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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1999 commission file number 0-11242
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1428528
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
22 NORTH SIXTH STREET INDIANA, PA 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (724) 349-7220
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XX No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
TITLE OF CLASS OUTSTANDING AT March 22, 2000
Common Stock, $1 Par Value 58,095,060 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 22, 2000), was approximately $538,660,680.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement related to the annual meeting of
security holders to be held April 24, 2000 are incorporated by reference
into Part III.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
First Commonwealth Financial Corporation
FORM 10-K
INDEX
PART I PAGE
ITEM 1. Business
Description of business.......................... 2
Competition...................................... 4
Supervision and regulation....................... 4
ITEM 2. Properties....................................... 7
ITEM 3. Legal Proceedings................................ 7
ITEM 4. Submission of Matters to a Vote of Security
Holders......................................... 7
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Security Holder Matters......................... 8
ITEM 6. Selected Financial Data.......................... 9
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.............. 10
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk..................................... 28
ITEM 8. Financial Statements and Supplementary Data...... 29
ITEM 9. Disagreements on Accounting and Financial
Disclosures..................................... 64
PART III
ITEM 10. Directors and Executive Officers of the
Registrant..................................... 64
ITEM 11. Management Renumeration and Transactions........ 65
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management................................. 65
ITEM 13. Certain Relationships and Related Transactions.. 65
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................ 66
Signatures..................................... 68
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business
Description of Business
First Commonwealth Financial Corporation (the "Corporation") was
incorporated as a Pennsylvania business corporation on November 15, 1982 and
is registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended. The Corporation operates two chartered banks, First
Commonwealth Bank and Southwest Bank. Personal financial planning and other
financial services and insurance products are also provided through First
Commonwealth Trust Company and First Commonwealth Insurance Agency. The
Corporation also operates through Commonwealth Systems Corporation, a data
processing subsidiary and First Commonwealth Professional Resources Inc.,
("FCPRI") a subsidiary providing professional services to affiliated
organizations.
First Commonwealth Bank ("FCB"), a Pennsylvania-chartered banking
corporation headquartered in Indiana, Pennsylvania operates through
divisions doing business under the following names: NBOC Bank, Deposit
Bank, Cenwest Bank, First Bank of Leechburg, Peoples Bank, Central Bank,
Peoples Bank of Western Pennsylvania, Unitas Bank and Reliable Bank.
On December 31, 1998 the Corporation affiliated, as a result of a statutory
merger, with Southwest National Corporation ("SNC") and its wholly-owned
subsidiary, Southwest Bank ("Southwest"). SNC was a Pennsylvania-chartered
bank holding company headquartered in Greensburg, Pennsylvania. Southwest
Bank is a Pennsylvania-chartered, federally insured commercial bank also
headquartered in Greensburg, Pennsylvania which traces its origin to 1900.
Upon merger, SNC was combined with the Corporation and Southwest Bank became
a subsidiary of the Corporation.
Through FCB, the Corporation traces its banking origins to 1866. FCB and
Southwest ("Subsidiary Banks") conduct business through 92 community banking
offices in the counties of Allegheny (5), Armstrong (3), Beaver (1), Bedford
(4), Blair (8), Cambria (11), Centre (2), Clearfield (5), Elk (3), Franklin
(2), Huntingdon (6), Indiana (9), Jefferson (4), Lawrence (6), Somerset (5),
Washington (1), and Westmoreland (17). The Subsidiary Banks engage in
general banking business and offer a full range of financial services
including such general retail banking services as demand, savings and time
deposits and mortgage, consumer installment and commercial loans.
The Subsidiary Banks operate a network of 81 automated teller machines
("ATMs") which permits customers to conduct routine banking transactions 24
hours a day. Of the ATMs, 60 are located on the premises of their main or
branch offices and 21 are in remote locations. All the ATMs are part of the
MAC network which consists of over 23,000 ATMs owned by numerous banks,
savings and loan associations and credit unions located throughout 45
states. The ATMs operated by the Subsidiary Banks are also part of the
global MasterCard/Cirrus network which is comprised of more than 300,000
ATMs located in the United States, Canada and 58 other countries and
territories, which services over 365 million card holders. Such networks
allow the Subsidiary Banks' customers to withdraw cash and in certain cases
conduct other banking transactions from ATMs of all participating financial
institutions.
In addition to funds access through the use of ATMs, the MAC debit card
offered to the Subsidiary Banks' deposit customers may be used at 300,000
point of sale terminals on the MAC system as well as being used on the
global MasterCard system for the purchase of goods and services. The MAC
debit card provides customers with the almost universal acceptability of a
credit card combined with the convenience of direct debit to the customers'
checking account.
2
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Description of Business (Continued)
First Commonwealth's corporate philosophy is to encourage its subsidiaries
to operate as locally-oriented, community-based financial service
affiliates, augmented by experienced, centralized support from the
Corporation in selected critical areas. This local market orientation is
reflected in the Subsidiary Banks' boards of directors and branch banking
centers, which generally have advisory boards comprised of local business
persons, professionals and other community representatives, that assist the
Subsidiary Banks in responding to local banking needs. The Subsidiary Banks
concentrate on customer service and business development, while relying upon
the support of the Corporation in identifying operational areas that can be
effectively centralized without sacrificing the benefits of a local
orientation. Primary candidates for centralization are those functions
which are not readily visible to customers and those which are critical to
risk management. Asset quality review, financial reporting, investment
activities, funds management, internal audit, data processing and loan
servicing are among the functions which are managed at the holding company
level, either directly or through utilization of non-bank subsidiaries as
professional resources providers.
Commonwealth Systems Corporation ("CSC") was incorporated as a Pennsylvania
business corporation in 1984 by the Corporation to function as its data
processing subsidiary and it has its principal place of business in Indiana,
Pennsylvania. Before August 1984, it had operated as the data processing
department of NBOC. CSC provides on-line general ledger accounting services
and bookkeeping services for deposit and loan accounts to the Corporation,
the Banking Subsidiaries and its other nonbank subsidiaries. CSC also acts
as a centralized purchasing agent for the purchase of computer hardware and
software products by the Corporation and subsidiaries as well as providing
technical support for the installation and use of these products. It
competes, principally with data processing subsidiaries of other, mostly
larger, banks, on the basis of the price and quality of its services and the
speed with which such services are delivered.
First Commonwealth Trust Company ("FCTC") was incorporated on January 18,
1991 as a Pennsylvania chartered trust company to render general trust
services. The trust departments of subsidiary banks were combined to form
FCTC, and the corporate headquarters are located in Indiana, Pennsylvania.
Upon the Corporation's merger with Southwest National, the trust department
of Southwest Bank was also merged into FCTC. FCTC has eight branch offices
in the service areas of the Subsidiary Banks and offers personal and
corporate trust services, including administration of estates and trusts,
individual and corporate investment management and custody services and
employee benefit trust services.
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 1,450 persons (full-time equivalents) at
December 31, 1999.
On June 1, 1989 Commonwealth Trust Credit Life Insurance Company
("Commonwealth Trust") began operations. The Corporation owns 50% of the
voting common stock of Commonwealth Trust. Commonwealth Trust provides
reinsurance for credit life and credit accident and health insurance sold by
the subsidiaries of the two unrelated holding company owners under a joint
venture arrangement whereby the net income derived from such reinsurance
inures proportionally to the benefit of the holding company selling the
underlying insurance to its banks' customers.
3
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
First Commonwealth Capital Trust I, a business trust created under the laws
of the State of Delaware, is a wholly-owned subsidiary of the Corporation.
The trust was formed during September 1999 for the exclusive purposes of
issuing and selling trust preferred securities, using the proceeds from the
sale of the trust preferred securities to acquire subordinated debentures
issued by the Corporation and engaging in only those other activities
necessary or incidental thereto.
The Corporation does not engage in any significant business activities other
than holding the stock of its subsidiaries. The Corporation does not at
present have any plans to expand or modify its business or that of its
subsidiaries, other than as described herein. Nevertheless, it will be
receptive to and may actively seek out mergers and acquisitions in the event
opportunities which management considers advantageous to the development of
the Corporation's business arise, and may otherwise expand or modify its
business as management deems necessary to respond to changing market
conditions or the laws and regulations affecting the business of banking.
Competition
The Subsidiary Banks, FCTC and FCIA face intense competition, both from
within and without their service areas, in all aspects of business. The
Subsidiary Banks compete for deposits, in such forms as checking, savings
and NOW (negotiable order of withdrawal) accounts, MMDA (money market
deposit accounts) and certificates of deposit, and in making consumer loans
and loans to smaller businesses, with numerous other commercial banks and
savings banks doing business within their service area. With respect to
loans to larger businesses the Subsidiary Banks also compete with much
larger banks located outside of their service area. The Subsidiary Banks
also compete, primarily in making consumer loans and for deposits, with
state and federally chartered savings and loan associations and with credit
unions. In recent years the Subsidiary Banks have encountered significant
competition for deposits from money market funds, mutual funds and
institutions that offer annuities located throughout the United States.
Money market funds pay dividends to their shareholders (which are the
equivalent of the interest paid by banks on deposits) and they are able to
offer services and conveniences similar to those offered by the Subsidiary
Banks. Annuities accumulate interest on the amounts deposited over a
predetermined time period. The depositor is then entitled to withdraw his
funds for a fixed period of time or until death. The effect of such
competition has been to increase the costs of the rest of deposits, which
provide the funds with which loans are made. In addition to savings and
loan associations and credit unions, the Subsidiary Banks also compete for
consumer loans with local offices of national finance companies and finance
subsidiaries of automobile manufacturers and with national credit card
companies such as MasterCard and VISA, whose cards, issued through financial
institutions, are held by consumers throughout their service area. The
Subsidiary Banks believe that the principal means by which they compete for
deposits and consumer and smaller commercial loans are the number and
desirability of the locations of their offices and ATMs, the sophistication
and quality of their services and the prices (primarily interest rates) of
their services. Additionally, the Subsidiary Banks intend to remain
competitive by offering financial services that target specific customer
needs. Examples of such specialized products include the "Sentry CD Watch"
which provides certificate of deposit rates of competitors to members of the
Subsidiary Banks' "Senior Accent" club, available to customers age 50 or
better, and mortgage products available to first time home buyers. Specific
customer needs are also met through an enhanced customer delivery system
that includes telephone banking, which provides convenient access to
financial services and hours of operation that extend past those of the
Subsidiary Banks' branch offices. The Corporation will continue to enhance
its customer delivery system in the future as the Internet is utilized to
provide customers access to product information and on-line banking.
4
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
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 ("BHC"), 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.
The Bank Holding Company Act and Regulation Y of the Federal Reserve Board
require every bank holding company to obtain the prior approval of the
Federal Reserve Board before it may acquire direct or indirect ownership or
control of more than 5% of the outstanding voting shares or substantially
all of the assets of a bank or merge or consolidate with another bank
holding company. The Federal Reserve Board may not approve acquisitions by
the Corporation of such percentage of voting shares or substantially all the
assets of any bank located in any state other than Pennsylvania unless the
laws of such state specifically authorize such an acquisition.
The Bank Holding Company Act generally prohibits a bank holding company from
engaging in a non-banking business or acquiring direct or indirect ownership
or control of more that 5% of the outstanding voting shares of any non-
banking corporation subject to certain exceptions, the principal exception
being where the business activity in question is determined by the Federal
Reserve Board to be closely related to banking or to managing or controlling
banks to be a proper incident thereto. The Bank Holding Company Act does
not place territorial restrictions on the activities of such banking related
subsidiaries of bank holding companies.
Under the Federal Reserve Act, subsidiary banks of a bank holding company
are subject to certain restrictions on extensions of credit to the bank
holding company or any of its subsidiaries, investments in the stock or
other securities thereof, or acceptance of such stock or securities as
collateral for loans to any one borrower. A bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit or the furnishing of property or
services.
Under the Pennsylvania Banking Code, there is no limit on the number of
Pennsylvania banks that may be owned or controlled by a Pennsylvania bank
holding company.
The Gramm-Leach-Bliley Act ("GBLA") of 1999 revolutionizes the regulation of
financial services companies. GBLA amends the Bank Holding Company Act of
1956 to create a new type of bank holding company, a financial holding
company ("FHC"), which is permitted to engage in all activities permitted by
a bank holding company as well as securities, merchant banking and insurance
activities that were prohibited to BHCs. GLBA also repeals Sections 20 and
32 of the Glass-Steagall Act, which prohibited affiliations between a member
bank and a company principally engaged in securities activities. The
activities of a BHC that does not qualify to become a FHC will be limited to
those the Federal Reserve Board had, prior to enactment of GBLA, deemed
closely related to banking. In order to qualify as a FHC, each depository
institution subsidiary of a BHC must be well capitalized, well managed and
if insured have a satisfactory or better rating under the Community
Reinvestment Act of 1977 ("CRA") as its most recent examination and the BHC
must file an election with the Federal Reserve Board certifying that it
meets the requirements of a FHC. GBLA expands the range of business
opportunities for commercial banking organizations and enables banking
companies and other types of financial companies such as securities,
insurance and financial technology companies to combine more readily. A FHC
5
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation (Continued)
does not need to obtain prior Federal Reserve Board approval in order to
engage in, or acquire a nonbank company that engages in financial
activities. The FHC only needs to provide notice to the Federal Reserve
Board, describing the activity commenced or conducted by the acquired
company, within 30 days after commencing the activity or consummating the
acquisition.
Subsidiary Banks
FCB and Southwest are Pennsylvania-chartered banks and are subject to the
supervision of and regularly examined by the Pennsylvania Department of
Banking and the Federal Deposit Insurance Corporation ("FDIC"), and subject
to certain regulations of the Federal Reserve Board. The areas of operation
subject to regulation by Federal and Pennsylvania laws, regulations and
regulatory agencies include reserves against deposits, maximum interest
rates for specific classes of loans, truth-in-lending disclosures,
permissible types of loans and investments, trust operations, mergers and
acquisitions, issuance of securities, payment of dividends, Community
Reinvestment Act evaluations, mandatory external audits, establishment of
branches and other aspects of operations. Under the Pennsylvania Banking
Code, a state bank located in Pennsylvania may establish branches anywhere
in the state.
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, 1999 enabling laws
have been passed so that the required reciprocity presently exists with
approximately 34 states, of which the following 18 are east of the
Mississippi River: Connecticut, Delaware, Illinois, Indiana, Kentucky,
Louisiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New
Jersey, New York, Ohio, Rhode Island, Tennessee, Vermont and West Virginia.
A similar law is applicable to savings associations and savings and loan
holding companies.
It is difficult to determine the precise effects that reciprocal regional
interstate banking will have on the Corporation in the future, but the law
has increased, and as reciprocity becomes effective for additional states
will increase further, the number of potential buyers for Pennsylvania banks
and bank holding companies. The law also permits Pennsylvania bank holding
companies and Pennsylvania savings and loan holding companies that desire to
expand outside Pennsylvania to acquire banks, savings institutions and bank
holding companies located in jurisdictions with which Pennsylvania has
reciprocity.
Effects of Governmental Policies
The business and earnings of the Corporation are affected not only by
general economic conditions, but also by the monetary and fiscal policies of
the United States Government and its agencies, including the Federal Reserve
Board. An important function of the Federal Reserve Board is to regulate
the national supply of bank credit. Among the instruments of monetary
policy used by the Federal Reserve Board to implement these objectives are
open market operations in United States government securities, changes in
6
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Effects of Governmental Policies
the discount rate on borrowings by member banks and savings institutions
from the Federal Reserve System and changes in reserve requirements against
bank and savings institution deposits. These instruments, together with
fiscal and economic policies of various governmental entities, influence
overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans, received on investments or paid for
deposits.
The monetary policies of the Federal Reserve Board have had a significant
effect on the operating results of bank holding companies and their
subsidiary banks in the past and are expected to continue to do so in the
future. In view of changing conditions in the national and Pennsylvania
economies and in the money markets, as well as the effect of actions by
monetary and fiscal authorities, including the Federal Reserve Board, no
prediction can be made as to possible future changes in interest rates,
deposit levels and loan demand or the effect of such changes on the business
and earnings of the Corporation or its subsidiaries.
