale of Pennsylvania bank
stocks with a book value of $14.4 million. The securities gains
during 1999 resulted in part from the sales of fixed rate U.S.
government agency securities and U.S. Treasury securities
classified as securities "available for sale" having book values
of $15.0 million and $21.9 million, respectively which resulted
in security gains of $167 thousand and $317 thousand,
respectively. Proceeds from the sale of U.S. Treasury securities
in 1999 were the primary funding source for the acquisition of
$20 million of bank owned life insurance during the first quarter
of 1999.
13
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 2000 as Compared to the First Nine Months of
1999 (Continued)
During the nine months of 2000 gains on the sale of loans were
$162 thousand compared to gains on sale of loans of $5.0 million
for the nine months of 1999. Gains on sale of loans for the 1999
period resulted primarily from the sale of $42.2 million of
residential mortgage loans during the first quarter of 1999 and
the sale of $20.4 million of retail credit card loans during the
second quarter of 1999 which resulted in gains of $890 thousand
and $4.0 million, respectively. Other income for the first nine
months of 2000 was $11.8 million representing an increase of $2.5
million compared to the first nine months of 1999. Other income
for the 2000 period reflected increases in gains on sale of fixed
assets of $515 thousand, merchant discount of $395 thousand, ATM
fees of $614 thousand and insurance commissions of $427 thousand.
Other income for the 2000 period also included an increase in
income from bank owned life insurance of $974 thousand, resulting
in part from claim income.
Noninterest expense was $74.9 million for the nine months of 2000
reflecting an increase of $2.9 million over the 1999 level of
$72.0 million. Total noninterest expense as a percent of average
assets was 2.32% for the 2000 period compared to 2.28% for the
1999 period. Employee costs were $39.9 million in 2000,
representing 1.24% of average assets on an annualized basis
compared to $37.6 million or 1.19% of average assets on an
annualized basis for 1999. Salary costs for the first nine
months of 2000 increased $1.8 million over 1999 levels of $29.4
million. Employee benefit costs for the first nine months of
2000 reflected increases of $497 thousand over the first nine
months of 1999 and primarily included increases in health
insurance costs and a reduction of deferred loan origination
costs compared to the first nine months of 1999. The number of
full time equivalent employees at September 30, 2000 was 1,444
compared to 1,438 at September 30, 1999.
Furniture and equipment expenses of $5.9 million for the first
nine months of 2000 reflected increases of $346 thousand over
1999 levels. Other operating expenses for the 2000 period were
$19.2 million reflecting an increase of $533 thousand over the
1999 amount of $18.6 million. The first nine months of 2000
included increases in charge card interchange, checkbook
printing, collection and repossession expenses and promotions
expense. The 2000 period also reflected an increase in FDIC
expenses resulting from rate changes as the FDIC Bank Insurance
Fund and Savings and Loan Insurance Fund rates were standardized.
Express freight charges for the first nine months of 2000
increased over the first nine months of 1999 partially because of
the impact of gasoline prices on carrier providers. Legal fees,
other professional fees, filing and recording fees and postage
expenses reflected decreases for the first nine months of 2000
compared to the 1999 period. Other operating expenses for the
14
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 2000 as Compared to the First Nine Months of
1999 (Continued)
first nine months of 2000 also included a decrease in the write-
down of mortgage servicing rights in the amount of $336 thousand
related to the disposition of BSI in 1999.
Income tax expense was $11.2 million for the nine months of 2000
compared to $15.3 million for the same period of 1999. The
Corporation's effective tax rate was 23.6% for the 2000 period
compared to 27.3% for the corresponding period of 1999. The
reduction of the Corporation's effective tax rate for 2000 was
primarily the result of increased tax free income from municipal
loans and bank owned life insurance during 2000 compared to the
1999 period.
Three Months ended September 30, 2000 as Compared to the Three
Months Ended September 30, 1999
Net income was $11.6 million for the third quarter of 2000, a
decrease of $2.2 million over 1999 results of $13.8 million.
Basic earnings per share was $0.20 during the 2000 quarter
compared to $0.22 for the same period of 1999. Return on average
assets was 1.07% and return on average equity was 14.97% during
the 2000 quarter, compared to 1.28% and 15.65% respectively,
during the 1999 quarter. Net interest income for the third
quarter of 2000 of $33.7 million represented a decrease of $3.0
million compared to the third quarter of 1999. Net interest
margin (net interest income, on a tax-equivalent basis, as a
percentage of average earning assets) for the 2000 period was
3.53%, reflecting a decrease of 27 basis points (0.27%) from
3.80% reported in 1999. The reduction in net interest margin was
partially related to the interest expense on funds borrowed to
acquire treasury shares. Net interest margin for the third
quarter of 2000 compared to the 1999 period was also negatively
impacted by the rate on short term liabilities increasing faster
than short term yields on assets.
