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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-11242
First Commonwealth Financial Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1428528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22 North Sixth Street Indiana, PA 15701
(Address of principal executive offices) (Zip Code)
724-349-7220
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No .
Number of shares outstanding of issuer's common stock, $1.00 Par Value as
of August 8, 2000 was 58,095,060.
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Included in Part I of this report: PAGE
First Commonwealth Financial Corporation and
Subsidiaries Consolidated Balance Sheets . . . . . 3
Consolidated Statements of Income. . . . . . . . . 4
Consolidated Statements of Changes in
Shareholders' Equity . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows. . . . . . . 6
Notes to Consolidated Financial Statements . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK . . . . . . . . . . . . . . . . . . . . . . . . 24
PART II - OTHER INFORMATION
Other Information . . . . . . . . . . . . . . . . . . . . . . 25
Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
June 30, December 31,
2000 1999
ASSETS
Cash and due from banks on demand.... $ 87,968 $ 92,673
Interest-bearing deposits with banks. 727 1,218
Federal funds sold .................. 1,450 8,700
Securities available for sale, at
market.............................. 1,131,750 1,144,042
Securities held to maturity, at cost,
(Market value $400,740 in 2000 and
$435,000 in 1999).................. 413,301 448,347
Loans................................ 2,503,117 2,503,687
Unearned income.................... (2,695) (3,628)
Allowance for credit losses........ (33,721) (33,539)
Net loans....................... 2,466,701 2,466,520
Property and equipment............... 43,993 43,380
Other real estate owned.............. 1,752 1,707
Other assets......................... 150,077 134,259
TOTAL ASSETS.................... $4,297,719 $4,340,846
LIABILITIES
Deposits (all domestic):
Noninterest-bearing................ $ 259,115 $ 251,404
Interest-bearing................... 2,751,257 2,697,425
Total deposits.................. 3,010,372 2,948,829
Short-term borrowings................ 308,496 424,827
Other liabilities.................... 41,781 42,152
Company obligated mandatorily
redeemable capital securities of
subsidiary trust.................... 35,000 35,000
Other long-term debt................. 607,730 603,355
Total long-term debt............ 642,730 638,355
Total liabilities............... 4,003,379 4,054,163
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value per
share, 3,000,000 shares authorized,
none issued........................ -0- -0-
Common stock $1 par value per share,
100,000,000 shares authorized;
62,525,412 shares issued; 58,095,060
and 58,142,848 shares outstanding at
June 30, 2000 and December 31, 1999,
respectively....................... 62,525 62,525
Additional paid-in capital........... 68,023 68,330
Retained earnings.................... 266,047 257,773
Accumulated other comprehensive income (40,414) (40,304)
Treasury stock (4,430,352 shares at
June 30, 2000 and 4,382,564 at
December 31, 1999, at cost)........ (55,934) (55,448)
Unearned ESOP shares................. (5,907) (6,193)
Total shareholders' equity......... 294,340 286,683
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.......... $4,297,719 $4,340,846
The accompanying notes are an integral part of these consolidated financial
statements.