ITEM 2. PROPERTIES
The Corporation's principal office is located in the old Indiana County
Courthouse complex. This certified Pennsylvania and national historic
landmark was built in 1870 and restored by NBOC in the early 1970s. The
Corporation, NBOC, CSC and FCB occupy this grand structure, which provides
32,000 square feet of floor space, under a 25-year restoration lease
agreement with Indiana County, which NBOC entered into in 1973 and renewed
during 1998 for an additional 25 years. Under the lease, NBOC is obligated
to pay all taxes, maintenance and insurance on the building and to restore
it in conformity with historic guidelines. In order to support future
expansion needs and centralization of various functional areas such as loan
processing, marketing, and accounting, the Corporation also owns two
additional structures, free of all liens and encumbrances. These facilities
currently provide office space for the Corporation, CSC, FCTC, FCB, FCIA and
FCPRI. The Subsidiary Banks have 92 banking facilities of which 26 are
leased and 66 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 20 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
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Part II
ITEM 5. Market for Registrant's Common Stock and Related Security Holder
Matters
First Commonwealth Financial Corporation (the "Corporation") is listed on
the New York Stock Exchange under the symbol "FCF." The approximate number
of holders of record of the Corporation's common stock is 12,500. 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
1999
First Quarter $12.406 $10.156 $0.115
Second Quarter $12.188 $10.375 $0.130
Third Quarter $12.750 $11.031 $0.130
Fourth Quarter $14.313 $11.625 $0.140
Cash
Dividends
Period High Sale Low Sale Per Share
1998
First Quarter $17.125 $13.656 $0.110
Second Quarter $14.875 $13.156 $0.110
Third Quarter $15.281 $11.500 $0.110
Fourth Quarter $13.406 $11.500 $0.115
8
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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,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Interest income............................ $297,507 $283,421 $254,772 $235,188 $227,182
Interest expense........................... 152,653 148,282 124,427 109,189 103,019
Net interest income...................... 144,854 135,139 130,345 125,999 124,163
Provision for credit losses................ 9,450 15,049 10,152 6,301 5,575
Net interest income after provision for
credit losses.......................... 135,404 120,090 120,193 119,698 118,588
Securities gains (losses).................. 565 1,457 6,825 1,599 (603)
Other operating income..................... 30,288 24,881 18,716 17,359 15,996
Merger and related charges................. -0- 7,915 -0- -0- -0-
Other operating expenses................... 93,615 92,286 88,857 85,299 83,689
Income before taxes and extra-
ordinary items...................... 72,642 46,227 56,877 53,357 50,292
Applicable income taxes.................... 19,612 12,229 17,338 16,164 15,728
Net income before extraordinary items 53,030 33,998 39,539 37,193 34,564
Extraordinary items (less applicable taxes
of $336)................................. -0- (624) -0- -0- -0-
Net income................................. $ 53,030 $ 33,374 $ 39,539 $ 37,193 $ 34,564
Per Share Data (a)
Net income before extraordinary items.... $0.88 $0.55 $0.64 $0.60 $0.55
Extraordinary items...................... 0.00 (0.01) 0.00 0.00 0.00
Net income............................... $0.88 $0.54 $0.64 $0.60 $0.55
Dividends declared....................... $0.515 $0.445 $0.41 $0.37 $0.33
Average shares outstanding............... 60,333,092 61,333,572 61,671,898 62,310,086 62,472,404
Per Share Data Assuming Dilution (a)
Net income before extraordinary items.... $0.88 $0.55 $0.64 $0.60 $0.55
Extraordinary items...................... 0.00 (0.01) 0.00 0.00 0.00
Net income............................... $0.88 $0.54 $0.64 $0.60 $0.55
Dividends declared....................... $0.515 $0.445 $0.41 $0.37 $0.33
Average shares outstanding............... 60,569,322 61,666,026 61,845,674 62,381,790 62,563,920
At End of Period
Total assets............................. $4,340,846 $4,096,789 $3,668,557 $3,339,996 $3,075,123
Investment securities.................... 1,592,389 1,525,332 1,015,798 901,411 960,588
Loans and leases, net of unearned income. 2,500,059 2,374,850 2,436,337 2,236,523 1,935,938
Allowance for credit losses.............. 33,539 32,304 25,932 25,234 23,803
Deposits................................. 2,948,829 2,931,131 2,884,343 2,756,111 2,586,545
Company obligated mandatorily redeemable
capital securities of subsidiary trust. 35,000 -0- -0- -0- -0-
Other long-term debt..................... 603,355 630,850 193,054 52,737 7,168
Shareholders' equity..................... 286,683 355,405 354,323 341,522 329,486
Key Ratios
Return on average assets................. 1.25% 0.85% 1.15% 1.17% 1.14%
Return on average equity................. 15.44% 9.13% 11.31% 11.07% 11.02%
Net loans to deposit ratio............... 83.64% 79.92% 83.57% 80.23% 73.93%
Dividends per share as a percent of net
income per share....................... 58.52% 82.41% 64.06% 61.67% 60.00%
Average equity to average assets ratio... 8.10% 9.28% 10.16% 10.53% 10.38%
(a) Per 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.
</TABLE>
9
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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, 1999, 1998 and 1997 and are intended to supplement, and should
be read in conjunction with, the consolidated financial statements and
related footnotes.
In addition to historical information, this discussion and analysis contains
forward-looking statements. The forward-looking statements contained herein
are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include,
but are not limited to, those discussed in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The
Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise
after the date hereof.
The Corporation acquired Southwest National Corporation and its subsidiary
("Southwest") effective December 31, 1998. The merger was accounted for as
a pooling of interests and accordingly, all financial statements have been
restated as though the merger had occurred at the beginning of the earliest
period presented. During the fourth quarter of 1997 the Corporation formed
First Commonwealth Insurance Agency ("FCIA") as a subsidiary of First
Commonwealth Bank ("FCB"), a commercial banking subsidiary of the
Corporation. FCIA began marketing a wide range of insurance and annuity
products to the Corporation's retail and commercial customers beginning
January 1, 1998.
On October 19, 1999, the Corporation's Board of Directors approved a 2-for-1
stock split effected in the form of a 100% stock dividend. Shareholders of
record at the close of business November 4, 1999 received one additional
share for each share held. The additional shares were distributed on
November 18, 1999. Share data for all periods presented has been restated
to reflect the stock split as if it had occurred at the beginning of the
earliest period presented.
Results of Operations
Net income in 1999 was $53.0 million, an increase of $19.7 million from the
1998 level of $33.4 million and compared to $39.5 million reported in 1997.
Basic earnings per share increased $0.34 per share in 1999 to $0.88. The
1998 period was impacted negatively by a number of merger and other related
charges totaling $7.9 million which resulted in a decrease of $0.13 per
share on a pre-tax basis for 1998. These charges include merger expenses
for the acquisition of Southwest National Corporation, early retirement and
postretirement benefit accruals and premises and equipment expenses to
standardize depreciation methods. Excluding merger and related charges,
gains on sale of loans and branches, securities transactions and
extraordinary items, basic earnings per share increased $0.22 or 36.67% for
1999 compared to 1998. Extraordinary items for 1998 resulted from a single
transaction whereby the Corporation incurred a cost of $960 thousand for the
prepayment of FHLB term borrowings. Increases in net interest income
increased basic earnings per share by $0.20 per share in 1999 and $0.09 per
share in 1998. Increases in employee costs decreased earnings per share by
$0.03 in both the 1999 and 1998 periods. Return on average assets was 1.25%
and return on average equity was 15.44% during 1999 compared to 0.85% and
9.13%, respectively for 1998. Return on average assets was 1.15% during
1997 while return on average equity was 11.31%.
10
<PAGE>
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
The following is an analysis of the impact of changes in net income on
earnings per share:
1999 1998
vs. vs.
1998 1997
Net income per share, prior year $0.54 $0.64
Increase (decrease) from changes in:
Net interest income 0.20 0.09
Provision for credit losses 0.09 (0.08)
Security transactions (0.01) (0.09)
Other income 0.11 0.10
Salaries and employee benefits (0.03) (0.03)
Occupancy and equipment costs 0.00 0.00
Merger and other related charges 0.13 (0.13)
Other expenses (0.03) (0.03)
Provision for income taxes (0.13) 0.08
Extraordinary items, net of tax 0.01 (0.01)
Net income per share $0.88 $0.54
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 $144.9 million in 1999
compared to $135.1 million in 1998 and $130.3 million in 1997. 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,
1999.
11
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<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
ITEM 7. Management's Discussion and Analysis
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
1999 1998 1997
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 $ 1,844 $ 121 6.56% $ 3,692 $ 230 6.23% $ 4,663 $ 236 5.06%
Investment securities 1,608,467 100,853 6.59 1,271,319 78,205 6.43 931,017 55,490 6.24
Federal funds sold 2,097 105 5.01 35,521 1,893 5.33 12,653 689 5.45
Loans (b) (c), net of
unearned income 2,408,450 196,428 8.27 2,439,436 203,093 8.43 2,330,657 198,357 8.60
Total interest-
earning assets 4,020,858 297,507 7.59 3,749,968 283,421 7.72 3,278,990 254,772 7.91
Noninterest-earning assets:
Cash 80,716 78,999 77,259
Allowance for credit losses (33,757) (27,388) (25,510)
Other assets 174,063 138,114 110,112
Total noninterest-
earning assets 221,022 189,725 161,861
Total Assets $4,241,880 $3,939,693 $3,440,851
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing
demand deposits (d) $ 386,124 $ 8,375 2.17% $ 341,835 $ 7,579 2.22% $ 271,321 $ 5,042 1.86%
Savings deposits (d) 712,637 17,769 2.49 715,814 21,379 2.99 737,725 22,752 3.08
Time deposits 1,499,857 77,187 5.15 1,530,491 85,002 5.55 1,517,972 84,806 5.59
Short-term borrowings 279,269 13,832 4.95 195,334 10,214 5.23 156,470 8,108 5.18
Long-term debt 643,746 35,490 5.51 430,677 24,108 5.60 65,820 3,719 5.65
Total interest-
bearing liabilities 3,521,633 152,653 4.33 3,214,151 148,282 4.61 2,749,308 124,427 4.53
Noninterest-bearing
liabilities and capital:
Noninterest-bearing
demand deposits (d) 345,311 328,720 311,304
Other liabilities 31,439 31,177 30,541
Shareholders' equity 343,497 365,645 349,698
Total noninterest-
bearing funding sources 720,247 725,542 691,543
Total Liabilities and
Shareholders' Equity $4,241,880 $3,939,693 $3,440,851
Net Interest Income and
Net Yield On Interest-
earning Assets $144,854 3.80% $135,139 3.77% $130,345 4.12%
(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 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
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Both interest income and interest expense increased over 1998 levels as
volume increases for 1999 were only partially offset by rate decreases.
Average interest-earning assets increased $270.9 million while average
interest-bearing liabilities increased $307.5 million in 1999. Asset
yields, on a tax-equivalent basis, decreased 13 basis points (0.13%) during
1999 to 7.59%, from 7.72% reported in 1998 and compared to 7.91% reported in
1997. The cost of funds for 1999 decreased 28 basis points (0.28%) from
1998 costs of 4.61% and compared to costs of 4.53% for 1997.
Interest and fees on loans decreased $6.7 million for 1999 over 1998 levels
and included decreases in interest on mortgage loans of $6.4 million and
decreases in interest on credit card loans of $1.4 million which were
primarily the result of loan sales. Average mortgage loans for the 1999
period decreased $88.7 million compared to 1998 averages, as a result of the
sale of $52.5 million and $42.2 million of 1-4 family residential mortgage
loans in the fourth quarter of 1998 and the first quarter of 1999,
respectively. Average credit card loans for the 1999 period decreased $9.8
million as $20.4 million of consumer credit card loans were sold in the
second quarter of 1999. The decreased income from mortgage and credit card
loans in 1999 was partially offset by increased income from commercial loans
as enhanced marketing strategies enabled the Corporation to capitalize on
lending opportunities with small to mid-sized commercial customers.
The loan portfolio also reflected decreases due to rate of $4.9 million
during 1999 as the decline in loan yields which began in the fourth quarter
of 1995 has continued throughout 1998 and 1999. Loan yields declined 16
basis points (0.16%) during 1999 to 8.27% from 8.43% reported for 1998 and
compared to 8.60% during 1997. The loan portfolio continued to be impacted
by loan refinancings and loans maturing at higher interest rates than
current market rates. Loan refinancings and prepayments slowed throughout
1999 as market interest rates rose. Mortgage portfolio yields rose 4 basis
points (0.04%) for 1999 compared to 1998 as yields on innovative loan
products introduced in previous years began to approach the average yield of
the mortgage portfolio as these products aged and introductory interest
rates were no longer offered on aged loans.
Interest income on investments increased $22.6 million for 1999 compared to
1998 as average balances of U.S. government agency securities and asset
backed securities for 1999 increased $183.6 million and $66.9 million,
respectively over 1998 averages. These securities purchases were part of a
capital management leveraging strategy whereby borrowings from the Federal
Home Loan Bank classified as long-term debt were invested in U.S. government
agency securities and mortgage backed securities. Interest income for 1999
was also impacted by volume increases from corporate securities, primarily
investments in trust preferred securities.
Yields on investments for 1999 were 6.59% compared to 6.43% for 1998 and
6.24% for 1997. Yields on investments for the 1999 period reflected an
increase in yields on U.S. government agency securities of 11 basis points
(0.11%) and an increase in yields on corporate securities of 119 basis
points (1.19%) for the 1999 period compared to 1998. Prepayment speeds of
mortgage backed securities ("MBS") which had accelerated during 1998 began
to slow during the 1999 period as interest rates rose. The primary risk of
owning MBS relates to the uncertainty of prepayments of the underlying
mortgages. Interest rate changes have a direct impact on prepayment speeds.
As interest rates increase, prepayment speeds generally decline, resulting
in a longer average life of a MBS. Conversely as interest rates decline,
prepayment speeds increase, resulting in a shorter average life of a MBS.
Using computer simulation models, the Corporation tests the average life and
yield volatility of all MBSs under various interest rate scenarios on a
continuing basis to insure that volatility falls within acceptable limits.
The Corporation holds no "high risk" securities nor does the Corporation own
any securities of a single issuer exceeding 10% of shareholders' equity
other than U.S. government and agency securities.
13
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
Interest on deposits decreased $10.6 million for 1999 compared to 1998 as
rate decreases were only partially offset by volume increases. Interest on
total savings deposits decreased $4.2 million and interest on time deposits
decreased $7.9 million for 1999 due to rate decreases and a decline in the
interest rate environment, particularly early in the year. Deposit costs
for total savings deposits reflected a decrease of 36 basis points (0.36%)
for 1999 while the cost of time deposits reflected a decrease of 41 basis
points (0.41%) over 1998 costs, primarily as a result of active interest
rate management. Volume increases for deposits in 1999 occurred primarily
in products offering higher interest rates than traditional products such as
the Corporation's "American Dream" savings product utilized by consumers and
the secured cash manager product utilized by municipalities. The secured
cash manager product allows the municipality to sweep excess balances from
noninterest-bearing accounts into an interest-bearing account which offers
higher interest rates than traditional N.O.W. accounts. Average balances of
noninterest-bearing demand deposits for 1999 reflected an increase of $16.6
million compared to 1998 averages.
Interest expense on short-term borrowings increased $3.6 million during 1999
primarily as a result of increases in average borrowings of $83.9 million
over 1998 averages. Increases in interest expense on short-term borrowings
as a result of volume increases during 1999 were partially offset by rate
decreases as the cost of short-term borrowings decreased 28 basis points
(0.28%) over 1998 costs.
Interest expense on long-term debt increased $11.4 million for the 1999
period compared to 1998 primarily as a result of increases in average
borrowings of $213.1 million over 1998 averages. The long-term debt
increase for 1999 included borrowings from the Federal Home Loan Bank with
maturities of up to 10 years to be utilized as part of the above mentioned
capital management leveraging strategy. The average spread of this leverage
strategy was approximately 1.17% during the 1999 period and 1.05% during the
1998 period. During 1999 and 1998 interest income before taxes on these
investments exceeded the funding costs by $8.0 million and $4.6 million,
respectively. Total long-term debt for 1999 also included increases
resulting from the funding of the repurchase of 3.8 million shares of the
Corporation's common stock through a "modified Dutch Auction" tender offer.
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 in the amount of $35 million were
issued during 1999 bearing an interest rate of 9.50% and maturing in thirty
years. Interest expense on capital securities for 1999 was $1.0 million.
The parent company incurred a $16 million bank loan during 1999 primarily to
fund the remaining cost of the stock repurchase. (SEE NOTE 13 to the
financial statements for a description of the Company obligated mandatorily
redeemable capital securities of subsidiary trust and NOTE 14 to the
financial statements for a description of the bank loan outstanding).
Net interest margin (net interest income, on a tax-equivalent basis as a
percentage of average earning assets), was 3.80% during 1999 compared to
3.77% in 1998 and 4.12% in 1997. The Corporation's use of computer modeling
to manage interest rate risk is described in the "Interest Sensitivity"
section of this discussion herein.
14
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis (Continued)
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)
1999 Change from 1998 1998 Change from 1997
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 $ (109) $ (115) $ 6 $ (6) $ (49) $ 43
Securities 22,648 21,682 966 22,715 21,241 1,474
Federal funds sold (1,788) (1,781) (7) 1,204 1,246 (42)
Loans (6,665) (2,613) (4,052) 4,736 9,351 (4,615)
Total interest income 14,086 17,173 (3,087) 28,649 31,789 (3,140)
Interest-bearing liabilities:
Deposits (10,629) (815) (9,814) 1,360 1,334 26
Short-term borrowings 3,618 4,389 (771) 2,106 2,014 92
Long-term debt 11,382 11,927 (545) 20,389 20,613 (224)
Total interest expense 4,371 15,501 (11,130) 23,855 23,961 (106)
Net interest income $ 9,715 $ 1,672 $ 8,043 $ 4,794 $ 7,828 $ (3,034)
</TABLE>
The provision for 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 credit losses was
$9.5 million in 1999 compared to $15.0 million in 1998 and $10.2 million in
1997. The 1998 period contains an additional provision of $4.2 million
recorded in the fourth quarter of 1998 to reflect changing economic
conditions. The allowance for credit losses was $33.5 million at
December 31, 1999, for a ratio of 1.34% of actual loans outstanding. The
ratio of the allowance for credit losses to total loans outstanding as of
December 31, 1999 has decreased slightly from the 1.36% reported as of
December 31, 1998, but this ratio remains above historic levels. Net
charge-offs for 1999 reflected decreases in consumer installment and
revolving credit loans of $896 thousand and commercial loans secured by real
estate of $315 thousand which were partially offset by increases in net
charge-offs of 1-4 family residential mortgages and commercial loans not
secured by real estate. Net charge-offs against the allowance for credit
losses were $8.2 million, or 0.34% of average total loans in 1999. This
compared to net charge-offs of $8.7 million in 1998 and $9.5 million in
1997. Net charge-offs were 0.36% and 0.41% of average total loans during
1998 and 1997, respectively. For an analysis of credit quality, see the
"Credit Review" section of this discussion.