Interest and fees on loans for the three months ended
September 30, 2000 increased $3.8 million compared to the three
months ended September 30, 1999. The increase in interest and
fees on loans for 2000 over 1999 levels was primarily a result of
volume increases and rate increases for commercial loans.
Average loans for the third quarter of 2000 increased $95.1
million compared to averages for the third quarter of 1999 and
included increases in commercial loans and municipal loans which
were partially offset by decreases in average mortgage loans and
credit card loans. The total yield on loans for the third
quarter of 2000 was 8.56% representing an increase of 38 basis
points (0.38%) compared to the third quarter of 1999.
15
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended September 30, 2000 as Compared to the Three
Months Ended September 30, 1999 (Continued)
Interest income on investments for the three months ended
September 30, 2000 was $25.8 million, reflecting a decrease of
$315 thousand over the three months ended September 30, 1999.
Volume decreases for investments during the third quarter of 2000
were partially offset by rate increases compared to the 1999
period. Average investments for the third quarter of 2000
decreased $67.1 million compared to averages for the third
quarter of 1999. Yields on investments for the 2000 quarter were
6.89% compared to 6.68% for the same period of 1999 reflecting an
increase of 21 basis points (0.21%).
Interest on deposits for the third quarter of 2000 was $30.3
million reflecting an increase of $4.5 million compared to the
third quarter of 1999. Interest on total savings deposits for
the three months ended September 30, 2000 increased $315 thousand
compared to the same period of 1999, as rate increases were
partially offset by volume decreases. Interest on time deposits
for the 2000 quarter increased $4.2 million over 1999 levels of
$19.1 million as both rates and volumes increased. The cost of
time deposits increased 73 basis points (0.73%) for the third
quarter of 2000 compared to the third quarter of 1999. Average
time deposits for the three months ended September 30, 2000 were
$1.6 billion reflecting an increase of $100.8 million over 1999
averages. Total cost of deposits for the third quarter of 2000
was 4.00% compared to 3.44% for the third quarter of 1999, an
increase of 56 basis points (0.56%).
Interest on short-term borrowings for the third quarter of 2000
increased $1.8 million compared to the third quarter of 1999,
primarily as a result of volume increases for repurchase
agreements. Interest on short-term borrowings during the third
quarter of 2000 also reflected rate increases. The cost of
short-term borrowings for the third quarter of 2000 was 6.23%
compared to 4.98% for the third quarter of 1999. Interest on
long-term debt for the three months ended September 30, 2000
increased $255 thousand over the three months ended September 30,
1999. Long term debt increases during 2000 were primarily the
result of capital securities issued during the third quarter of
1999 as partial funding for the previously discussed "modified
Dutch Auction" tender offer.
Provision for credit losses was $2.5 million for the three months
ended September 30, 2000 compared to $2.4 million for the three
months ended September 30, 1999. Net charge-offs for the third
quarter of 2000 were $1.5 million, compared to net charge-offs of
$1.8 million for the third quarter of 1999. Net charge-offs for
the third quarter of 2000 included decreases in charge-offs of
loans to individuals and charge-offs of commercial loans secured
by real estate compared to 1999 levels.
16
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended September 30, 2000 as Compared to the Three
Months Ended September 30, 1999 (Continued)
Other income of $4.1 million for the third quarter of 2000
represented an increase of $913 thousand over 1999 levels. Other
income for the third quarter of 2000 included increases in ATM
interchange fees, utility payment processing fees and income from
bank owned life insurance of $428 thousand, $139 thousand and
$298 thousand, respectively, compared to the same period of 1999.
Total noninterest expense for the three months ended September
30, 2000 was $24.7 million reflecting an increase of $1.4 million
over the $23.3 million that was reported for the corresponding
period of 1999. Employee costs were $13.0 million during the
third quarter of 2000 reflecting an increase of $1.0 million over
1999 levels. Employee cost increases for the third quarter of
2000 included salary increases of $840 thousand and employee
benefit cost increases of $166 thousand compared to the third
quarter of 1999. Employee benefit costs for the third quarter of
2000 were primarily the result of increased health insurance
costs.