3
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands except per share data)
For the Quarter For the 6 Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
Interest Income
Interest and fees on loans....... $51,955 $48,049 $103,065 $95,984
Interest and dividends on
investments:
Taxable interest............... 21,941 22,095 44,333 42,560
Interest exempt from Federal
income taxes.................. 2,421 2,348 4,865 4,597
Dividends...................... 904 734 1,834 1,438
Interest on Federal funds sold... 74 10 123 59
Interest on bank deposits........ 22 30 40 91
Total interest income......... 77,317 73,266 154,260 144,729
Interest Expense
Interest on deposits............. 27,544 25,573 53,709 51,440
Interest on short-term borrowings 5,612 2,852 11,774 5,281
Interest on company obligated
mandatorily redeemable capital
securities of subsidiary trust.. 831 -0- 1,662 -0-
Interest on other long-term debt. 8,456 8,564 16,802 17,008
Total interest on long-term
debt......................... 9,287 8,564 18,464 17,008
Total interest expense........ 42,443 36,989 83,947 73,729
Net Interest Income................ 34,874 36,277 70,313 71,000
Provision for credit losses...... 2,415 2,337 4,920 4,550
Net interest income after provision
for credit losses................ 32,459 33,940 65,393 66,450
Other Income
Securities gains................. 1,686 -0- 1,686 563
Trust income..................... 1,402 1,209 2,764 3,023
Service charges on deposit
accounts........................ 2,622 2,590 5,136 4,986
Gain on sale of loans............ 70 3,978 73 4,902
Other income..................... 4,160 3,057 7,639 6,063
Total other income............ 9,940 10,834 17,298 19,537
Other Expenses
Salaries and employee benefits... 12,930 12,520 26,841 25,598
Net occupancy expense............ 1,606 1,609 3,320 3,365
Furniture and equipment expense.. 1,948 1,922 3,808 3,795
Data processing expense.......... 924 863 1,691 1,762
Pennsylvania shares tax expense.. 916 883 1,810 1,730
Other operating expenses......... 6,724 6,213 12,728 12,434
Total other expenses.......... 25,048 24,010 50,198 48,684
Income before income taxes......... 17,351 20,764 32,493 37,303
Applicable income taxes.......... 4,261 5,938 7,952 10,472
Net income......................... $13,090 $14,826 $24,541 $26,831
Average Shares Outstanding(a)......57,515,772 61,203,388 57,510,617 61,178,188
Average Shares Outstanding
Assuming Dilution(a).............57,566,079 61,376,932 57,586,513 61,404,598
Per Share Data(a):
Basic earnings per share......... $ 0.23 $ 0.24 $ 0.43 $ 0.44
Diluted earnings per share....... $ 0.23 $ 0.24 $ 0.43 $ 0.44
Cash dividends per share......... $ 0.140 $ 0.130 $ 0.280 $ 0.245
(a) Share amounts have been restated to reflect the two-for-one stock split
effected in the form of a 100% stock dividend declared on October 19, 1999.
The accompanying notes are an integral part of these consolidated financial
statements.
4
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
<TABLE>
Accumulated
Additional Other Unearned Total
Common Paid-in Retained Comprehensive Treasury ESOP Shareholders'
Stock Capital Earnings Income Stock Shares Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998......$62,525 $ 68,978 $235,623 $ 2,199 $(5,913) $(8,007) $355,405
Comprehensive income
Net income...................... -0- -0- 26,831 -0- -0- -0- 26,831
Other comprehensive income, net
of tax: Unrealized holding gains
(losses) on securities arising
during the period.............. -0- -0- -0- (28,548) -0- -0- (28,548)
Less: reclassification adjust-
ment for gains on securities
included in net income....... -0- -0- -0- (366) -0- -0- (366)
Total other comprehensive
income....................... -0- -0- -0- (28,914) -0- -0- (28,914)
Total comprehensive income...... -0- -0- 26,831 (28,914) -0- -0- (2,083)
Cash dividends declared......... -0- -0- (15,171) -0- -0- -0- (15,171)
Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 853 853
Discount on dividend reinvestment
plan purchases................ -0- (233) -0- -0- -0- -0- (233)
Treasury stock acquired......... -0- -0- -0- -0- -0- -0- -0-
Treasury stock reissued......... -0- (291) -0- -0- 700 -0- 409
Balance at June 30, 1999..........$62,525 $ 68,454 $247,283 $(26,715) $ (5,213) $(7,154) $339,180
Balance at December 31, 1999......$62,525 $ 68,330 $257,773 $(40,304) $(55,448) $(6,193) $286,683
Comprehensive income
Net income...................... -0- -0- 24,541 -0- -0- -0- 24,541
Other comprehensive income, net
of tax: Unrealized holding gains
(losses) on securities arising
during the period............ -0- -0- -0- 986 -0- -0- 986
Less: reclassification adjust-
ment for gains on securities
included in net income....... -0- -0- -0- (1,096) -0- -0- (1,096)