15
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<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
credit losses for the five years ended December 31, 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
Summary of Loan Loss Experience
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Loans outstanding at end of year $2,500,059 $2,374,850 $2,436,337 $2,236,523 $1,935,938
Average loans outstanding $2,408,450 $2,439,436 $2,330,657 $2,060,196 $1,846,507
Allowance for credit losses:
Balance, beginning of year $ 32,304 $ 25,932 $ 25,234 $ 23,803 $ 22,375
Loans charged off:
Commercial, financial and agricultural 1,821 1,513 1,473 633 1,188
Loans to individuals 6,126 7,293 8,022 5,069 3,717
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial 427 812 664 440 218
Real estate-residential 1,035 690 819 195 481
Lease financing receivables 187 319 -0- 26 52
Total loans charged off 9,596 10,627 10,978 6,363 5,656
Recoveries of loans previously charged off:
Commercial, financial and agricultural 290 462 223 263 159
Loans to individuals 1,057 1,328 1,218 1,033 1,067
Real estate-construction -0- -0- -0- -0- -0-
Real estate-commercial -0- 70 13 83 56
Real estate-residential 33 87 57 109 128
Lease financing receivables 1 3 13 5 99
Total recoveries 1,381 1,950 1,524 1,493 1,509
Net loans charged off 8,215 8,677 9,454 4,870 4,147
Provision charged to expense 9,450 15,049 10,152 6,301 5,575
Balance, end of year $ 33,539 $ 32,304 $ 25,932 $ 25,234 $ 23,803
Ratios:
Net charge-offs as a percentage of
average loans outstanding 0.34% 0.36% 0.41% 0.24% 0.22%
Allowance for credit losses as
a percentage of average loans
outstanding 1.39% 1.32% 1.11% 1.22% 1.29%
</TABLE>
Net securities gains decreased $892 thousand during 1999 from $1.5 million
reported in 1998 and compared to $6.8 million in 1997. 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 securities 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. The security gains
during 1998 resulted in part from the third and fourth quarter sales of
floating collateralized mortgage obligations classified as securities
"available for sale" having book values of $87.9 million and $16.1 million
respectively, which resulted in security gains of $1.7 million during the
third quarter and security losses of $803 thousand during the fourth
quarter. These securities were sold to reduce the exposure to accelerated
prepayments in a declining interest rate environment. The $89.6 million
proceeds from the sale of securities in the third quarter of 1998 were used
to reduce outstanding Federal funds purchased while the $15.3 million
proceeds in the fourth quarter of 1998 were reinvested in higher yielding
municipal securities. The 1998 securities gains also included the first
quarter sale of U.S. Treasury securities classified as securities "available
for sale" having a book value of $45.8 million with the proceeds being
reinvested in mortgage backed and other U.S. government agency securities
with similar average expected maturities. Securities losses of $586
thousand were incurred during the fourth quarter of 1998 primarily as a
result of the sale of mutual funds classified as equity securities having a
book value of $5.8 million. Additional security gains were incurred during
the fourth quarter of 1998 as a result of the sale of Pennsylvania bank
stocks having a book value of $5.2 million. The securities gains during
16
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<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
1997 resulted primarily from the sale of investments in Pennsylvania bank
stocks having a book value of $17.4 million which were sold for gains of
$6.7 million.
Trust income of $5.5 million for 1999 reflected an increase of $274 thousand
over 1998 levels and compared to $4.4 million reported in 1997. Enhanced
referral programs and integrated growth plans for financial affiliates have
been initiated to help improve sales in various areas including trust assets
managed. The 1998 increase in trust income occurred primarily in fees from
employee benefit accounts, agency/custodial accounts and retail mutual fund
commissions and trailer fees. Service charges on deposits increased $981
thousand during 1999 as fee schedules for the Corporation's subsidiary banks
were evaluated and modified. Additional noninterest income analysis is
planned for 2000 through the use of recently implemented customer and
product profitability systems which will be augmented with the use of
outside consultants.
Gains on sale of loans increased $3.4 million for 1999 to $5.0 million from
$1.6 million reported in 1998 and compared to $207 thousand for 1997. 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 its $20.4 million retail credit card loans during the second
quarter of 1999 which generated gains of $890 thousand and $4.0 million,
respectively. Gains on sale of loans for 1998 resulted primarily from the
sale of $52.5 million of 1-4 family residential mortgage loans during the
fourth quarter of 1998 which resulted in a gain of $1.3 million. The
Corporation mitigated prepayment risk through the sale of mortgage loans
bearing higher interest rates than current market rates and reduced interest
rate risk through the sale of mortgage loans bearing interest rates which
were lower than current market rates.
Other income was $10.5 million in 1999 compared to $9.7 million in 1998 and
$5.7 million in 1997. Other revenue for 1999 reflected increases in the
cash surrender value of bank owned life insurance of $761 thousand and
increases in merchant discount of $411 thousand over 1998 levels. Insurance
commissions, primarily those generated from FCIA, increased $662 thousand
during 1999 compared to 1998. As a result of branch analysis including the
evaluation of the potential sale or consolidation of branches competing in
the same market area, the Corporation sold two of its branches located in
State College, Pennsylvania during 1998. The premium on sale of $10.1
million of deposits from the State College branches resulted in a gain of
$950 thousand in the fourth quarter of 1998. Other income for 1998
reflected increases in cash surrender value of bank owned life insurance of
$1.2 million and insurance commissions of $288 thousand compared to 1997
revenues. Charges for non-customer use of the Corporation's ATMs also
increased other revenue for 1998 by $607 thousand over 1997 levels.
Total other operating expenses decreased $6.6 million to $93.6 million in
1999 compared to $100.2 million and $88.9 million in 1998 and 1997,
respectively. Employee costs were $49.8 million in 1999, representing 1.17%
of average assets compared to $48.7 million and 1.24% of average assets for
1998. Employee costs for 1997 were $47.1 million or 1.37% of average
assets. Salary and benefit costs increased only 2.3% for 1999 compared to
1998 and were favorably impacted by the early retirement plan offered to
employees during the fourth quarter of 1998. The success of the early
retirement plan accelerated the process of right-sizing the Corporation
beyond normal attrition management by adjusting employment levels quickly
while continuing the Corporation's tradition of not laying off employees due
to merger activity. The number of full time equivalent employees at
December 31, 1999 was 1,453 compared to 1,500 at December 31, 1998.
Increases in employee benefit expenses are anticipated in 2000 due to rate
increases for health insurance of approximately 23% compared to 1999 rates.
Net occupancy and furniture and equipment costs decreased for all periods
presented. The 1999 period reflected decreases in occupancy and furniture
and equipment expenses as a result of the sale of two branches in 1998 and
the closing or consolidation of several branches in 1999. All categories of
17
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
occupancy expense reflected decreases during 1998 while furniture and
equipment expense included decreases in maintenance and repairs which were
partially offset by an increase in depreciation during 1998.
Outside data processing expenses were $3.2 million for 1999 compared to $3.1
million and $3.0 million for 1998 and 1997 respectively. Outside data
processing expenses are managed by the Corporation's data processing
subsidiary along with management of internal data processing costs.
Outsourced data processing needs are evaluated based on technology,
efficiency and cost considerations. Pennsylvania shares tax expense
increased $325 thousand during 1999 and $201 thousand in 1998.
Included in the 1998 period were merger and related charges of $7.9 million.
Merger expenses incurred during the acquisition of Southwest National
Corporation for legal, accounting, printing, filing and other professional
services totaled $1.6 million and were expensed during the fourth quarter of
1998. As part of the evaluation of appropriate staffing levels for the
Corporation after inclusion of Southwest, an early retirement plan was
offered to employees during the fourth quarter of 1998. Salary and benefit
costs of the early retirement plan in the amount of $4.7 million are
included in merger and other related charges for 1998, as approximately 5%
of employees took advantage of this opportunity. In anticipation of the
merger of Southwest benefit plans into those of the Corporation in the near
future, Southwest curtailed their postretirement benefit plan during the
fourth quarter of 1998. An additional accrual adjustment of $1.1 million
related to this curtailment is included in merger and other related charges
for 1998. Additional merger and other related charges of $462 thousand were
incurred during 1998 to standardize depreciation for Southwest to that of
the Corporation and to write-off signs and supplies that become obsolete as
a result of the merger.
Other operating expenses remained stable during 1999 at $24.6 million,
compared to $24.5 million reported in 1998 and $22.6 million reported in
1997. Other operating expenses for the 1999 period included an increase in
the write-down of mortgage servicing rights in the amount of $336 thousand
related to the disposition of BSI. The disposition of BSI in 1999 also
resulted in a loss on sale of $202 thousand. Advertising, software
maintenance and charge card interchange expense reflected increases for the
1999 period of $265 thousand, $247 thousand, and $335 thousand, respectively
compared to the 1998 period. Increases in telephone expense of $265
thousand during 1999 are being analyzed during 2000 for potential cost
control in future periods. Other professional fees decreased $757 thousand
during 1999 as outside professionals contracted during 1998 under limited
engagements to review the Corporation's asset/liability management model,
provide consulting services for marketing, customer profitability analysis
and branch automation initiatives were not extended to the 1999 period. The
1999 period also reflected decreases in audit and accounting fees and legal
fees compared to 1998.
Lease residual insurance costs, operational losses and charge-offs and
software depreciation and maintenance expenses for 1998 reflected increases
of $192 thousand, $403 thousand and $325 thousand respectively over 1997
levels. Loan processing expenses increased $353 thousand for 1998 compared
to 1997, while accelerated prepayment speeds for loans in the fourth quarter
of 1998 resulted in an increase in the amortization of purchased mortgage
servicing rights of $336 thousand over 1997 amortization. Other
professional fees for 1998 increased $753 thousand over amounts recorded for
1997.
Income tax expense was $19.6 million during 1999 representing an increase of
$7.4 million over the 1998 amount of $12.2 million and compared to $17.3
million in 1997. The Corporation's effective tax rate was 27.0% for 1999
compared to 26.5% for 1998 and 30.5% for 1997. Extraordinary items for 1998
resulted from a single transaction whereby the Corporation incurred a cost
of $960 thousand for the prepayment of FHLB term borrowings. This
transaction was executed as part of the Corporation's repositioning of its
balance sheet to reduce exposure to declining interest rates.
18
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Liquidity
Liquidity is a measure of the Corporation's ability to efficiently meet
normal cash flow requirements of both borrowers and depositors. In the
ordinary course of business, funds are generated from deposits (primary
source) and the maturity or repayment of earning assets, such as securities
and loans. As an additional secondary source, short-term liquidity needs
may be provided through the use of overnight Federal funds purchased,
borrowings through the use of lines available for repurchase agreements, and
borrowings from the Federal Reserve Bank. Additionally, the banking
subsidiaries are members of the Federal Home Loan Bank and may borrow under
overnight and term borrowing arrangements. The sale of earning assets may
also provide an additional source of liquidity.
Increased competition from nonbanking sources such as mutual funds,
insurance companies and brokerage and investment banking firms have required
banks to rely more heavily on alternative funding from other borrowings.
Many of our competitors have significantly greater resources (financial and
other) than us and may offer certain services that our banks do not provide
at this time. In addition certain of our banks' competitors are not subject
to the regulation and supervision to which we and our banks are subject, and
therefore may have competitive advantages over our banks and us. The impact
of increased competition for deposits could become more consequential in the
future. 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 and a $16 million bank loan to provide funding
for stock buy-back.
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. Core deposits decreased $41.2 million in 1999 while total
deposits increased $17.7 million for 1999. Non-core deposits, which are
time deposits in denominations of $100 thousand or more represented 12.15%
of total deposits at December 31, 1999, up from 10.21% of total deposits at
December 31, 1998. Non-core deposits increased by $58.8 million in 1999
primarily as a result of an increase in public funds. Time deposits of $100
thousand or more at December 31, 1999, 1998 and 1997 had remaining
maturities as follows:
<TABLE>
<CAPTION>
Maturity Distribution of
Large Certificates of Deposit
(Dollar Amounts in Thousands)
1999 1998 1997
Amount Percent Amount Percent Amount Percent
Remaining Maturity:
<S> <C> <C> <C> <C> <C> <C>
3 months or less $273,376 76% $151,121 50% $ 92,481 28%
Over 3 months through 6 months 13,372 4 40,363 14 64,874 20
Over 6 months through 12 months 14,503 4 27,546 9 53,428 16
Over 12 months 57,010 16 80,382 27 118,524 36
Total $358,261 100% $299,412 100% $329,307 100%
</TABLE>
Net loans increased $124.0 million during 1999 as commercial loans secured
by real estate and commercial loans not secured by real estate increased by
$108.6 million and $16.3 million respectively, compared to year-end 1998.
Increases during 1999 for commercial loans were partially offset by
decreases in loans secured by residential real estate and decreases in loans
to individuals. The reduction in residential mortgage loans was primarily
the result of the sale of $42.2 million of residential mortgages in March of
1999. The mortgage loans were sold to reduce the Corporation's prepayment
19
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
risk and to shorten the average life of the fixed rate loan portfolio. The
reduction in loans to individuals was primarily the result of the sale of
$20.4 million of consumer credit card loans in June of 1999.
Below is a schedule of loans by classification for the five years ended
December 31, 1999.
<TABLE>
<CAPTION>
Loans by Classification
(Dollar Amounts in Thousands)
1999 1998 1997 1996 1995
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 $ 417,300 16% $ 377,733 16% $ 363,699 15% $ 316,550 14% $ 254,311 13%
Real estate-construction 41,734 2 33,097 1 35,308 1 39,120 2 32,914 2
Real estate-commercial 495,789 20 387,166 16 384,794 16 356,106 16 347,543 18
Real estate-residential 980,506 39 1,009,903 42 1,048,405 43 941,147 41 801,306 40
Loans to individuals 502,465 20 517,907 22 569,742 23 578,204 25 519,949 26
Net leases 65,893 3 56,423 3 51,245 2 36,329 2 24,190 1
Gross loans and
leases 2,503,687 100% 2,382,229 100% 2,453,193 100% 2,267,456 100% 1,980,213 100%
Unearned income (3,628) (7,379) (16,856) (30,933) (44,275)
Total loans, and leases
net of unearned income $2,500,059 $2,374,850 $2,436,337 $2,236,523 $1,935,938
</TABLE>
An additional source of liquidity is marketable securities that the
Corporation holds in its investment portfolio. These securities are
classified as "securities available for sale". While the Corporation does
not have specific intentions to sell these securities, they have been
designated as "available for sale" because they may be sold for the purpose
of obtaining future liquidity, for management of interest rate risk or as
part of the implementation of tax management strategies. As of December 31,
1999, securities available for sale had an amortized cost of $1,206 million
and an approximate fair value of $1,144 million. Gross unrealized gains
were $328 thousand and gross unrealized losses were $62.3 million. Based
upon the Corporation's historical ability to fund liquidity needs from other
sources, the current available for sale portfolio is deemed to be more than
adequate, as the Corporation does not anticipate a need to liquidate the
investments until maturity. Below is a schedule of the contractual maturity
distribution of securities held to maturity and securities available for
sale at December 31, 1999.
<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> <C> <C>
Within 1 year $ 1,355 $ 3,941 $ -0- $ 5,296 5.57%
After 1 but within 5 years 98,306 21,600 24,506 144,412 6.40
After 5 but within 10 years 78,523 31,536 355 110,414 6.25
After 10 years 110,532 77,693 -0- 188,225 6.51
Total $288,716 $134,770 $24,861 $448,347 6.40%
</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 $ 3,002 $ 1,615 $ 5 $ 4,622 6.86%
After 1 but within 5 years 123,130 9,605 19,830 152,565 6.32
After 5 but within 10 years 51,940 12,592 499 65,031 6.27
After 10 years 732,024 51,536 200,199 983,759 6.67
Total $910,096 $75,348 $220,533 $1,205,977 6.55%
*Yields are calculated on a tax-equivalent basis.
</TABLE>
20
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Interest Sensitivity
The objective of interest rate sensitivity management is to maintain an
appropriate balance between the stable growth of income and the risks
associated with maximizing income through interest sensitivity imbalances.
While no single number can accurately describe the impact of changes in
interest rates on net interest income, interest rate sensitivity positions,
or "gaps" when measured over a variety of time periods may be helpful.
An asset or liability is considered to be interest-sensitive if the rate it
yields or bears is subject to change within a predetermined time period. If
interest-sensitive assets ("ISA") exceeds interest-sensitive liabilities
("ISL") during a prescribed time period, a positive gap results.
Conversely, when ISL exceeds ISA during a time period, a negative gap
results.
A positive gap tends to indicate that earnings will be impacted favorably if
interest rates rise during the period and negatively when interest rates
fall during the time period. A negative gap tends to indicate that earnings
will be affected inversely to interest rate changes. In other words, as
interest rates fall, a negative gap should tend to produce a positive effect
on earnings and when interest rates rise, a negative gap should tend to
affect earnings negatively.
The primary components of ISA include adjustable rate loans and investments,
loan repayments, investment maturities and money market investments. The
primary components of ISL include maturing certificates of deposit, money
market deposits, savings deposits, NOW accounts and short-term borrowings.