Cost decreases for the third quarter of 2000 included a reduction
in outside data processing expenses and Pennsylvania shares tax
expense compared to the third quarter of 1999. Other operating
expenses for the three months ended September 30, 2000 increased
$239 thousand compared to the three months ended September 30,
1999. Collection and repo expenses reflected increases for the
2000 quarter as collection efforts for delinquent loans were
accelerated. Express, freight and storage expenses for the third
quarter of 2000 increased over the third quarter of 1999,
partially as a result of higher gas prices being passed on from
carriers. Cost decreases for the third quarter of 2000 compared
to the corresponding period of 1999 occurred in other
professional fees and telephone expenses.
Income taxes decreased $1.6 million for the third quarter of 2000
compared to the 1999 quarter as income before income taxes
decreased $3.8 million for the corresponding period. The
Corporation's effective tax rate was 21.7% for the 2000 period
compared to 25.9% for the 1999 period. The Corporation's
effective tax rate was impacted by an increase in tax free income
for the third quarter of 2000 compared to the third quarter of
1999.
17
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY
Liquidity is a measure of the Corporation's ability to
efficiently meet normal cash flow requirements of both borrowers
and depositors. In the ordinary course of business, funds are
generated from deposits (primary source) and the maturity or
repayment of earning assets, such as securities and loans. As an
additional secondary source, short-term liquidity needs may be
provided through the use of overnight Federal funds purchased,
borrowings through the use of lines available for repurchase
agreements, and borrowings from the Federal Reserve Bank.
Additionally, the banking subsidiaries are members of the Federal
Home Loan Bank and may borrow under overnight and term borrowing
arrangements. The sale of earning assets may also provide an
additional source of liquidity.
The Corporation monitors liquidity through regular computations
of prescribed liquidity ratios. The Corporation actively manages
liquidity within a defined range and has developed liquidity
contingency plans, including ensuring availability of alternate
funding sources to maintain liquidity under a variety of business
conditions. In addition to the previously described funding
sources the Corporation's ability to access the capital markets
was demonstrated during 1999 through the issuance of $35 million
of capital securities.
Net loans decreased $7.2 million in the first nine months of 2000
as increases in commercial loans secured by real estate and
increases in municipal loans were offset by decreases in
residential real estate loans and loans to individuals. Total
deposits increased $53.1 million for the first nine months of
2000 and included increases in time deposits of $97.2 million
which were partially offset by decreases in demand deposits and
total savings deposits of $6.3 million and $37.8 million,
respectively. Customers continue to reinvest savings deposits in
higher yielding investments both within and outside the
commercial banking industry. Included in the increase in time
deposits during the first nine months of 2000 was the issuance of
brokered time deposits in the amount of $26.1 million. Although
the Corporation's primary source of funds remains traditional
deposits from within the communities served by its banking
subsidiaries, future sources of deposits utilized could include
the use of brokered time deposits offered outside the
Corporation's traditional market area.
18
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY (Continued)
Marketable securities that the Corporation holds in its
investment portfolio are an additional source of liquidity.
These securities are classified as "securities available for
sale" and 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
September 30, 2000 securities available for sale had an amortized
cost of $1,240.7 million and an approximate fair value of
$1,197.0 million.
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")
exceed interest-sensitive liabilities ("ISL") during the
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
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 September 30, 2000 and December 31, 1999
(Dollar amounts in thousands):
September 30, 2000
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans....................$ 589,409 $134,158 $ 244,237 $ 967,804
Investments.............. 43,216 42,907 84,519 170,642
Other interest-earning
assets.................. 569 -0- -0- 569
Total interest-sensitive
assets................ 633,194 177,065 328,756 1,139,015
Certificates of deposits. 233,659 185,564 428,284 847,507
Other deposits........... 1,030,656 -0- -0- 1,030,656
Borrowings............... 376,447 790 884 378,121
Total interest-sensitive
liabilities........... 1,640,762 186,354 429,168 2,256,284
GAP....................$(1,007,568) $ (9,289) $(100,412) $(1,117,269)
ISA/ISL.................. 0.39 0.95 0.77 0.50
Gap/Total assets......... 23.27% 0.21% 2.32% 25.81%
December 31, 1999
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans....................$ 697,645 $113,547 $ 204,090 $ 1,015,282
Investments.............. 44,666 39,497 66,465 150,628
Other interest-earning
assets.................. 18,799 2,759 4,532 26,090
Total interest-sensitive
assets................ 761,110 155,803 275,087 1,192,000
Certificates of deposits. 325,985 231,804 277,769 835,558
Other deposits........... 1,074,451 -0- -0- 1,074,451
Borrowings............... 467,255 961 127,108 595,324
Total interest-sensitive
liabilities........... 1,867,691 232,765 404,877 2,505,333
GAP....................$(1,106,581) $(76,962) $(129,790) $(1,313,333)
ISA/ISL.................. 0.41 0.67 0.68 0.48
Gap/Total assets......... 25.49% 1.77% 2.99% 30.26%
20
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Sensitivity (Continued)
Although the periodic gap analysis provides management with a
method of measuring current interest rate risk, it only measures
rate sensitivity at a specific point in time. Therefore, to more
precisely measure the impact of interest rate changes on the
Corporation's net interest income, management simulates the
potential effects of changing interest rates through computer
modeling. The income simulation model used by the Corporation
captures all assets, liabilities, and off-balance sheet financial
instruments, accounting for significant variables that are
believed to be affected by interest rates. These variables
include prepayment speeds on mortgage loans and mortgage backed
securities, cash flows from loans, deposits and investments and
balance sheet growth assumptions. The model also captures
embedded options, such as interest rate caps/floors or call
options, and accounts for changes in rate relationships as
various rate indices lead or lag changes in market rates. The
Corporation is then better able to implement strategies which
would include an acceleration of a deposit rate reduction or lag
in a deposit rate increase. The repricing strategies for loans
would be inversely related.