Total other comprehensive
income....................... -0- -0- -0- (110) -0- -0- (110)
Total comprehensive income...... -0- -0- 24,541 (110) -0- -0- 24,431
Cash dividends declared......... -0- -0- (16,267) -0- -0- -0- (16,267)
Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 286 286
Discount on dividend reinvestment
plan purchases................ -0- (294) -0- -0- -0- -0- (294)
Treasury stock acquired......... -0- -0- -0- -0- (873) -0- (873)
Treasury stock reissued......... -0- (88) -0- -0- 387 -0- 299
Tax benefit of stock options.... -0- 75 -0- -0- -0- -0- 75
Balance at June 30, 2000..........$62,525 $ 68,023 $266,047 $(40,414) $(55,934) $(5,907) $294,340
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 6 Months
Ended June 30,
2000 1999
Operating Activities
Net income....................................... $24,541 $26,831
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses................... 4,920 4,550
Depreciation and amortization................. 3,558 4,048
Net gains on sales of assets.................. (1,933) (5,194)
Income from increase in cash surrender value
of bank owned life insurance................. (1,732) (1,056)
Decrease (increase) in interest receivable.... 615 (635)
Increase (decrease) in interest payable....... 683 (3,134)
Increase in income taxes payable.............. 201 1,870
Change in deferred taxes...................... 30 (1,902)
Other-net..................................... (1,150) (7,794)
Net cash provided by operating activities... 29,733 17,584
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales........................... -0- -0-
Proceeds from maturities and redemptions...... 40,000 69,747
Purchases..................................... (4,931) (45,777)
Transactions with securities available for sale:
Proceeds from sales........................... 16,358 38,484
Proceeds from maturities and redemptions...... 44,315 113,743
Purchases..................................... (46,887) (309,355)
Proceeds from sales of loans and other assets.... 13,520 86,485
Sale of subsidiary............................... -0- (2,396)
Investment in bank owned life insurance.......... (15,000) (20,000)
Net decrease in time deposits with banks......... 491 1,408
Net increase in loans............................ (18,415) (79,422)
Purchases of premises and equipment.............. (3,944) (2,192)
Net cash provided (used) by investing
activities.................................. 25,507 (149,275)
Financing Activities
Repayments of other long-term debt............... (25,240) (110)
Proceeds from issuance of other long-term debt... 29,900 9,000
Discount on dividend reinvestment plan purchases. (294) (233)
Dividends paid................................... (16,273) (12,202)
Net increase in Federal funds purchased.......... 4,875 9,925
Net increase (decrease) in other short-term
borrowings..................................... (121,206) 73,359
Net decrease in deposits......................... 61,543 37,637
Stock option tax benefit......................... 75 -0-
Purchase of treasury stock....................... (873) -0-
Proceeds from sale of treasury stock............. 298 409
Net cash provided (used) by financing
activities................................. (67,195) 117,785
Net decrease in cash and cash equivalents... (11,955) (13,906)
Cash and cash equivalents at January 1............. 101,373 97,615
Cash and cash equivalents at June 30............... $89,418 $ 83,709
The accompanying notes are an integral part of these consolidated financial
statements.
6
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
NOTE 1 Management Representation
In the opinion of management, the unaudited interim consolidated
financial statements include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair statement of
financial position as of June 30, 2000 and the results of
operations for the three month and six month periods ended
June 30, 2000 and 1999, and statements of cash flows and changes
in shareholders' equity for the six month periods ended June 30,
2000 and 1999. The results of the three and six months ended
June 30, 2000 and 1999 are not necessarily indicative of the
results to be expected for the entire year. The interim
consolidated financial statements should be read in conjunction
with the annual consolidated financial statements of First
Commonwealth Financial Corporation and Subsidiaries, including
the notes thereto.
NOTE 2 Financial Statement Reclassifications
Amounts in prior periods have been reclassified to conform to the
presentation format used in 2000. The reclassifications had no
effect on the Corporation's financial condition or results of
operations.