The following table lists the amounts and ratios of assets and liabilities
with rates or yields subject to change within the periods indicated as of
December 31, 1999 and 1998 (Dollar Amounts in Thousands):
<TABLE>
<CAPTION>
1999
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
<S> <C> <C> <C> <C>
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 deposit 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%
</TABLE>
<TABLE>
<CAPTION>
1998
Cumulative
0-90 Days 91-180 Days 181-365 Days 0-365 Days
<S> <C> <C> <C> <C>
Loans $ 765,948 $168,297 $293,082 $1,227,327
Investments 59,942 87,042 149,497 296,481
Other interest-earning assets 38,048 4,120 6,207 48,375
Total interest-sensitive
assets 863,938 259,459 448,786 1,572,183
Certificates of deposit 359,487 323,760 318,282 1,001,529
Other deposits 1,094,125 -0- -0- 1,094,125
Borrowings 142,509 1,085 2,413 146,007
Total interest-sensitive
liabilities 1,596,121 324,845 320,695 2,241,661
Gap $ (732,183) $(65,386) $128,091 $ (669,478)
ISA/ISL 0.54 0.80 1.40 0.70
Gap/Total assets 17.87% 1.60% 3.13% 16.34%
</TABLE>
21
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Although the periodic gap analysis provides management with a method of
measuring current interest rate risk, it only measures rate sensitivity at a
specific point in time. Therefore, to more precisely measure the impact of
interest rate changes on the Corporation's net interest income, management
simulates the potential effects of changing interest rates through computer
modeling. The income simulation model used by the Corporation captures all
assets, liabilities, and off-balance sheet financial instruments, accounting
for significant variables that are believed to be affected by interest
rates. These variables include prepayment speeds on mortgage loans and
mortgage backed securities, cash flows from loans, deposits and investments
and balance sheet growth assumptions. The model also captures embedded
options, such as interest rate caps/floors or call options, and accounts for
changes in rate relationships as various rate indices lead or lag changes in
market rates. The Corporation is then better able to implement strategies
which would include an acceleration of a deposit rate reduction or lag in a
deposit rate increase. The repricing strategies for loans would be
inversely related.
The Corporation's asset/liability management policy guidelines limit
interest rate risk exposure for the succeeding twenty-four month period.
Simulations are prepared under the base case where interest rates remain
flat and most likely case where interest rates are defined using projections
of economic factors. Additional simulations are produced estimating the
impact on net interest income of a 300 basis point (3.00%) movement upward
or downward from the base case scenario. The Corporation's current
asset/liability management policy indicates that a 300 basis point (3.00%)
change in interest rates up or down cannot result in more than a 7.5% change
in net interest income when compared to a base case without Board approval
and a strategy in place to reduce interest rate risk below the established
maximum level. The analysis at December 31, 1999, indicated that a 300
basis point (3.00%) movement in interest rates in either direction over the
next twelve months would not have a significant impact on the Corporation's
anticipated net interest income over that time nor over the next twenty-four
months and the Corporation's position would remain well within current
policy guidelines.
The Corporation's "Asset/Liability Management Committee" ("ALCO") is
responsible for the identification, assessment and management of interest
rate risk exposure, liquidity, capital adequacy and investment portfolio
position. The primary objective of the ALCO process is to ensure that the
Corporation's balance sheet structure maintains prudent levels of risk
within the context of currently known and forecasted economic conditions and
to establish strategies which provide the Corporation with appropriate
compensation for the assumption of those risks. The ALCO attempts to
mitigate interest rate risk through the use of strategies such as asset
disposition, asset and liability pricing and matched maturity funding. The
ALCO strategies are established by the Corporation's senior management and
are approved by the Corporation's board of directors.
Final loan maturities and rate sensitivity of the loan portfolio excluding
consumer installment and mortgage loans and before unearned income at
December 31, 1999 were as follows (Dollar Amounts in Thousands):
Within One One to After
Year 5 Years 5 Years Total
Commercial and industrial $157,993 $ 72,231 $ 66,269 $296,493
Financial institutions -0- 93 -0- 93
Real estate-construction 18,460 7,246 16,028 41,734
Real estate-commercial 78,823 73,323 343,643 495,789
Other 25,365 12,953 82,396 120,714
Totals $280,641 $165,846 $508,336 $954,823
Loans at fixed interest rates 147,617 367,732
Loans at variable interest rates 18,229 140,604
Totals $165,846 $508,336
22
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Credit Review
Maintaining a high quality loan portfolio is of great importance to the
Corporation. The Corporation manages the risk characteristics of the loan
portfolio through the use of prudent lending policies and procedures and
monitors risk through a periodic review process provided by internal
auditors, regulatory authorities and our loan review staff. These reviews
include the analysis of credit quality, diversification of industry,
compliance to policies and procedures, and an analysis of current economic
conditions.
In the management of its credit portfolio, the Corporation emphasizes the
importance of the collectibility of loans and leases as well as asset and
earnings diversification. The Corporation immediately recognizes as a loss
all credits judged to be uncollectible and has established an allowance for
credit losses that may exist in the portfolio at a point in time, but have
not been specifically identified.
The Corporation's written lending policy requires certain underwriting
standards to be met prior to funding any loan, including requirements for
credit analysis, collateral value coverage, documentation, and terms. The
principal factor used to determine potential borrowers' creditworthiness is
business cash flows or consumer income available to service debt payments.
Secondary sources of repayment, including collateral or guarantees, are
frequently obtained.
The lending policy provides limits for individual and bank committees
lending authorities. In addition to the bank loan approval process,
requests for borrowing relationships which will exceed one million dollars
must also be approved by the Corporation's Credit Committee. This Committee
consists of a minimum of three members of the Corporation's board of
directors.
Commercial and industrial loans are generally granted to small and middle
market customers for operating, expansion or asset acquisition purposes.
Operating cash flows of the business enterprise are identified as the
principal source of repayment, with business assets held as collateral.
Collateral margins and loan terms are based upon the purpose and structure
of the transaction as set forth in loan policy.
Commercial real estate loans are granted for the acquisition or improvement
of real property. Generally, commercial real estate loans do not exceed 75%
of the appraised value of property pledged to secure the transaction.
Repayment of such loans are expected from the operations of the subject real
estate and are carefully analyzed prior to approval.
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.
23
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Real estate loans secured by 1-4 family residential housing properties are
granted subject to statutory limits in effect for each bank regarding the
maximum percentage of appraised value of the mortgaged property.
Residential loan terms are normally established in compliance with secondary
market requirements. Residential mortgage portfolio interest rate risk is
controlled by secondary market sales, variable interest rate loans and
balloon maturities.
Loans to individuals represent financing extended to consumers for personal
or household purposes, including automobile financing, education, home
improvement, and personal expenditures. These loans are granted in the form
of installment, credit card, or revolving credit transactions. Consumer
creditworthiness is evaluated on the basis of ability to repay, stability of
income sources, and past credit history.
The Corporation maintains an allowance for credit losses at a level deemed
sufficient to absorb losses which are inherent in the loan and lease
portfolios at each balance sheet date. Management reviews the adequacy of
the allowance on at least a quarterly basis to ensure that the provision for
credit losses has been charged against earnings in an amount necessary to
maintain the allowance at a level that is appropriate based on management's
assessment of probable estimated losses. The Corporation's methodology for
assessing the appropriateness of the allowance for credit losses consists of
several key elements. These elements include a specific allowance for
primary watch list classified loans, an allowance based on historical
trends, an additional allowance for special circumstances, and an
unallocated portion. The Corporation consistently applies the following
comprehensive methodology and procedure at the subsidiary bank level.
The allowance for primary watch list classified loans addresses those loans
maintained on the Corporation's primary watch list which are assigned a
rating of substandard, doubtful, or loss. Substandard loans are those with
a well-defined weakness or a weakness which jeopardizes the repayment of the
debt. A loan may be classified as substandard as a result of impairment of
the borrower's financial condition and repayment capacity. Loans for which
repayment plans have not been met or collateral equity margins do not
protect the Corporation may also be classified as substandard. Doubtful
loans have the characteristics of substandard loans with the added
characteristic that collection or liquidation in full, on the basis of
presently existing facts and conditions, is highly improbable. Although the
possibility of loss is extremely high for doubtful loans, the classification
of loss is deferred until pending factors, which might improve the loan,
have been determined. Loans rated as doubtful in whole or in part are
placed in nonaccrual status. Loans which are classified as loss are
considered uncollectible and are charged to the allowance for credit losses
at the next meeting of the Corporation's credit committee after placement in
this category. There were no loans classified as loss on the primary watch
list as of December 31, 1999.
Loans on the primary watch list may also be impaired loans, which are
defined as nonaccrual loans or troubled debt restructurings which are not in
compliance with their restructured terms. Each of the classified loans on
the primary watch list are individually analyzed to determine the level of
the potential loss in the credit under the current circumstances. The
specific reserve established for these criticized and impaired loans is
based on careful analysis of the loan's performance, the related collateral
value, cash flow considerations and the financial capability of any
guarantor. The allowance for primary watch list classified loans is equal
to the total amount of potential unconfirmed losses for the individual
classified loans on the watch list. Primary watch list loans are managed
and monitored by assigned account officers within the Corporation in
conjunction with Senior Management.
The allowance based on historical trends uses charge-off experience of the
Corporation to estimate potential unconfirmed losses in the balances of the
loan and lease portfolios. The historical loss experience percentage is
24
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
based on the charge-off history for the twenty most recent quarters.
Historical loss experience percentages are applied to all non-classified
loans to obtain the portion of the allowance for credit losses which is
based on historical trends. Before applying the historical loss experience
percentages, loan balances are reduced by the portion of the loan balances
which are subject to guarantee by a government agency. Loan balances are
also adjusted for unearned discount on installment loans.
The additional allowance for special circumstances provides management with
the opportunity to estimate additional potential allowance amounts which may
be needed to cover specific factors. The specific factors that management
currently evaluates consist of portfolio risk or concentrations of credit,
off balance sheet risk, economic conditions, management or staff
considerations, and comparative peer analysis variances. Portfolio risks
include unusual changes or recent trends in specific portfolios such as
unexpected changes in the trends or levels of delinquency or charge-offs,
unusual repossession activities or large levels of unsecured loans in a
portfolio.
The Corporation also maintains an unallocated allowance. The unallocated
allowance is used to cover any factors or conditions which may cause a
potential credit loss but are not specifically identifiable. It is prudent
to maintain an unallocated portion of the allowance because no matter how
detailed an analysis of potential credit losses is performed these estimates
by definition lack precision. Management must make estimates using
assumptions and information which is often subjective and changing rapidly.
Since all identified losses are immediately charged off, no portion of the
allowance for 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 credit losses at December 31
according to the categories indicated:
<TABLE>
<CAPTION>
Allocation of the Allowance for Credit Losses
(Dollar Amounts in Thousands)
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Commercial, industrial, financial,
agricultural and other $ 6,321 $ 4,375 $ 3,726 $ 3,628 $ 2,482
Real estate-construction 831 414 415 461 330
Real estate-commercial 7,675 5,119 4,912 4,731 4,170
Real estate-residential 9,928 10,319 8,595 8,145 6,420
Loans to individuals 5,131 5,223 4,583 4,933 3,892
Lease financing receivables 586 512 393 285 162
Unallocated 3,067 6,342 3,308 3,051 6,347
Total $33,539 $32,304 $25,932 $25,234 $23,803
Allowance as percentage
of average total loans 1.39% 1.32% 1.11% 1.22% 1.29%
</TABLE>
Other than those described below, there are no material credits that
management has serious doubts as to the borrower's ability to comply with
the present loan repayment terms. The following table identifies
nonperforming loans at December 31. A loan is placed in a nonaccrual status
at the time when ultimate collectibility of principal or interest, wholly or
partially, is in doubt. Past due loans are those loans which were
contractually past due 90 days or more as to interest or principal payments
but are well secured and in the process of collection. Renegotiated loans
are those loans which terms have been renegotiated to provide a reduction or
deferral of principal or interest as a result of the deteriorating financial
position of the borrower.
25
<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)
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual basis $12,765 $ 9,677 $11,387 $ 9,536 $ 8,782
Past due loans 15,815 15,780 13,955 14,046 9,410
Renegotiated loans 62 64 67 280 803
Total nonperforming loans $28,642 $25,521 $25,409 $23,862 $18,995
Nonperforming loans as a percentage of
total loans 1.15% 1.07% 1.04% 1.07% 0.98%
Allowance as percentage of nonperforming
loans 117,10% 126.58% 102.06% 105.75% 125.31%
Other real estate owned $ 1,707 $ 2,370 $ 1,950 $ 1,732 $ 1,467
Gross income that would have been
recorded at original rates $ 724 $ 961 $ 1,017 $ 799 $ 946
Interest that was reflected in income 458 286 146 223 241
Net reduction to interest income due to
nonaccrual $ 266 $ 675 $ 871 $ 576 $ 705
</TABLE>
The reduction of income due to renegotiated loans was less than $50 thousand
in any year presented.
The level of nonperforming loans at year-end 1999 increased $3.1 million
over 1998 levels as a result of increases in nonaccrual loans. Increases
for nonaccrual commercial loans secured by real estate, commercial loans not
secured by real estate and construction loans of $2.2 million, $1.4 million
and $1.1 million, respectively were partially offset by decreases of $1.6
million for nonaccrual loans secured by residential real estate.
Nonperforming loans as a percentage of total loans for 1999 also increased
over 1998 levels. Although the allowance for credit losses as a percentage
of nonperforming loans of 117.10% at December 31, 1999 has decreased over
1998 levels, this ratio has not decreased below historic levels.
Management believes that the allowance for credit losses and nonperforming
loans remained safely within acceptable levels.
Capital Resources
Equity capital decreased $68.7 million in 1999 to $286.7 million. On July
13, 1999, the Corporation announced that the Board of Directors authorized a
repurchase of up to 4 million shares (post split) of its outstanding common
stock. The Corporation purchased 3,819,420 shares in a "modified Dutch
Auction" which reduced equity by $50.1 million for the cost of the shares.
The Corporation also purchased an additional 102,248 treasury shares in open
market transactions which reduced equity by $1.3 million. Proceeds from the
reissuance of treasury shares to provide for stock options exercised
increased equity capital by $1.5 million.
Dividends declared decreased equity by $30.9 million during 1999, an
increase over dividends for the 1998 period as the dividend rate was
increased. The retained net income of $22.2 million remained in permanent
capital to fund future growth and expansion. Long-term debt payments and
fair value adjustments to unearned ESOP shares increased equity capital by
$1.9 million. The market value adjustment to securities available for sale
decreased equity by $42.5 million. Amounts paid to fund the discount on
reinvested dividends reduced equity by $358 thousand.
26
<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 22 for an analysis of regulatory capital
guidelines and the Corporation's capital ratios relative to these
measurement standards.
Year 2000 Analysis
The Corporation began evaluating the size and complexity of the year 2000
issue during 1995. Project teams were established to identify and
prioritize critical systems and processes affected by the year 2000 date
change. By fully dedicating numerous technical staff from Commonwealth
Systems Corporation, the Corporation's data processing subsidiary and
utilizing additional staff from various functional areas, multiple computer
systems were addressed concurrently. All mission critical systems operated
as expected when the date changed to January 1, 2000. The Corporation's
greatest asset in successfully dealing with the year 2000 issue was its
dedicated staff.
The Corporation utilized internal resources to evaluate, reprogram and test
software and hardware for year 2000 issues to the extent possible. Salary
and benefit costs related to year 2000 activities were expensed as incurred.
External year 2000 expenditures included amounts for capitalized hardware
and software which will be amortized over three years for software and five
years for hardware. In most cases, the new software and hardware offer
additional benefits in processing capability or efficiencies gained from
modernization in addition to achieving year 2000 compliance. Mainframe
software and hardware replaced will result in enhancements or features of
potential benefit in serving banking customers or processing financial
transactions. Year 2000 expenditures which were expensed as incurred during
the past three years included the cost of leased off-site testing of
mainframe systems, outside professionals utilized for independent
verification, travel and lodging during off-site testing and vendor testing.
Cash outlays were funded through operating cash flows.
27
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Year 2000 Analysis (Continued)
The following table summarizes year 2000 expenditures during 1999, 1998 and
1997.
(Dollar Amounts in Thousands)
12 Months 12 Months 12 Months
Ended Ended Ended
12/31/99 12/31/98 12/31/97
Capitalized hardware and software $ 152 $ 250 $106
Non-employee expenses including testing 87 152 20
Employee related costs 793 1,003 163
Subtotal 1,032 1,405 289
Capitalized hardware and software replaced
without acceleration due to year 2000 723 2,043 70
Total expenditures $1,755 $3,448 $359
Inflation and Changing Prices
Management is aware of the impact inflation has on interest rates and
therefore the impact it can have on a bank's performance. The ability of a
financial institution to cope with inflation can only be determined by
analysis and monitoring of its asset and liability structure. The
Corporation monitors its asset and liability position with particular
emphasis on the mix of interest-sensitive assets and liabilities in order to
reduce the effect of inflation upon its performance. However, it must be
remembered that the asset and liability structure of a financial institution
is substantially different from an industrial corporation in that virtually
all assets and liabilities are monetary in nature, meaning that they have
been or will be converted into a fixed number of dollars regardless of
changes in general price levels. Examples of monetary items include cash,
loans and deposits. Nonmonetary items are those assets and liabilities
which do not gain or lose purchasing power solely as a result of general
price level changes. Examples of nonmonetary items are premises and
equipment.
Inflation can have a more direct impact on categories of noninterest
expenses such as salaries and wages, supplies and employee benefit costs.