The Corporation's asset/liability management policy guidelines
limit interest rate risk exposure for the succeeding twenty-four
month period. Simulations are prepared under the base case where
interest rates remain flat and most likely case where interest
rates are defined using projections of economic factors.
Additional simulations are produced estimating the impact on net
interest income of a 300 basis point (3.00%) movement upward or
downward from the base case scenario. The Corporation's current
asset/liability management policy indicates that a 300 basis
point (3.00%) change in interest rates up or down cannot result
in more than a 7.5% change in net interest income when compared
to a base case, without Board approval and a strategy in place to
reduce interest rate risk below the established maximum level.
The analysis at September 30, 2000, indicated that a 300 basis
point (3.00%) movement in interest rates in either direction over
the next twelve months would not have a significant impact on the
Corporation's anticipated net interest income over that time
frame nor over the next twenty-four months and the Corporation's
position would remain well within current policy guidelines.
The Corporation's "Asset/Liability Management Committee" ("ALCO")
is responsible for the identification, assessment and management
of interest rate risk exposure, liquidity, capital adequacy and
investment portfolio position. The primary objective of the ALCO
process is to ensure that the Corporation's balance sheet
structure maintains prudent levels of risk within the context of
currently known and forecasted economic conditions and to
establish strategies which provide the Corporation with
appropriate compensation for the assumption of those risks. The
ALCO attempts to mitigate interest rate risk through the use of
strategies such as asset disposition, asset and liability pricing
and matched maturity funding. The ALCO strategies are
established by the Corporation's senior management and are
approved by the Corporation's board of directors.
21
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW
The following table identifies amounts of loan losses and
nonperforming loans. Past due loans are those which were
contractually past due 90 days or more as to interest or
principal payments but 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 and are in compliance with the restructured
terms.
At September 30,
2000 1999
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 11,953 $ 10,184
Past due loans 17,687 15,776
Renegotiated loans 1,630 63
Total Nonperforming Loans $ 31,270 $ 26,023
Other real estate owned $ 1,224 $ 1,628
Loans outstanding at end of period $2,493,987 $2,437,391
Average loans outstanding (year-to-date) $2,504,998 $2,387,563
Nonperforming loans as percent of
total loans 1.25% 1.07%
Provision for credit losses $ 7,425 $ 6,913
Net charge-offs $ 6,280 $ 5,020
Net charge-offs as percent of
average loans outstanding 0.25% 0.21%
Provision for credit losses as percent
of net charge-offs 118.23% 137.71%
Allowance for credit losses as percent
of average loans outstanding 1.38% 1.43%
Allowance for credit losses as percent
of end-of-period loans outstanding 1.39% 1.40%
Allowance for credit losses as percent
of nonperforming loans 110.92% 131.41%
22
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW (Continued)
The Corporation considers a loan to be impaired when, based on
current information and events, it is probable that the
Corporation 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.
Impaired loans include loans on a nonaccrual basis and
renegotiated loans.