NOTE 3 Cash Flow Disclosures (dollar amounts in thousands)
2000 1999
Cash paid during the first six
months of the year for:
Interest $83,264 $ 76,862
Income Taxes $ 7,725 $ 10,450
Noncash investing and financing
activities:
ESOP loan reductions $ 286 $ 853
Loans transferred to other real
estate owned and repossessed
assets $ 3,649 $ 2,463
Gross increase (decrease) in
market value adjustment to
securities available for sale $ (169) $(44,483)
7
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
NOTE 4 Comprehensive Income Disclosures
The following table identifies the related tax effects allocated
to each component of other comprehensive income in the Statements
of Changes in Shareholders' Equity: (dollar amounts in thousands)
<TABLE>
June 30, 2000 June 30, 1999
Tax Net of Tax Net of
Pre-tax (Expense) Tax Pre-tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period $ 1,517 $(531) $ 986 $(43,920) $15,372 $(28,548)
Less: reclassification adjustment for
gains realized in net income (1,686) 590 (1,096) (563) 197 (366)
Net unrealized gains (losses) (169) 59 (110) (44,483) 15,569 (28,914)
Other comprehensive income $ (169) $ 59 $ (110) $(44,483) $15,569 $(28,914)
</TABLE>
NOTE 5 New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes
accounting and reporting standards for derivative instruments and
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. FAS No. 133 was
amended by FASB statement No. 137 in June 1999. FAS No. 137
delays the effective date of FAS No. 133 to the first quarter of
years beginning after June 15, 2000. Management's preliminary
analysis is that adoption of FAS No. 133 will not have a material
impact on the Corporation's financial condition or results of
operations.
8
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Six Months of 2000 as Compared to the First Six Months of
1999
This discussion and the related financial data are presented to
assist in the understanding and evaluation of the consolidated
financial condition and results of operations of First
Commonwealth Financial Corporation (the "Corporation") including
its subsidiaries. In addition to historical information, this
discussion and analysis contains forward-looking statements. The
forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference
include, but are not limited to, those discussed in this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The
Corporation undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
Net income in the six months of 2000 was $24.5 million reflecting
a decrease of $2.3 million over 1999 results of $26.8 million.
The decrease in net income for the 2000 period was primarily the
result of gains on the sale of loans which were earned during the
1999 period. Basic earnings per share and diluted earnings per
share were $0.43 for the six months of 2000 compared to basic
earnings per share and diluted earnings per share of $0.44 for
the six months of 1999.
Basic earnings per share excluding gains on sale of assets was
$0.40 for the six months of 2000 compared to $0.38 for the six
months of 1999, representing an increase of 5%. Return on
average assets was 1.15% and return on average equity was 17.00%
during the 2000 period, compared to 1.29% and 14.95%,
respectively during the same period of 1999.
Net interest income, the most significant component of earnings,
is the amount by which interest generated from earning assets
exceeds interest expense on liabilities. Net interest income was
$70.3 million for the six months of 2000 compared to $71.0
million for the same period of 1999. Net interest margin (net
interest income, on a tax-equivalent basis, as a percentage of
average earning assets) was 3.70% for the six months of 2000
compared to 3.80% for the six months of 1999. The reduction in
net interest margin for the 2000 period compared to 1999 was
related to the interest expense on funds borrowed to acquire
treasury shares.
9
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Six Months of 2000 as Compared to the First Six Months of
1999 (Continued)
The following table shows the effect of changes in volumes and
rates on interest income and interest expense.
Analysis of Changes in Net Interest Income
(dollar amounts in thousands)
2000 Change from 1999
Total Change Due Change Due
Change To Volume To Rate
Interest-earning assets:
Time deposits with banks $ (51) $ (47) $ (4)
Securities 2,437 (759) 3,196
Federal funds sold 64 39 25
Loans 7,081 4,951 2,130
Total interest income 9,531 4,184 5,347
Interest-bearing liabilities:
Deposits 2,269 685 1,584
Short-term borrowings 6,493 5,100 1,393
Long-term debt 1,456 277 1,179
Total interest expense 10,218 6,062 4,156
Net interest income $ (687) $(1,878) $1,191
Interest and fees on loans increased $7.1 million for 2000 over
1999 levels, primarily as a result of volume increases and rate
increases for commercial loans. Average loans for the six months
of 2000 increased $128.7 million compared to averages for the six
months of 1999 and included increases in commercial loans and
municipal loans which were partially offset by decreases in
average consumer loans. The decrease in consumer loans for the
2000 period resulted from the sale of $42.2 million of 1-4 family
residential mortgage loans in the first quarter of 1999 and the
sale of $20.4 million of consumer credit card loans during the
second quarter of 1999. The total yield on loans for the first
half of 2000 was 8.41% representing an increase of 18 basis
points (0.18%) compared to the first half of 1999.
Interest income on investments increased $2.4 million for the six
months of 2000 compared to the corresponding period of 1999 and
included increases due to rate for U.S. government agency
securities and increases due to volume for corporate bonds.