These expenses are very closely monitored by management for both the effects
of inflation and increases relating to such items as staffing levels, usage
of supplies and occupancy costs.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information appearing in Item 7 of this report under the caption "Interest
Sensitivity" is incorporated herein by reference in response to this item.
28
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
(Dollar Amounts in Thousands)
December 31,
1999 1998
Assets
Cash and due from banks.....................$ 92,673 $ 96,615
Interest-bearing bank deposits.............. 1,218 1,914
Federal funds sold.......................... 8,700 1,000
Securities available for sale, at market.... 1,144,042 1,042,636
Securities held to maturity, at cost, (market
value $435,000 in 1999 and $486,185 in 1998) 448,347 482,696
Loans....................................... 2,503,687 2,382,229
Unearned income........................... (3,628) (7,379)
Allowance for credit losses............... (33,539) (32,304)
Net loans............................ 2,466,520 2,342,546
Property and equipment...................... 40,917 41,929
Other real estate owned..................... 1,707 2,370
Other assets................................ 136,722 85,083
Total assets.........................$4,340,846 $4,096,789
Liabilities
Deposits (All Domestic):
Noninterest-bearing.......................$ 251,404 $ 264,082
Interest-bearing.......................... 2,697,425 2,667,049
Total deposits....................... 2,948,829 2,931,131
Short-term borrowings....................... 424,827 140,547
Other liabilities........................... 42,152 38,856
Company obligated mandatorily redeemable
capital securities of subsidiary trust.... 35,000 -0-
Other long-term debt........................ 603,355 630,850
Total long-term debt................ 638,355 630,850
Total liabilities.................... 4,054,163 3,741,384
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 and 58,142,848 shares
outstanding in 1999; 62,525,412 shares
issued and 61,875,946 shares outstanding
in 1998................................... 62,525 62,525
Additional paid-in capital.................. 68,330 68,978
Retained earnings........................... 257,773 235,623
Accumulated other comprehensive income...... (40,304) 2,199
Treasury stock (4,382,564 and 649,466 shares
at December 31, 1999 and 1998, respectively
at cost).................................. (55,448) (5,913)
Unearned ESOP shares........................ (6,193) (8,007)
Total shareholders' equity........... 286,683 355,405
Total liabilities and
shareholders' equity..........$4,340,846 $4,096,789
The accompanying notes are an integral part of these consolidated
financial statements.
29
<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,
1999 1998 1997
<S> <C> <C> <C>
Interest Income
Interest and fees on loans................... $196,428 $203,093 $198,357
Interest and dividends on investments:
Taxable interest........................... 88,266 69,467 49,246
Interest exempt from Federal income taxes.. 9,479 6,600 4,869
Dividends.................................. 3,108 2,138 1,375
Interest on Federal funds sold............... 105 1,893 689
Interest on bank deposits.................... 121 230 236
Total interest income.................... 297,507 283,421 254,772
Interest Expense
Interest on deposits......................... 103,331 113,960 112,600
Interest on short-term borrowings............ 13,832 10,214 8,108
Interest on mandatorily redeemable capital
securities of subsidiary trust............. 1,007 -0- -0-
Interest on other long-term debt............. 34,483 24,108 3,719
Total interest on long-term debt......... 35,490 24,108 3,719
Total interest expense................... 152,653 148,282 124,427
Net interest income............................ 144,854 135,139 130,345
Provision for credit losses.................... 9,450 15,049 10,152
Net interest income after provision for
credit losses................................ 135,404 120,090 120,193
Other Income
Securities gains............................. 565 1,457 6,825
Trust income................................. 5,525 5,251 4,421
Service charges on deposits.................. 9,255 8,274 8,432
Gain on sale of loans........................ 4,996 1,630 207
Other income................................. 10,512 9,726 5,656
Total other income....................... 30,853 26,338 25,541
Other Expenses
Salaries and employee benefits............... 49,806 48,710 47,074
Net occupancy expense........................ 6,537 6,750 7,063
Furniture and equipment expense.............. 5,991 6,105 6,165
Data processing expense...................... 3,213 3,101 3,049
Pennsylvania shares tax expense.............. 3,477 3,152 2,951
Merger and related charges................... -0- 7,915 -0-
Other operating expenses..................... 24,591 24,468 22,555
Total other expenses..................... 93,615 100,201 88,857
Income before income taxes and extra-
ordinary items................................ 72,642 46,227 56,877
Applicable income taxes........................ 19,612 12,229 17,338
Net income before extraordinary items.......... 53,030 33,998 39,539
Extraordinary items (less applicable income
taxes of $336)............................... -0- (624) -0-
Net Income..................................... $53,030 $33,374 $39,539
Average Shares Outstanding (a)................. 60,333,092 61,333,572 61,671,898
Average Shares Outstanding Assuming Dilution (a) 60,569,322 61,666,026 61,845,674
Earnings per common share: (a)
Net income before extraordinary items........ $0.88 $ 0.55 $0.64
Extraordinary items.......................... $0.00 $(0.01) $0.00
Net income................................... $0.88 $ 0.54 $0.64
Earnings per common share assuming dilution: (a)
Net income before extraordinary items........ $0.88 $ 0.55 $0.64
Extraordinary items.......................... $0.00 $(0.01) $0.00
Net income................................... $0.88 $ 0.54 $0.64
(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.
</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
Consolidated Statements of Changes in Shareholders' Equity
(Dollar Amounts 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, 1996............. $63,322 $75,491 $210,843 $1,429 $(6,089) $(3,474) $341,522
Comprehensive income
Net income............................. -0- -0- 39,539 -0- -0- -0- 39,539
Other comprehensive income, net of tax:
Unrealized holding gains on securities
arising during the period............ -0- -0- -0- 5,159 -0- -0- 5,159
Less: reclassification adjustment
for gains on securities included
in net income...................... -0- -0- -0- (4,432) -0- -0- (4,432)
Total other comprehensive income....... -0- -0- -0- 727 -0- -0- 727
Total comprehensive income.............. -0- -0- 39,539 727 -0- -0- 40,266
Cash dividends declared.................. -0- -0- (22,152) -0- -0- -0- (22,152)
Decrease in unearned ESOP shares......... -0- 171 -0- -0- -0- 1,038 1,209
Discount on dividend reinvestment plan
purchases............................... -0- (630) -0- -0- -0- -0- (630)
Treasury stock acquired.................. -0- -0- -0- -0- (5,908) -0- (5,908)
Treasury stock reissued.................. -0- (34) -0- -0- 50 -0- 16
Balance at December 31, 1997............. 63,322 74,998 228,230 2,156 (11,947) (2,436) 354,323
Comprehensive income
Net income............................. -0- -0- 33,374 -0- -0- -0- 33,374
Other comprehensive income, net of tax:
Unrealized holding gains on securities
arising during the period............. -0- -0- -0- 971 -0- -0- 971
Less: reclassification adjustment
for gains on securities included
in net income......................... -0- -0- -0- (928) -0- -0- (928)
Total other comprehensive income....... -0- -0- -0- 43 -0- -0- 43
Total comprehensive income.............. -0- -0- 33,374 43 -0- -0- 33,417
Cash dividends declared.................. -0- -0- (25,981) -0- -0- -0- (25,981)
Net increase in unearned ESOP shares..... -0- 158 -0- -0- -0- (5,571) (5,413)
Discount on dividend reinvestment plan
purchases............................... -0- (1,016) -0- -0- -0- -0- (1,016)
Treasury stock acquired.................. -0- -0- -0- -0- (2,123) -0- (2,123)
Treasury stock reissued.................. -0- (38) -0- -0- 2,255 -0- 2,217
Treasury stock cancelled in merger....... (795) (5,107) -0- -0- 5,902 -0- -0-
Cash issued for partial shares in merger. (2) (17) -0- -0- -0- -0- (19)
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- 53,030 -0- -0- -0- 53,030
Other comprehensive income, net of tax:
Unrealized holding losses on
securities arising during the period.. -0- -0- -0- (42,137) -0- -0- (42,137)
Less: reclassification adjustment
for gains on securities included
in net income......................... -0- -0- -0- (366) -0- -0- (366)
Total other comprehensive income....... -0- -0- -0- (42,503) -0- -0- (42,503)
Total comprehensive income.............. -0- -0- 53,030 (42,503) -0- -0- 10,527
Cash dividends declared.................. -0- -0- (30,880) -0- -0- -0- (30,880)
Decrease in unearned ESOP shares......... -0- 53 -0- -0- -0- 1,814 1,867
Discount on dividend reinvestment plan
purchases............................... -0- (358) -0- -0- -0- -0- (358)
Treasury stock acquired.................. -0- -0- -0- -0- (51,331) -0- (51,331)
Treasury stock reissued.................. -0- (343) -0- -0- 1,796 -0- 1,453
Balance at December 31, 1999............. $62,525 $68,330 $257,773 $(40,304) $(55,448) $(6,193) $286,683
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
31
<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,
1999 1998 1997
<S> <C> <C> <C>
Operating Activities
Net income............................................ $ 53,030 $ 33,374 $ 39,539
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses........................ 9,450 15,049 10,152
Depreciation and amortization...................... 7,735 7,914 7,033
Net gains on sales of assets....................... (5,192) (3,829) (7,148)
Income from increase in cash surrender value of
bank owned life insurance........................ (2,126) (1,365) (204)
Increase in interest receivable.................... (773) (4,011) (8,241)
Increase in interest payable....................... 1,815 1,159 2,842
Increase (decrease) in income taxes payable........ 445 (584) (451)
Change in deferred taxes........................... 287 (1,404) 1,327
Other - net........................................ (11,922) 6,567 3,621
Net cash provided by operating activities....... 52,749 52,870 48,470
Investing Activities
Transactions with securities held to maturity:
Sales.............................................. -0- -0- -0-
Maturities and redemptions......................... 127,566 211,948 137,124
Purchases of investment securities................. (93,151) (184,668) (125,078)
Transactions with securities available for sale:
Sales.............................................. 39,282 171,891 50,049
Maturities and redemptions......................... 193,605 184,508 87,936
Purchases of investment securities................. (398,933) (891,718) (256,444)
Proceeds from sales of loans and other assets......... 99,692 104,609 22,772
Sale of subsidiary.................................... (2,431) -0- -0-
Investment in bank owned life insurance............... (20,000) -0- (25,000)
Net decrease (increase) in time deposits with banks... 689 3,127 (759)
Net increase in loans................................. (227,347) (50,580) (232,881)
Purchases of premises and equipment................... (5,197) (7,702) (6,141)
Net cash used by investing activities........... (286,225) (458,585) (348,422)
Financing Activities
Proceeds from issuance of other long-term debt........ 25,000 469,800 204,842
Repayments of other long-term debt.................... (50,319) (37,576) (63,487)
Proceeds from issuance of company obligated
mandatorily redeemable capital securities of
subsidiary trust.................................... 35,000 -0- -0-
Discount on dividend reinvestment plan purchases...... (358) (1,016) (630)
Dividends paid........................................ (27,825) (25,746) (21,739)
Net increase (decrease) in Federal funds purchased.... (45,025) (60,675) 53,675
Net increase (decrease) in other short-term borrowings 329,306 (2,228) (7,417)
Sale of branch and deposits, net of cash received..... -0- (8,612) -0-
Acquisition of treasury stock......................... (51,331) (2,123) (5,908)
Reissuance of treasury stock.......................... 1,453 2,217 16
Net increase in deposits.............................. 21,333 56,909 128,253
Net cash provided by financing activities....... 237,234 390,950 287,605
Net increase (decrease) in cash and cash
equivalents................................... 3,758 (14,765) (12,347)
Cash and cash equivalents at January 1.................. 97,615 112,380 124,727
Cash and cash equivalents at December 31................ $101,373 $ 97,615 $112,380
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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, 1999, 1998 and 1997
NOTE 1--Statement of Accounting Policies
General
The following summary of accounting and reporting policies is presented to
aid the reader in obtaining a better understanding of the financial
statements and related financial data of First Commonwealth Financial
Corporation and its subsidiaries (the "Corporation") contained in this
report.
The financial information is presented in accordance with generally accepted
accounting principles and general practice for financial institutions. In
preparing financial statements, management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. In addition, these estimates and assumptions affect revenues
and expenses in the financial statements and as such, actual results could
differ from those estimates.
Through its subsidiaries which include two commercial banks, a nondepository
trust company, and insurance agency, the Corporation provides a full range
of loan, deposit, trust and insurance services primarily to individuals and
small to middle-market businesses in seventeen counties in central and
western Pennsylvania. Under current conditions, the Corporation is
reporting one business segment.
The Corporation and subsidiaries are subject to regulations of certain state
and federal agencies. These regulatory agencies periodically examine the
Corporation and its subsidiaries for adherence to laws and regulations. As
a consequence, the cost of doing business may be affected.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Corporation and its wholly-owned subsidiaries. All material
intercompany transactions have been eliminated in consolidation.
Investments of 20 to 50 percent of the outstanding common stock of investees
are accounted for using the equity method of accounting.
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 has 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 is determined by using the
specific identification method.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS No. 133") which is effective for the first quarter of
years beginning after June 15, 2000. 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.
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, 1999, 1998 and 1997
NOTE 1--Statement of Accounting Policies (Continued)
Securities (Continued)
Management's preliminary analysis is that adoption of FAS No. 133 should not
have a material impact on the Corporation's financial condition or results
of operations.
Effective January 1, 1999, the Corporation adopted the FASB Statement No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" ("FAS No. 134"). FAS No. 134 amends FAS No. 65 "Accounting for
Certain Mortgage Banking Activities". FAS No. 65 required that after the
securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed
securities as trading securities while FAS No. 134 requires the resulting
mortgage-backed securities or other retained interests be classified based
on the entity's ability and intent to sell or hold those investments. On
the date FAS No. 134 is initially applied, an enterprise may reclassify
mortgage backed securities and other beneficial interests retained after the
securitization of mortgage loans held for sale from the trading category,
except for those with sales commitments in place. The Corporation currently
holds no mortgage backed securities or other beneficial interests retained
after the securitization of mortgage loans held for sale. The adoption of
FAS No. 134 did not have a material impact on the Corporation's financial
condition or results of operations.
Loans
Loans are carried at the principal amount outstanding. Unearned income on
installment loans and leases is taken into income on a declining basis which
results in an approximately level rate of return over the life of the loan
or lease. Interest is accrued as earned on nondiscounted loans.
The Corporation considers a loan to be impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect principal or interest due according to the contractual terms of the
loan. Loan impairment is measured based on the present value of expected
cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent.
Payments received on impaired loans are applied against the recorded
investment in the loan. For loans other than those that the Corporation
expects repayment through liquidation of the collateral, when the remaining
recorded investment in the impaired loan is less than or equal to the
present value of the expected cash flows, income is recorded on a cash
basis.
Mortgage Servicing Rights
When the Corporation purchases or originates mortgage loans with a
definitive plan to sell or securitize those loans and retain the mortgage
servicing rights, the Corporation measures 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 Corporation 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 allocates
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
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Mortgage Servicing Rights (Continued)
income (servicing revenue in excess of servicing cost). Mortgage servicing
rights are periodically evaluated for impairment based on fair values.
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 Credit Losses
The allowance for 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 January 1999 and November 1997, the Corporation purchased insurance on
the lives of a certain group of employees. The policies accumulate asset
values to meet future liabilities including the payment of employee benefits
such as health care. Premiums of $20,000 and $25,000 are shown in the
Consolidated Statements of Cash Flows for 1999 and 1997, respectively.
Increases in the cash surrender value are recorded as other income in the
Consolidated Statements of Income. The cash surrender value of bank-owned
life insurance is reflected in "other assets" on the Consolidated Balance
Sheets.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line and accelerated
methods over the estimated useful life of the asset. Charges for
maintenance and repairs are expensed as incurred. Where a lease is
involved, amortization is charged over the term of the lease or the
estimated useful life of the improvement, whichever is shorter.
35
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Accounting for the Impairment of Long-Lived Assets
The Corporation reviews long-lived assets, such as premises and equipment
and intangibles for impairment whenever events or changes in circumstances,
such as a significant decrease in the market value of an asset or the extent
or manner in which an asset is used indicate that the carrying amount of an
asset may not be recoverable. If there is an indication that the carrying
amount of an asset may not be recoverable, future discounted cash flows
expected to result from the use of the asset are estimated. If the sum of
the expected cash flows is less than the carrying value of the asset a loss
is recognized for the difference between the carrying value and fair market
value of the asset.
Income Taxes
The Corporation records taxes in accordance with the asset and liability
method utilized by Statement of Financial Accounting Standards No. 109 ("FAS
No. 109"), whereby deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities and
their respective tax bases given the provisions of the enacted tax laws.
Deferred tax assets are reduced, if necessary, by the amount of such
benefits that are not expected to be realized based upon available evidence.
Comprehensive Income Disclosures
For all periods presented, "other comprehensive income" (comprehensive
income excluding net income) includes only one component, which is the
change in unrealized holding gains and losses on available for sale
securities. The following table identifies the related tax effects
allocated to each component of other comprehensive income in the Statements
of Changes in Shareholders' Equity:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
Tax Net of Tax Net of Tax Net of
Pre-tax (Expense) Tax Pre-tax (Expense) Tax Pre-tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $(64,826) $22,689 $(42,137) $1,495 $(524) $971 $7,936 $(2,777) $5,159
Less: reclassification adjustment for
gains realized in net income (563) 197 (366) (1,428) 500 (928) (6,819) 2,387 (4,432)
Net unrealized gains (losses) (65,389) 22,886 (42,503) 67 (24) 43 1,117 (390) 727
Other comprehensive income $(65,389) $22,886 $(42,503) $ 67 $ (24) $ 43 $1,117 $ (390) $ 727
</TABLE>
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands, except per share data)
NOTE 1--Statement of Accounting Policies (Continued)
Cash Flow Statement
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and Federal funds sold. Generally, Federal
funds are sold for one-day periods.