The following table identifies impaired loans, and information
regarding the relationship of impaired loans to the reserve for
credit losses at September 30, 2000 and September 30, 1999:
2000 1999
(amounts in thousands)
Recorded investment in impaired loans at end
of period $13,583 $10,247
Year to date average balance of impaired loans $13,166 $10,031
Allowance for credit losses related to impaired
loans $ 2,483 $ 2,854
Impaired loans with an allocation of the allowance
for credit losses $ 5,200 $ 4,833
Impaired loans with no allocation of the allowance
for credit losses $ 8,383 $ 5,414
Year to date income recorded on impaired loans on
a cash basis $ 300 $ 280
Other than those described above, there are no material credits
that management has serious doubts as to the borrower's ability
to comply with the present loan repayment terms. Additionally,
the portfolio is well diversified and as of September 30, 2000,
there were no significant concentrations of credit.
Nonperforming loans at September 30, 2000 increased $5.2 million
compared to 1999 levels and included increases in nonaccrual
loans, past due loans and renegotiated loans of $1.8 million,
$1.9 million and $1.6 million, respectively. Nonaccrual loans
reflected increases in nonaccrual loans secured by commercial
real estate of $1.4 million and increases in nonaccrual home
equity loans of $677 thousand. Increases in nonaccrual
commercial loans and home equity loans for 2000 were partially
23
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW (Continued)
offset by decreases in nonaccrual loans secured by residential
real estate of $436 thousand. Past due loans reflected increases
in past due loans secured by residential real estate of $1.3
million and past due loans secured by commercial real estate of
$1.7 million. Past due loans at September 30, 2000 reflected a
decrease of past due loans to individuals. The increase in
renegotiated loans at September 30, 2000 compared to the
corresponding period of 1999 was the result of the modification
of loan terms for one commercial borrower. Nonperforming loans
as a percent of total loans was 1.25% at September 30, 2000
compared to 1.15% at December 31, 1999 and 1.07% at September 30,
1999.
The Corporation's loan portfolio continues to be monitored by
senior management to identify potential portfolio risks and
detect potential credit deterioration in the early stages.
Credit risk is mitigated through the use of sound underwriting
policies and collateral requirements. Management attempts to
minimize loan losses by analyzing and modifying collection
techniques on a periodic basis. Management believes that the
allowance for credit losses and nonperforming loans remain safely
within acceptable levels.
CAPITAL RESOURCES
Equity capital increased $23.9 million in the first nine months
of 2000. Dividends declared reduced equity by $24.4 million
during the 2000 period, while earnings retention was $11.7
million, representing an earnings retention rate of 32.4%. 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 fair value adjustments to Unearned
ESOP shares, increased equity by $429 thousand. Amounts paid to
fund the discount on reinvested dividends reduced equity by $443
thousand. The market value adjustment to securities available
for sale increased equity by $11.9 million. The cost of
purchasing treasury shares decreased equity by $873 thousand
while proceeds from the reissuance of treasury shares to provide
for stock options exercised increased equity by $299 thousand
during 2000. Equity capital during 2000 also reflected an
increase of $852 thousand from the reissuance of treasury shares
to fund the buy-out of FCIA's joint venture partner (See NOTE 4
to the Consolidated Financial Statements.)
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.
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CAPITAL RESOURCES (Continued)
The Federal Reserve Board has issued risk-based capital adequacy
guidelines which are designed principally as a measure of credit
risk. These guidelines require: (1) at least 50% of a banking
organization's total capital be common and other "core" equity
capital ("Tier I Capital"); (2) assets and off-balance-sheet
items be weighted according to risk; (3) the total capital to
risk-weighted assets ratio be at least 8%; and (4) a minimum
leverage ratio of Tier I capital to average total assets. The
minimum leverage ratio is not specifically defined, but is
generally expected to be 3-5 percent for all but the most highly
rated banks, as determined by a regulatory rating system.
The table below presents the Corporation's capital position at
September 30, 2000:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $363,668 13.2%
Risk-Based Requirement 109,962 4.0
Total Capital 398,031 14.5
Risk-Based Requirement 219,923 8.0
Minimum Leverage Capital 363,668 8.5
Minimum Leverage Requirement 128,679 3.0
At September 30, 2000 the Corporation's banking subsidiaries are
considered well capitalized as defined by the Federal Deposit
Insurance Corporation Improvement Act of 1991.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Information appearing in Item 2 of this report under the caption
"Interest Sensitivity" is incorporated herein by reference in
response to this item.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were 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 a material adverse effect on the
consolidated operations or financial position of the
Corporation and its subsidiaries.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements 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.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
DATED: NOVEMBER 13, 2000 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: NOVEMBER 13, 2000 /S/ John J. Dolan
John J. Dolan, Executive Vice
President and Chief Financial
Officer
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