Supplemental Disclosures
1999 1998 1997
Cash paid during the year for:
Interest $150,839 $147,123 $121,600
Income taxes $ 18,832 $ 14,200 $ 16,685
Noncash investing and financing activities:
ESOP borrowings $ -0- $ 6,000 $ -0-
ESOP loan reductions $ 1,814 $ 429 $ 1,038
Loans transferred to
other real estate owned
and repossessed assets $ 4,936 $ 6,624 $ 7,314
Gross increase (decrease)
in market value adjustment
to securities available for
sale $(65,390) $ 67 $ 1,117
Stock Split
On October 19, 1999, the Corporation's Board of Directors approved a 2-for-1
stock split effected in the form of a 100% stock dividend. Shareholders of
record at the close of business November 4, 1999 received one additional
share for each share held. The additional shares were distributed on
November 18, 1999. Pursuant to the foregoing stock split an additional
31,262,706 common shares were issued, and the sum of $31,263 ($1 per share)
was transferred to the Corporation's common stock account, and such amount
was charged against the Corporation's additional paid-in capital account.
Common stock, additional paid-in capital, and share data for all periods
presented have been restated to reflect the stock split as if it had
occurred at the beginning of the earliest period presented.
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Earnings Per Common Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders less unallocated ESOP shares 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. For all periods presented the
dilutive effect on average shares outstanding is the result of compensatory
stock options outstanding.
Employee Stock Ownership Plan
Accounting treatment for the Corporation's Employee Stock Ownership Plan
("ESOP") described in NOTE 18 follows Statement of Position 93-6 ("SOP 93-
6") "Employers Accounting for Employee Stock Ownership Plans" for ESOP
shares acquired after December 31, 1992 (new shares). The Corporation has
elected, as permitted under SOP 93-6, 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
average 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
FASB Statement No. 123 "Accounting for Stock Based Compensation" ("FAS No.
123") defines a method of measuring stock based compensation, such as stock
options granted, at an estimated fair value. FAS No. 123 also permits the
continued measurement of stock based compensation under provisions of the
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25").
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 19).
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 2--Sale of Subsidiary
Effective April 1, 1999, the Corporation sold all of the outstanding common
stock of BSI Financial Services Inc. ("BSI"), a wholly-owned subsidiary of
the Corporation, to a bank headquartered in Richmond, Indiana. Cash
proceeds in the amount of $1,709 were received, resulting in a loss on sale
of $202 which has been reflected in the financial statements. BSI provided
mortgage banking, loan servicing and collection services to the
Corporation's subsidiary banks and unaffiliated organizations. Services
performed by BSI for the subsidiary banks have been transferred to the
subsidiary banks or other nonbank subsidiaries of the Corporation.
NOTE 3--Business Combination
Effective December 31, 1998, the Corporation acquired all of the outstanding
shares of Southwest National Corporation ("Southwest"), a Pennsylvania-
chartered bank holding company headquartered in Greensburg, Pennsylvania.
Each of the 3,043,738 outstanding shares of Southwest National Corporation
were exchanged for 5.8 shares of the Corporation's common stock. The
aggregate number of shares issued by the Corporation, excluding partial
shares was 17,652,156. Related share amounts have been restated for the
stock split described in NOTE 1. The merger was accounted for as a pooling
of interests, and accordingly, all financial statements were restated as
though the merger had occurred at the beginning of the earliest period
presented.
NOTE 4--Cash and Due From Banks on Demand
Regulations of the Board of Governors of the Federal Reserve System impose
uniform reserve requirements on all depository institutions with transaction
accounts (checking accounts, NOW accounts, etc.). Reserves are maintained
in the form of vault cash or a noninterest-bearing balance held with the
Federal Reserve Bank. The subsidiary banks maintained with the Federal
Reserve Bank average balances of $3,807 during 1999 and $18,561 during 1998.
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 5--Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of
securities available for sale at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
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 $ 4,970 $ -0- $ (27) $ 4,943 $ 29,961 $ 400 $ -0- $ 30,361
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities 781,690 104 (38,777) 743,017 715,882 2,342 (1,167) 717,057
Other 123,436 -0- (4,068) 119,368 176,571 1,149 (152) 177,568
Obligations of States and
Political Subdivisions 75,348 210 (5,940) 69,618 36,225 744 (185) 36,784
Debt Securities Issued
by Foreign Governments 430 -0- -0- 430 460 -0- -0- 460
Corporate Securities 70,252 11 (5,812) 64,451 1,099 -0- (7) 1,092
Other Mortgage Backed
Securities 85,521 -0- (4,413) 81,108 34,169 61 (552) 33,678
Total Debt Securities 1,141,647 325 (59,037) 1,082,935 994,367 4,696 (2,063) 997,000
Equities 64,330 3 (3,226) 61,107 44,749 887 -0- 45,636
Total Securities
Available for Sale $1,205,977 $328 $(62,263) $1,144,042 $1,039,116 $5,583 $(2,063) $1,042,636
</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 21 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, 1999 and 1998, 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.
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 5--Securities Available For Sale (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 1999, 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 $ 4,962 $ 4,969
Due after 1 but within 5 years 152,005 147,816
Due after 5 but within 10 years 15,585 15,106
Due after 10 years 101,884 90,919
274,436 258,810
Mortgage Backed Securities 867,211 824,125
Total Debt Securities $1,141,647 $1,082,935
Proceeds from the sales of securities available for sale were $39,282,
$171,891 and $50,049 during 1999, 1998 and 1997 respectively. Gross gains
of $541, $2,817 and $6,833 and gross losses of $0, $1,284 and $14 were
realized on those sales during 1999, 1998 and 1997 respectively.
Securities available for sale with an approximate fair value of $463,004 and
$179,943 were pledged at December 31, 1999 and 1998, respectively to secure
public deposits and for other purposes required or permitted by law.
NOTE 6--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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
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 $183,926 $ 60 $ (4,231) $179,755 $224,312 $ 655 $ (429) $224,538
Other 104,790 -0- (2,436) 102,354 105,785 1,296 (92) 106,989
Obligations of States and
Political Subdivisions 134,770 176 (6,204) 128,742 140,513 2,556 (512) 142,557
Debt Securities Issued by
Foreign Governments 358 -0- -0- 358 358 -0- -0- 358
Corporate Securities 22,212 -0- (711) 21,501 5,249 10 -0- 5,259
Other Mortgage Backed
Securities 2,291 -0- (1) 2,290 6,479 5 -0- 6,484
Total Securities Held to
Maturity $448,347 $236 $(13,583) $435,000 $482,696 $4,522 $(1,033) $486,185
</TABLE>
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
Note 6--Securities Held to Maturity (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 1999, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or repay obligations with or without call or
prepayment penalties.
Approximate
Amortized Fair
Cost Value
Due within 1 year $ 3,941 $ 3,941
Due after 1 but within 5 years 133,853 131,225
Due after 5 but within 10 years 46,643 45,849
Due after 10 years 77,693 71,940
262,130 252,955
Mortgage Backed Securities 186,217 182,045
Total Debt Securities $448,347 $435,000
There were no sales of securities held to maturity in 1999, 1998 or 1997.
Securities held to maturity with an amortized cost of $282,388 and $277,345
were pledged at December 31, 1999 and 1998, respectively, to secure public
deposits and for other purposes required or permitted by law.
NOTE 7--Loans (all domestic)
Loans at year end were divided among these general categories:
December 31,
1999 1998
Commercial, financial,
agricultural and other $ 417,300 $ 377,733
Real estate loans:
Construction and land
development 41,734 33,097
1-4 Family dwellings 980,506 1,009,903
Other real estate loans 495,789 387,166
Loans to individuals for household,
family and other personal
expenditures 502,465 517,907
Leases, net of unearned income 65,893 56,423
Subtotal 2,503,687 2,382,229
Unearned income (3,628) (7,379)
Total loans and leases $2,500,059 $2,374,850
Most of the Corporation's business activity was with customers located
within Pennsylvania. The portfolio is well diversified, and as of
December 31, 1999 and 1998, there were no significant concentrations of
credit.
NOTE 8--Allowance for Credit Losses
Description of changes:
1999 1998 1997
Allowance at January 1 $32,304 $25,932 $25,234
Additions:
Recoveries of previously
charged off loans 1,381 1,950 1,524
Provision charged to operating
expense 9,450 15,049 10,152
Deductions:
Loans charged off 9,596 10,627 10,978
Allowance at December 31 $33,539 $32,304 $25,932
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 8--Allowance for Credit Losses (Continued)
Relationship to impaired loans:
1999 1998
Recorded investment in impaired loans
at end of period $12,827 $ 9,741
Average balance of impaired loans for
the year $10,808 $10,756
Allowance for credit losses related
to impaired loans $ 3,082 $ 1,593
Impaired loans with an allocation
of the allowance for credit losses $ 7,471 $ 4,530
Impaired loans with no allocation
of the allowance for credit losses $ 5,356 $ 5,211
Income recorded on impaired loans
on a cash basis $ 458 $ 286
NOTE 9--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, 1999 and 1998, 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, 1999 and 1998.
1999 1998
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $421,871 $481,354
Standby letters of credit $ 39,847 $ 38,456
Commercial letters of credit $ 514 $ -0-
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.
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 9--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 10--Premises and Equipment
Premises and equipment are described as follows:
Estimated
Useful Life 1999 1998
Land Indefinite $ 5,425 $ 5,481
Buildings and improvements 5 - 50 Years 44,582 44,368
Leasehold improvements 5 - 39 Years 9,930 9,725
Furniture and equipment 3 - 25 Years 46,177 44,124
Subtotal 106,114 103,698
Less accumulated depreciation
and amortization 65,197 61,769
Total premises and
equipment $40,917 $41,929
Depreciation and amortization related to premises and equipment was $5,160
in 1999, $5,669 and $5,171 in 1998 and 1997, respectively.
NOTE 11--Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
1999 1998
NOW and Super NOW accounts $ 98,545 $ 107,947
Savings and MMDA accounts 1,073,789 1,078,534
Time deposits 1,525,091 1,480,568
Total interest-bearing deposits $2,697,425 $2,667,049
Interest-bearing deposits at December 31, 1999 and 1998, include
reallocations from demand deposits of $97,883 and $94,588 and reallocations
from NOW and Super NOW accounts of $294,943 and $272,320 respectively into
Savings and MMDA accounts. These reallocations are based on a formula
approved by the regulatory authorities and have been made to reduce the
Corporation's reserve requirement.
Included in time deposits at December 31, 1999 and 1998, were certificates
of deposit in denominations of $100 or more of $358,261 and $299,412
respectively.
Interest expense related to $100 or greater certificates of deposit amounted
to $18,103 in 1999, $16,921 in 1998, and $17,574 in 1997.
Included in time deposits at December 31, 1999, were certificates of deposit
with the following scheduled maturities:
2000 $ 799,072
2001 293,846
2002 340,042
2003 45,619
2004 and thereafter 44,007
$1,522,586
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 12--Short-term Borrowings
Short-term borrowings at December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998
Ending Average Average Ending Average Average
Balance Balance Rate Balance Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Federal funds
purchased $ 2,950 $ 94,161 5.22% $ 47,975 $ 72,511 5.68%
Borrowings from
FHLB 100,000 49,037 5.21% -0- 18,336 5.73%
Securities sold
under agreements
to repurchase 262,301 124,904 4.66% 84,228 90,383 4.76%
Treasury, tax and
loan note option 59,576 11,167 4.81% 8,344 14,104 5.24%
Total $424,827 $279,269 4.95% $140,547 $195,334 5.23%
Maximum total at
any month-end $424,960 $278,247
</TABLE>
Interest expense on short-term borrowings for the years ended December 31 is
detailed below:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Federal funds purchased $ 4,913 $ 4,119 $3,466
Borrowings from FHLB 2,557 1,051 274
Securities sold under agreements to
repurchase 5,825 4,305 3,772
Treasury, tax and loan note option 537 739 596
Total interest on
short-term borrowings $13,832 $10,214 $8,108
</TABLE>
NOTE 13--Company Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust
The Corporation established First Commonwealth Capital Trust I ("the
Trust"), a Delaware business trust and the Trust issued 35,000 capital
securities (liquidation amount of $35 million) during September 1999,
through a private offering to qualified investors. Additionally, the Trust
issued common securities to the Corporation. The Trust used the proceeds
from the sale to buy a series of 9.50% junior subordinated deferrable
interest debentures due 2029 from the Corporation with the same economic
terms as the capital securities. The Trust will distribute the cash
payments it receives from the Corporation on the debentures to the holders
of the capital securities and the common securities.
The original series A capital securities and series A junior subordinated
deferrable interest debentures have since been exchanged for registered
series B capital securities and registered series B junior subordinated
deferrable interest debentures having the same economic terms as the
original series A securities.
The Trust will redeem all of the outstanding capital securities when the
debentures are paid at maturity on September 1, 2029. Subject to receiving
prior approval of the Board of Governors of the Federal Reserve System the
Corporation may redeem the debentures, in whole or in part, at any time on
or after September 1, 2009, at a redemption price equal to 104.750% of the
principal amount of the debentures on September 1, 2009, declining ratably
on each September 1 thereafter to 100% on or after September 1, 2019, plus
accrued and unpaid interest to the date of redemption. The Corporation may
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 13--Company Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust (Continued)
also redeem the debentures prior to September 1, 2009, upon the occurrence
of certain tax and bank regulatory events, subject to receiving prior
approval of the Board of Governors of the Federal Reserve System. If the
Corporation redeems any debentures before their maturity, the Trust will use
the cash it receives on the redemption of the debentures to redeem, on a pro
rata basis, capital securities and common securities having an aggregate
liquidation amount equal to the aggregate principal amount of the debentures
redeemed.
The net proceeds (after deduction of offering expenses and the initial
purchaser's commission) from the sale of the debentures to the Trust were
approximately $34.2 million. The Corporation used the net proceeds from the
issuance of the debentures to partially finance the purchase of 3,819,420
shares of its outstanding common stock (approximately 6.5% of its
outstanding shares of common stock) pursuant to a "modified Dutch Auction"
tender offer. Unamortized deferred issuance costs associated with the
capital securities amounted to $909 as of December 31, 1999 and are being
amortized on a straight-line basis over the term of the capital securities.
The outstanding balance of the capital securities are included as a separate
component of long-term debt on the Consolidated Balance Sheets while
interest on the capital securities is included as a separate component of
interest expense on the Consolidated Statements of Income. The amortization
of the deferred issuance costs is included in interest expense from the
capital securities on the Consolidated Statements of Income.
NOTE 14--Other Long-term Debt
Long-term debt at December 31, follows:
<TABLE>
<CAPTION>
1999 1998
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
ESOP loan due December, 2005 $ 6,193 Libor +1% $8,007 Libor +1%
Bank loan due July, 2003 16,000 FF + 1.25% 0
Borrowings from FHLB due:
February, 2000 25,000 4.72% 25,000 4.72%
July, 2000 25,000 4.72% 25,000 4.72%
August, 2002 -0- 25,000 5.36%
November, 2002 50,000 5.82% 50,000 5.82%
November, 2002 -0- 25,000 5.33%
December, 2002 50,000 5.71% 50,000 5.71%
February, 2008 100,000 5.45% 100,000 5.45%
February, 2008 100,000 5.48% 100,000 5.48%
May, 2008 55,000 5.67% 55,000 5.67%
May, 2008 45,000 5.67% 45,000 5.67%
November, 2008 50,000 5.03% 50,000 5.03%
December, 2008 65,000 4.96% 65,000 4.96%
December, 2017 7,264 6.17% 7,476 6.17%
June, 2019 8,898 5.72% -0-
Mortgage loan due July, 2012 -0- 177 2.00%
Mortgage loan due January, 2013 -0- 190 4.50%
$603,355 $630,850
</TABLE>
All Federal Home Loan Bank stock, along with an interest in unspecified
mortgage loans and mortgage-backed securities, with an aggregate statutory
value equal to the amount of the preceding advances, have been pledged as
collateral with the Federal Home Loan Bank of Pittsburgh.
Capital securities included in total long-term debt on the Consolidated
Balance Sheets are excluded from NOTE 14, but are described in NOTE 13.
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands, except per share data)
NOTE 14--Other Long-term Debt (Continued)
In October 1999, the parent company entered into an agreement with an
unrelated financial institution which enabled the parent company to borrow
up to $20,000 through October 2000. As of December 31, 1999, $16,000 was
outstanding and $4,000 remained available on this line of credit. At the
option of the lender this commitment could be extended for an additional
year. Loan terms require payments of eleven quarterly installments equal to
one-sixteenth of the outstanding principal amount as of the commitment
expiration date plus a balloon payment for the remaining outstanding balance
to be paid at maturity. The maturity date of the loan is the third
anniversary of the commitment expiration date. Interest on advances taken
is accrued at either the daily Federal funds rate plus 1.25%, Euro-rate plus
1.25%, the lender's as-offered rate or prime rate. The parent company may
elect the interest rate method to be applied for each advance.
Scheduled loan payments for other long-term debt are summarized below:
2000 2001 2002 2003 2004 Thereafter
Loan payments $52,051 $5,670 $105,611 $8,634 $1,465 $429,924
During 1998, the Corporation incurred a cost of $960 for the prepayment of
FHLB term borrowings with original maturities scheduled for 2007. This
amount was recorded on the Consolidated Statements of Income as an
extraordinary item, net of $336 of applicable income taxes.
NOTE 15--Common Share Commitments
At December 31, 1999, the Corporation had 100,000,000 common shares
authorized and 62,525,412 shares outstanding. Outstanding shares were
reduced by 4,382,564 shares of treasury stock at December 31, 1999 and
649,466 shares at December 31, 1998. The Corporation may be required to
issue additional shares to satisfy common share purchases related to the
employee stock ownership plan described in NOTE 18. The dilutive effect of
stock options outstanding on average shares outstanding in the diluted
earnings per share reported on the income statement were 236,230, 332,454
and 173,776 shares at December 31, 1999, 1998 and 1997 respectively.
During 1999, 3,921,668 shares of treasury stock were acquired at an average
price of $13.09. During 1998, 86,800 shares of treasury stock were acquired
at an average price of $12.22 and reissued to the leveraged ESOP. Treasury
shares consisting of 188,570 and 131,138 were reissued during 1999 and 1998
upon exercise of stock options.
NOTE 16--Income Taxes
The income tax provision consists of:
1999 1998 1997
Current tax provision for income
exclusive of securities
transactions:
Federal $19,111 $13,097 $13,384
State 16 (11) 238
Securities transactions 198 547 2,389
Total current tax
provision 19,325 13,633 16,011
Deferred tax provision (benefit) 287 (1,404) 1,327
Total tax provision $19,612 $12,229 $17,338
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands, except per share data)
NOTE 16--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, 1999 and 1998, were as
follows:
1999 1998
Deferred tax assets:
Allowance for credit losses $11,641 $11,132
Postretirement benefits other than
pensions 985 973
Accumulated depreciation 242 278
Unrealized loss on securities
available for sale 21,702 -0-
Other 827 631
Total deferred tax assets 35,397 13,014
Deferred tax liabilities:
Accumulated accretion of bond discount (250) (325)
Unrealized gain on securities
available for sale -0- (1,184)
Lease financing deduction (9,372) (7,829)
Loan origination fees and costs (628) (849)
Basis difference in assets acquired (892) (1,143)
Pension expense (200) (233)
Other (262) (257)
Total deferred tax liabilities (11,604) (11,820)
Net deferred tax asset $23,793 $ 1,194
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>
1999 1998 1997
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $25,425 35.0 $16,179 35.0 $19,907 35.0
Increase (decrease)
resulting from:
Effect of
nontaxable
income (5,247) (7.2) (3,894) (8.4) (2,660) (4.7)
Merger expenses -0- 0.0 542 1.2 -0- 0.0
State income taxes 16 0.0 (11) (0.0) 238 0.4
Other (582) (0.8) (587) (1.3) (147) (0.2)
Total tax
provision $19,612 27.0 $12,229 26.5 $17,338 30.5
</TABLE>
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 17--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 484,178 shares of the Corporation's common stock in 1998 at a
corresponding cost of $6,000, which the Corporation borrowed and
concurrently loaned this amount to the ESOP. This amount represents
leveraged and unallocated shares, and accordingly has been recorded as long-
term debt and the offset as a reduction of the common shareholders' equity.
Compensation costs related to the plan were $1,555 in 1999, $1,068 in 1998
and $1,032 in 1997. (See NOTE 18).
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 10% of compensation to the plan which up to 4% is matched
100% by the employer's contribution. Prior to 1999, each participant could
contribute up to 5% of compensation to the plan, which was matched by the
employer's contribution equal to 80% of the employee's contribution.
Employees of Southwest are covered by a 401(k) plan whereby each participant
may contribute up to 10% of compensation to the plan of which up to 4% is
matched 100% by the employer's contribution. The Southwest Board of
Directors may also authorize an annual discretionary contribution to the
plan. The Southwest plan was not yet mergered into the Corporation's plan
as of December 31, 1999. The 401(k) plan expense was $2,328 in 1999, $2,261
in 1998 and $2,415 in 1997.
Upon shareholder approval at the regular 1998 meeting the Corporation
established a "Supplemental Executive Retirement Plan" ("SERP") to provide
deferred compensation for a select group of management. The purpose of this
plan is to restore some of the benefits lost to the highly compensated
employees compared to other employees due to limits and restrictions
incorporated into the Corporation's 401(k) and ESOP plans. The
Corporation's 401(k) and ESOP plans include restrictions on maximum
compensation, actual deferral percentage, actual contribution, maximum
contribution and maximum salary reduction which are required in order to
meet specific legal requirements.
Participants in the SERP may elect to contribute up to 10% of plan
compensation (compensation in excess of limits of the Corporation's 401(k)
and ESOP plans) into the SERP, through salary reduction. The Corporation
will make an elective contribution to the SERP equal to the elective
contribution of the participant. Each participant of the SERP will also
receive a matching contribution equal to 100% of the employee's elective
contribution up to 4%, and an additional non-elective contribution from the
employer equal to 8% of plan compensation. For 1998, each participant could
make an elective contribution for up to 5% of plan compensation which was
matched by an employers' contribution equal to 80% of the employee's
contribution.
The SERP will continue to supplement the Corporation's 401(k) and ESOP plans
and will therefore be modified at the same time and in the same respect as
the basic plans are modified in future periods. The SERP plan expense was
$153 in 1999 and $62 in 1998.
Pension Plan of Acquired Subsidiary
Southwest's noncontributory defined benefit pension plan covers all eligible
employees and provides benefits that are based on each employee's years of
service and compensation.
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 17--Retirement Plans (Continued)
Pension Plan of Acquired Subsidiary (Continued)
Net periodic pension cost of this plan for each of the last three years was
as follows:
1999 1998 1997
Service cost $ -0- $ 365 $ 327
Interest cost on projected benefit obligation 394 469 411
Actual return on plan assets (261) (425) (1,042)
Net amortization and deferral (153) (179) 507
Net periodic pension cost $ (20) $ 230 $ 203
The following table sets forth the plan's funded status and the amounts
recognized on the Corporation's Consolidated Balance Sheet as of
December 31:
1999 1998
Market value of plan assets, primarily registered
investment companies, U.S. government and agency
obligations and money markets $6,485 $7,132
Projected benefit obligation 5,765 7,926
Plan assets (less) greater than projected benefit
obligation 720 (794)
Unrecognized net transition asset (92) (123)
Unrecognized net loss (gain) (56) 1,470
Prepaid pension expense recognized on the balance sheet $ 572 $ 553
Actuarial present value of accumulated benefits,
including vested benefits of $5,588 and $7,615 $5,765 $7,926
The following table sets forth the change in benefit obligation:
1999 1998
Benefit obligation at beginning of year $7,926 $6,794
Service cost -0- 365
Interest cost 394 469
Benefit payment (908) (973)
Actuarial loss (gain) (1,647) 5,343
Curtailment -0- (4,072)
Benefit obligation at end of year $5,765 $7,926
The following table sets forth the change in plan assets:
1999 1998
Fair value of plan assets at beginning of year $7,132 $7,679
Return on plan assets 261 425
Employer contribution -0- -0-
Benefits paid (908) (972)
Fair value of plan assets at end of year $6,485 $7,132
Assumptions used in determining the actuarial present value of the projected
benefit obligation were as follows at December 31:
1999 1998
Discount rates 6.0% 5.0%
Rates of increase in compensation levels N/A 3.5
Expected long-term rate of return on assets 6.5 6.0
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 17--Retirement Plans (Continued)
Pension Plan of Acquired Subsidiary (Continued)
Effective December 31, 1998, participants' accrued benefit in the Southwest
Bank Pension Plan was frozen. Participants became participants in the First
Commonwealth Financial Corporation ESOP Plan with no lapse in credited
service, and no loss of accrued benefits. The Southwest Bank Plan is
expected to be terminated at some future date, with distribution made in
accordance with Plan provisions and applicable regulations.
Postretirement Benefits other than Pensions for Acquired Subsidiary
Employees of Southwest were covered by a postretirement benefit plan.
Net periodic benefit cost of this plan was as follows:
1999 1998
Service cost $ 13 $ 61
Interest cost on projected benefit obligation 197 259
Amortization of transition obligation 2 55
Loss amortization 48 82
Net periodic benefit cost $260 $457
The following table sets forth the plan's funded status and the amounts
recognized on the Corporation's Consolidated Balance Sheet as of
December 31:
1999 1998
Accumulated postretirement benefit obligation:
Retirees $2,762 $2,941
Fully eligible active plan participants 14 155
Other plan participants 183 318
Total accumulated postretirement benefit obligation 2,959 3,414
Plan assets at fair value -- --
Accumulated postretirement benefit obligation in
excess of plan assets 2,959 3,414
Unrecognized transition obligation (21) (610)
Unrecognized net loss (56) (23)
Accrued benefit liability recognized on the
balance sheet $2,882 $2,781
The following table sets forth the change in benefit obligation:
1999 1998
Benefit obligation at beginning of year $3,414 $3,805
Service cost 13 61
Interest cost 197 259
Benefit payments (225) (193)
Actuarial loss (gain) (440) 642
Curtailment -0- (1,160)
Benefit obligation at end of year $2,959 $3,414
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 17--Retirement Plans (Continued)
Postretirement Benefits other than Pensions for Acquired Subsidiary
(Continued)
The discount rates used in determining the actuarial present value of the
accumulated postretirement benefit obligation were 6.75% and 6.0% for 1999
and 1998 respectively. The health care cost trend rates used for 1999 were
projected at an initial rate of 5.75% decreasing over time to an annual rate
of 4.50% for grandfathered participants and an initial rate of 5.00%
decreasing over time to an annual rate of 4.50% for non-grandfathered
participants. The health care cost trend rates used for 1998 were projected
at level rates of 5.75% for grandfathered participants and 5% for non-
grandfathered participants. This grandfathering is related to cost sharing
requirements for different groups of participants for these benefits.
The health care cost trend rate assumption can have a significant impact on
the amounts reported for this plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Effect on total of service and interest
cost components $ 14 $ (12)
Effect on postretirement benefit
obligation $200 $(179)
Southwest amended this plan to discontinue participation for active
employees December 31, 1998 and to limit participation to employees retiring
before January 1, 2002. As the result of this plan curtailment, an
additional expense of $1,129 was recorded for 1998.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("FAS No. 132") which is
effective for years beginning after December 15, 1997. FAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans
but does not change the measurement or recognition of those plans.
The adoption of FAS No. 132 did not have a material impact on the
Corporation's financial condition or results of operations.
NOTE 18--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 $6,193 at December 31, 1999 and $8,007 at December 31, 1998.
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 six year period from
contributions to the ESOP by the Corporation and dividends on unallocated
ESOP shares.
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands, except per share data)
NOTE 18--Unearned ESOP Shares (Continued)
The following is an analysis of ESOP shares held in suspense:
(See NOTE 1 for the definition of "old" and "new shares").
Old New
Total Shares Shares
Shares in suspense December 31, 1997 342,502 202,398 140,104
Shares acquired during 1998 484,178 -0- 484,178
Shares allocated during 1998 (96,066) (23,520) (72,546)
Shares in suspense December 31, 1998 730,614 178,878 551,736
Shares allocated during 1999 (131,927) (32,300) (99,627)
Shares in suspense December 31, 1999 598,687 146,578 452,109
The fair market value of the new shares remaining in suspense was
approximately $5,425 and $6,759 at December 31, 1999 and 1998 respectively.
Interest on ESOP loans was $460 in 1999, $255 in 1998 and $211 in 1997.
During 1999, 1998 and 1997, dividends on unallocated shares in the amount of
$369, $196 and $213 respectively were used for debt service while all
dividends on allocated shares were allocated to the participants.
NOTE 19--Stock Option Plan
At December 31, 1999, the Corporation had a stock-based compensation plan,
which is described below. All of the exercise prices and related number of
shares have been restated to reflect the previously described stock split.
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 1997 became vested at December 31,
1997 and expire ten years from the grant date, all options granted during
1998 became vested at December 31, 1998 and expire ten years from the grant
date and all options granted during 1999 became vested on December 31, 1999
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>
1999 1998 1997
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Net Income $53,030 $52,197 $33,374 $33,374 $39,539 $33,597
Basic earnings per share $ 0.88 $ 0.87 $ 0.54 $ 0.54 $ 0.64 $ 0.54
Diluted earnings per share $ 0.88 $ 0.86 $ 0.54 $ 0.54 $ 0.64 $ 0.54
</TABLE>
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, 1999, 1998 and 1997
(Dollar Amounts in Thousands, except per share data)
NOTE 19--Stock Option Plan (Continued)
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes options pricing model with the following weighted
average assumptions used:
1999 1998 1997
Dividend yield 4.29% per annum 3.75% per annum 2.5% per annum
Expected volatility 31.4% 90.0% 28.0%
Risk-free interest rate 6.3% 5.1% 5.6%
Expected option life 9.1 years 9.1 years 5.7 years
Under the Corporation's 1995 Stock Option Plan, the Corporation may grant
options to its executives and, as amended during 1999, non-employee
directors, 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.
A summary of the status of the Corporation's outstanding stock options as of
December 31, 1999, 1998 and 1997 and changes for the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,306,346 $10.53 1,052,548 $ 8.75 466,616 $8.05
Granted 610,416 $11.56 404,016 $14.69 624,560 $9.25
Exercised (188,570) $ 8.66 (131,138) $ 8.72 (5,600) $3.22
Forfeited (48,014) $12.08 (19,080) $ 9.81 (33,028) $9.22
Outstanding at end of year 1,680,178 $11.07 1,306,346 $10.53 1,052,548 $8.75
Exercisable at end of year 1,680,178 $11.07 956,058 $11.06 690,038 $8.47
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-Average
Range of Number Outstanding Remaining Contract Weighted-Average Number Exercisable Weighted-Average
Exercise Prices at 12/31/99 Life Exercise Price at 12/31/99 Exercise Price
<S> <C> <C> <C> <C> <C>
$2.50-2.99 20,328 2.3 $ 2.71 20,328 $ 2.71
$4.00-4.99 8,800 3.2 $ 4.04 8,800 $ 4.04
$9.1875-9.25 697,067 7.0 $ 9.22 697,067 $ 9.22
$11.1825-11.5625 596,083 9.1 $11.56 596,083 $11.56
$14.6875 357,900 8.2 $14.69 357,900 $14.69
Total 1,680,178 $11.07 1,680,178 $11.07
</TABLE>
54
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 20--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 21--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 1999.
Balances December 31, 1998 $10,308
Advances 7,889
Repayments (8,889)
Other (904)
Balances December 31, 1999 $ 8,404
"Other" primarily reflects the change in those classified as a "related
party" as a result of mergers, resignations and retirements.
NOTE 22--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, 1999, dividends from subsidiary banks were
restricted not to exceed $79,092. These restrictions have not had, and are
not expected to have, a significant impact on the Corporation's ability to
meet its cash obligations.
The Corporation is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific
capital guidelines that involve quantitative measures of the Corporation's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of total and
Tier I capital (common and certain other "core" equity capital) to risk
weighted assets, and of Tier I capital to average assets. As of
December 31, 1999, the Corporation and its banking subsidiaries meet all
capital adequacy requirements to which they are subject.
55
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 22--Regulatory Restrictions and Capital Adequacy (Continued)
As of December 31, 1999, the most recent notifications from the Federal
Reserve Board and Federal Deposit Insurance Corporation categorized First
Commonwealth Bank and Southwest Bank as well capitalized under the
regulatory framework for prompt corrective action. To be considered as well
capitalized, the banks must maintain minimum total risk-based capital, Tier
I risk-based capital and Tier I leverage ratios as set forth in the table
below. There are no conditions or events since that notification that
management believes have changed the institution's category.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Actual Regulatory Minimum Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital to Risk Weighted Assets
First Commonwealth Financial
Corporation (a) $384,368 14.4% $213,009 8.0% Not Applicable Not Applicable
First Commonwealth Bank $287,968 13.7% $168,687 8.0% $210,859 10.0%
Southwest Bank $ 92,933 17.6% $ 42,308 8.0% $ 52,886 10.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial
Corporation (a) $351,085 13.2% $106,504 4.0% Not Applicable Not Applicable
First Commonwealth Bank $261,744 12.4% $ 84,344 4.0% $126,515 6.0%
Southwest Bank $ 86,322 16.3% $ 21,154 4.0% $ 31,731 6.0%
Tier I Capital to Average Assets
First Commonwealth Financial
Corporation (a) $351,085 7.4% $141,488 3.0% Not Applicable Not Applicable
First Commonwealth Bank $261,744 7.2% $108,724 3.0% $181,207 5.0%
Southwest Bank $ 86,322 8.2% $ 31,790 3.0% $ 52,983 5.0%
As of December 31, 1998
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $372,538 15.8% $188,929 8.0% Not Applicable Not Applicable
First Commonwealth Bank $269,259 14.4% $149,993 8.0% $187,492 10.0%
Southwest Bank $ 86,040 18.4% $ 37,364 8.0% $ 46,705 10.0%
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation $342,999 14.5% $ 94,464 4.0% Not Applicable Not Applicable
First Commonwealth Bank $245,823 13.1% $ 74,997 4.0% $112,495 6.0%
Southwest Bank $ 80,184 17.2% $ 18,682 4.0% $ 28,023 6.0%
Tier I Capital to Average Assets
First Commonwealth Financial Corporation $342,999 8.6% $119,491 3.0% Not Applicable Not Applicable
First Commonwealth Bank $245,823 8.0% $ 92,383 3.0% $153,972 5.0%
Southwest Bank $ 80,184 9.2% $ 26,274 3.0% $ 43,790 5.0%
</TABLE>
(a) Includes $35,000 of Company obligated mandatorily redeemable capital
securities of subsidiary trust described in NOTE 13 which qualify as Tier I
Capital.
56
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 23--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only)
Balance Sheets
December 31,
1999 1998
Assets
Cash $ 5,122 $ 4,501
Securities available for sale 103 145
Loans to affiliated parties 480 498
Investment in subsidiaries 330,400 348,597
Investment in jointly-owned company 3,477 3,059
Premises and equipment 6,992 6,022
Dividends receivable from subsidiaries 2,786 2,914
Receivable from subsidiaries 3,574 3,588
Other assets 2,711 526
Total assets $355,645 $369,850
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 2,544 $ 1,352
Dividends payable 8,141 5,086
Loans payable 22,193 8,007
Subordinated debentures payable 36,083 -0-
Shareholders' equity 286,684 355,405
Total liabilities and
shareholders' equity $355,645 $369,850
Statements of Income
Years Ended December 31,
1999 1998 1997
Interest and dividends $ 149 $ 251 $ 94
Dividends from subsidiaries 36,506 28,559 37,023
Interest expense (1,758) (255) (214)
Net securities gains 57 203 382
Other revenue 15 1,008 16
Operating expenses (11,476) (8,111) (8,262)
Income before taxes and equity
in undistributed earnings of
subsidiaries 23,493 21,655 29,039
Applicable income tax benefits 4,421 2,348 2,610
Income before equity in
undistributed earnings of
subsidiaries 27,914 24,003 31,649
Equity in undistributed
earnings of subsidiaries 25,116 9,371 7,890
Net income $53,030 $33,374 $39,539
57
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 23--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only) (Continued)
Statements of Cash Flows
Years Ended December 31,
1999 1998 1997
Operating Activities
Net income $ 53,030 $ 33,374 $ 39,539
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 1,655 1,470 1,522
Net (gains) losses on sale of
assets 144 (203) (381)
Decrease (Increase) in prepaid
income taxes (242) 13 229
Undistributed equity in
subsidiaries (25,116) (9,371) (7,890)
Other - net (818) (1,642) (403)
Net cash provided by
operating activities 28,653 23,641 32,616
Investing Activities
Transactions with securities
available for sale:
Purchases of investment
securities -0- (10,091) (6,734)
Sales of investment
securities 102 13,709 5,419
Net change in loans to
affiliated parties 17 (28) 48
Purchases of premises and
equipment (1,476) (2,036) (1,005)
Additional net investment
in subsidiary (2,406) (1,770) -0-
Sale of subsidiary 1,709 -0- -0-
Net cash used by
investing activities (2,054) (216) (2,272)
Financing Activities
Net decrease in short-term
borrowings -0- -0- (103)
Issuance of subordinated
debentures 36,083 -0- -0-
Issuance of other long-term debt 16,000 -0- -0-
Discount on dividend reinvestment
plan purchases (358) (1,016) (630)
Treasury stock acquired (51,331) (2,123) (5,908)
Treasury stock reissued 1,453 2,217 16
Cash dividends paid (27,825) (25,746) (21,739)
Net cash used by
financing activities (25,978) (26,668) (28,364)
Net increase (decrease) in cash 621 (3,243) 1,980
Cash at beginning of year 4,501 7,744 5,764
Cash at end of year $ 5,122 $ 4,501 $ 7,744
58
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 23--Condensed Financial Information of First Commonwealth Financial
Corporation (parent company only) (Continued)
Supplemental disclosures
Proceeds from the issuance of subordinated debentures and other long-term
debt during 1999 were used primarily to fund the purchase of 3,819,420
shares of the Corporation's common stock pursuant to a "modified Dutch
Auction" tender offer.
Noncash investing and financing activities:
1999 1998 1997
ESOP borrowings $ -0- $6,000 $ -0-
ESOP loan reductions $1,814 $ 429 $1,038
The Corporation borrowed $6,000 in 1998 and concurrently loaned this amount
to the ESOP on identical terms. The loan was recorded as long-term debt and
the offset was recorded as a reduction of the common shareholders' equity.
Loan payments in the amount of $1,814 in 1999, $429 in 1998 and $1,038 in
1997 were made by the ESOP thereby reducing the outstanding amount related
to unearned ESOP shares to $6,193 at December 31, 1999.
NOTE 24--Fair Values of Financial Instruments
Below are various estimated fair values at December 31, 1999 and 1998, 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.
59
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(Dollar Amounts in Thousands)
NOTE 24--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.
The following table presents carrying amounts and estimated fair values of
the Corporation's financial instruments at December 31, 1999 and 1998.
1999 1998
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and due from banks $ 92,673 $ 92,673 $ 96,615 $ 96,615
Interest-bearing deposits with
banks 1,218 1,218 1,914 1,914
Federal funds sold 8,700 8,700 1,000 1,000
Securities available for sale 1,144,042 1,144,042 1,042,636 1,042,636
Investments held to maturity 448,347 435,000 482,696 486,185
Loans, net of allowance 2,466,520 2,547,096 2,342,546 2,389,039
Financial liabilities
Deposits 2,948,829 2,913,140 2,931,131 2,946,535
Short-term borrowings 424,827 424,827 140,547 140,547
Long-term debt 638,355 581,254 630,850 635,252
60
<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 sheets of First
Commonwealth Financial Corporation and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The 1998 and 1997
consolidated financial statements give retroactive effect to the merger of
First Commonwealth Financial Corporation and Southwest National Corporation
on December 31, 1998, which has been accounted for as a pooling of interests
as described in Note 3 to the consolidated financial statements. We did not
audit the balance sheet of Southwest National Corporation as of December 31,
1998, or the related statements of income, shareholders' equity, and cash
flows of Southwest National Corporation for the years ended December 31,
1998 and 1997, which statements reflect total assets of 23% as of December
31, 1998, and net interest income of 25% and 26% of the related consolidated
totals for the years ended December 31, 1998 and 1997, respectively. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for
Southwest National Corporation for 1998 and 1997, is based solely on the
report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements present fairly, in all material
respects, the financial position of First Commonwealth Financial Corporation
and subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/S/Deloitte & Touche, LLP
Pittsburgh, Pennsylvania
January 28, 2000
61
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Southwest National Corporation:
We have audited the consolidated balance sheet of Southwest National
Corporation and subsidiary as of December 31, 1998, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1998
(not presented separately herein). These consolidated financial statements
are the responsibility of Southwest National Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Southwest National Corporation and subsidiary at December 31, 1998, and the
results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/S/KPMG LLP
Pittsburgh, Pennsylvania
February 17, 1999
62
<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, restated to reflect pooling
of interests for the years ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income................................................. $71,801 $73,636 $75,360 $76,710
Interest expense................................................ 36,740 36,989 38,154 40,770
Net interest income........................................ 35,061 36,647 37,206 35,940
Provision for credit losses..................................... 2,213 2,337 2,363 2,537
Net interest income after provision for credit losses........... 32,848 34,310 34,843 33,403
Securities gains................................................ 563 -0- 2 -0-
Other operating income.......................................... 7,319 9,944 6,581 6,444
Other operating expenses........................................ 24,191 23,490 22,870 23,064
Income before income taxes................................. 16,539 20,764 18,556 16,783
Applicable income taxes......................................... 4,534 5,938 4,804 4,336
Net income................................................. $12,005 $14,826 $13,752 $12,447
Basic earnings per share (a).................................... $ 0.20 $ 0.24 $ 0.22 $ 0.22
Diluted earnings per share (a).................................. $ 0.20 $ 0.24 $ 0.22 $ 0.21
Average shares outstanding (a)..................................61,152,708 61,203,388 61,290,374 57,713,182
Average shares outstanding assuming dilution (a)................61,432,570 61,376,932 61,491,946 58,003,391
</TABLE>
<TABLE>
<CAPTION>
1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income................................................. $68,450 $72,016 $72,408 $70,547
Interest expense................................................ 35,201 38,023 38,394 36,664
Net interest income........................................ 33,249 33,993 34,014 33,883
Provision for credit losses..................................... 2,475 2,625 2,857 7,092
Net interest income after provision for credit losses........... 30,774 31,368 31,157 26,791
Securities gains (losses)....................................... 982 -0- 1,657 (1,182)
Other operating income.......................................... 5,056 5,833 5,798 8,194
Merger and other related charges................................ -0- -0- -0- 7,915
Other operating expenses........................................ 22,930 22,843 23,005 23,508
Income before taxes and extraordinary items................ 13,882 14,358 15,607 2,380
Applicable income taxes......................................... 3,900 3,864 4,063 402
Net income before extraordinary items...................... 9,982 10,494 11,544 1,978
Extraordinary items, net of income taxes........................ -0- -0- -0- (624)
Net income................................................. $ 9,982 $10,494 $11,544 $ 1,354
Basic earnings per share, before extraordinary items (a)........ $ 0.16 $ 0.17 $ 0.19 $ 0.03
Diluted earnings per share, before extraordinary items (a)...... $ 0.16 $ 0.17 $ 0.19 $ 0.03
Average shares outstanding (a)..................................61,607,954 61,545,594 61,503,208 60,685,824
Average shares outstanding assuming dilution (a)................62,023,294 61,901,396 61,796,158 60,953,602
(a) Per 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.
</TABLE>
63
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
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 24, 2000
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 77 Chairman of the Board of the Corporation,
Chairman of the Board of FCTC, CSC, FCB
and FCIA; Director of CTCLIC, FCPRI;
Former President and Chief Executive
Officer of the Corporation
Joseph E. O'Dell 54 President, Chief Executive Officer and
director of the Corporation; Director of
FCB, FCTC, FCPRI, Southwest Bank and
FCIA; Vice Chairman of the Board of CSC;
Former Senior Executive Vice President
and Chief Operating Officer of the
Corporation; former President and Chief
Executive Officer of FCB
Gerard M. Thomchick 44 Senior Executive Vice President and Chief
Operating Officer of the Corporation;
President, Chief Executive Officer and
Director of CTCLIC; President and
Director of FCPRI; Director of FCB,
FCTC and FCIA
David R. Tomb, Jr. 68 Senior Vice President, Secretary,
Treasurer and Director of the
Corporation; Secretary and Cashier of
FCB; Secretary of FCIA, FCTC, FCPRI and
CSC; Director of FCB, CSC, FCTC, FCPRI,
FCIA and CTCLIC
David S. Dahlmann 50 Vice Chairman of the Corporation;
President and Chief Executive Officer of
Southwest Bank; Former President and
Chief Executive Officer of Southwest
National; Director of Southwest Bank
and FCPRI
John J. Dolan 43 Executive 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; Chief Financial
Officer of FCPRI; Treasurer of
FCIA; Administrative Trustee of First
Commonwealth Capital Trust I
William R. Jarrett 65 Senior Vice President, Risk Management of
the Corporation
64
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT (Continued)
R. John Previte 50 Senior Vice President, Investments of the
Corporation; Investment Officer of FCB
and Southwest
Rosemary Krolick 46 Executive Vice President and Chief
Information Officer of the Corporation;
President, Chief Executive Officer and
director of CSC; Director of FCPRI
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 24, 2000
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 24, 2000
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 24, 2000
is incorporated herein by reference in response to this item.
65
<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 10.4 to Form S-4
Robert C. Williams filed June 17, 1994
10.3 Change in Control Exhibit 10.4 to Form 10-K
Agreement dated filed March 21, 1996
October 27, 1995
Joseph E. O'Dell
10.4 Change in Control Exhibit 10.5 to Form 10-K
Agreement dated filed March 21, 1996
October 27, 1995
Gerard M. Thomchick
10.5 Change in Control Exhibit 10.6 to Form 10-K
Agreement dated filed March 21, 1996
October 30, 1995, entered
into between First Commonwealth
Financial Corporation and
John J. Dolan, together with a
schedule listing substantially
identical Change in Control
Agreements with the following
individuals: George E. Dash,
William R. Jarrett, R. John Previte,
David L. Dawson, Johnston A. Glass,
Rosemary Krolick, Domenic P. Rocco
and Robert C. Wagner.
10.6 Employment Contract Exhibit 10.4 to Form S-4
David S. Dahlmann filed November 2, 1998
10.7 Supplemental Executive Exhibit 10.7 to Form 10-K
Retirement Plan filed March 31, 1999
66
<PAGE>
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND
REPORTS ON FORM 8-K
PART IV (Continued)
10.8 Deferred Compensation Exhibit 10.8 to Form 10-K
Plan filed March 31, 1999
10.9 Cash Incentive Bonus Exhibit 10.9 to Form 10-K
Program filed March 31, 1999
21.1 Subsidiaries of the Page 69
Registrant
23.1 Consent of Deloitte & Page 70
Touche LLP Certified
Public Accountants
23.2 Consent of KPMG LLP Page 71
Certified Public
Accountants
24.1 Power of Attorney Page 72
27.1 Financial Data Schedule Page 73
(B) Report on Form 8-K
(1) Form 8-K dated November 2, 1999 reporting the declaration of
a 2-for-1 stock split effected in the form of a 100% stock
dividend. Form 8-K also reported changes in the registrant's
Dividend Reinvestment Plan.
67
<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 29th day of March 2000.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
/S/JOSEPH E. O'DELL
Joseph E. O'Dell, President and Chief Executive Officer
68
<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
Southwest Bank 100%
111 South Main Street
Greensburg, PA 15601
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
First Commonwealth Professional Resources Incorporated 100%
22 North Sixth Street
Indiana, PA 15701
First Commonwealth Capital Trust I 100%
22 North Sixth Street
Indiana, PA 15701
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 28, 2000, appearing in this Annual Report on Form 10-K
of First Commonwealth Financial Corporation for the year ended December 31,
1999.
/S/Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 29, 2000
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
Exhibit 23.2 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Commonwealth Financial Corporation:
We consent to incorporation by reference in the registration statement
(No. 33-55687) on Form S-8 of First Commonwealth Financial Corporation of
our report dated February 17, 1999, relating to the consolidated balance
sheet of Southwest National Corporation and subsidiary as of December 31,
1998, the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the two-year
period ended December 31, 1998, which report appears in the December 31,
1999, annual report on Form 10-K of First Commonwealth Financial
Corporation.
/S/KPMG LLP
Pittsburgh, Pennsylvania
March 29, 2000
<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION
Exhibit 24.1 - POWER OF ATTORNEY
KNOWN ALL MEN 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/DAVID S. DAHLMANN March 14, 2000
David S. Dahlmann, Director
/S/JOHN A. ROBERTSHAW, JR. March 14, 2000
John A. Robertshaw, Jr., Director
/S/DAVID R. TOMB, JR. March 14, 2000
David R. Tomb, Jr., Sr. Vice President,
Secretary and Treasurer and Director
/S/JOHNSTON A. GLASS March 14, 2000
Johnston A. Glass, Director
/S/RONALD C. GEISER March 14, 2000
Ronald C. Geiser, Director
/S/DALE P. LATIMER March 14, 2000
Dale P. Latimer, Director
/S/THOMAS L. DELANEY March 14, 2000
Thomas L. Delaney
/S/E. H. BRUBAKER March 14, 2000
E. H. Brubaker, Director
/S/JOSEPH E. O'DELL March 14, 2000
Joseph E. O'Dell, President and CEO
and Director
/S/HARVEY H. HEILMAN, JR. March 14, 2000
Harvey H. Heilman, Jr., Director
/S/JOHN J. DOLAN March 14, 2000
John J. Dolan, Executive Vice President
& Chief Financial Officer (1)
/S/JAMES W. NEWILL March 16, 2000
James W. Newill, Director
/S/RAY T. CHARLEY March 16, 2000
Ray T. Charley, Director
/S/LAURIE STERN SINGER March 16, 2000
Laurie Stern Singer, Director
(1) Also Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 92,673
<INT-BEARING-DEPOSITS> 1,218
<FED-FUNDS-SOLD> 8,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,144,042
<INVESTMENTS-CARRYING> 448,347
<INVESTMENTS-MARKET> 435,000
<LOANS> 2,503,687
<ALLOWANCE> 33,539
<TOTAL-ASSETS> 4,340,846
<DEPOSITS> 2,948,829
<SHORT-TERM> 424,827
<LIABILITIES-OTHER> 42,152
<LONG-TERM> 638,355
0
0
<COMMON> 62,525
<OTHER-SE> 224,158
<TOTAL-LIABILITIES-AND-EQUITY> 4,340,846
<INTEREST-LOAN> 196,428
<INTEREST-INVEST> 100,853
<INTEREST-OTHER> 226
<INTEREST-TOTAL> 297,507
<INTEREST-DEPOSIT> 103,331
<INTEREST-EXPENSE> 152,653
<INTEREST-INCOME-NET> 144,854
<LOAN-LOSSES> 9,450
<SECURITIES-GAINS> 565
<EXPENSE-OTHER> 93,615
<INCOME-PRETAX> 72,642
<INCOME-PRE-EXTRAORDINARY> 53,030
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,030
<EPS-BASIC> 0.88
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 7.59
<LOANS-NON> 12,765
<LOANS-PAST> 15,815
<LOANS-TROUBLED> 62
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 32,304
<CHARGE-OFFS> 9,596
<RECOVERIES> 1,381
<ALLOWANCE-CLOSE> 33,539
<ALLOWANCE-DOMESTIC> 30,472
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,067
</TABLE>