Yields on U.S. government agency securities increased 40 basis
points (0.40%) for the six months of 2000 compared to the six
months of 1999. Average balances of corporate bonds increased
$70.1 million for the first half of 2000 compared to averages for
the first half of 1999. Yields on investments for the first six
months of 2000 were 6.89% compared to 6.44% for the first six
months of 1999 period.
10
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Six Months of 2000 as Compared to the First Six Months of
1999 (Continued)
Interest on deposits increased $2.3 million for the 2000 period
compared to 1999, as interest on time deposits increased $2.4
million for the six months of 2000 compared to 1999. Average
time deposits increased $51.7 million for the six months of 2000
compared to 1999 averages resulting in an increase in interest
expense due to volume of $1.4 million. The cost of time deposits
for the six months of 2000 increased by 12 basis points (0.12%)
compared to 1999 costs of 5.22% resulting in an increase in
interest expense due to rate of $1.0 million.
Interest expense on short-term borrowings increased $6.5 million
for the six months of 2000 compared to the six months of 1999 as
the average balance of repurchase agreements increased $181.0
million over 1999 averages. The cost of short-term borrowings
for the six months of 2000 also increased by 113 basis points
(1.13%) compared to 1999 costs of 4.65%.
Interest expense on long-term debt increased $1.5 million for
2000 compared to the 1999 period. The long-term debt increase
for 2000 resulted primarily from the funding of the repurchase of
3.8 million shares of the Corporation's common stock through a
"modified Dutch Auction" tender offer during 1999. The aggregate
amount of $49.7 million paid by the Corporation in connection
with the repurchase of common shares was funded through the
issuance of capital securities and the issuance of a bank loan
from an unrelated financial institution. Capital securities
borrowings in the amount of $35 million were issued during the
third quarter of 1999 bearing an interest rate of 9.50% and
maturing in thirty years.
The provision for credit losses was $4.9 million for the six
months of 2000 compared to $4.6 million during the 1999 period.
Net charge-offs against the allowance for credit losses were $4.7
million in the 2000 period and $3.2 million in the 1999 period
reflecting an increase of $1.5 million. The 2000 increase in net
charge-offs included increases in net charge-offs for commercial
loans not secured by real estate of $1.8 million compared to 1999
net charge-offs. See the "Credit Review" section for an analysis
of the quality of the loan portfolio.
11
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Six Months of 2000 as Compared to the First Six Months of
1999 (Continued)
Below is an analysis of the consolidated allowance for credit
losses for the six month periods ended June 30, 2000 and 1999.
2000 1999
(Amounts in thousands)
Balance January 1, $33,539 $32,304
Loans charged off:
Commercial, financial and
agricultural 2,027 201
Real estate-construction -0- -0-
Real estate-commercial -0- 67
Real estate-residential 338 625
Loans to individuals 2,812 2,972
Lease financing receivables 226 26
Total loans charged off 5,403 3,891
Recoveries of previously
charged off loans:
Commercial, financial and
agricultural 192 143
Real estate-construction -0- -0-
Real estate-commercial -0- -0-
Real estate-residential 15 10
Loans to individuals 433 527
Lease financing receivables 25 1
Total recoveries 665 681
Net charge offs 4,738 3,210
Provision charged to operations 4,920 4,550
Balance June 30, $33,721 $33,644
Net securities gains increased $1.1 million during the 2000
period from $563 thousand reported in 1999. The securities gains
during 2000 resulted primarily from the sale of Pennsylvania bank
stocks with a book value of $14.2 million. The securities gains
during 1999 resulted in part from the sales of fixed rate U.S.
government agency securities and U.S. Treasury securities
classified as securities "available for sale" having book values
of $15.0 million and $21.9 million, respectively, which resulted
in security gains of $167 thousand and $317 thousand,
respectively. Proceeds from the sale of U.S. Treasury securities
in 1999 were the primary funding source for the acquisition of
$20 million of bank owned life insurance during the first quarter
of 1999.
12
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Six Months of 2000 as Compared to the First Six Months of
1999 (Continued)
During the six months of 2000 gains on the sale of loans were $73
thousand compared to gains on sale of loans of $4.9 million for
the six months of 1999. Gains on sale of loans for the 1999
period resulted primarily from the sale of $42.2 million of
residential mortgage loans during the first quarter of 1999 and
the sale of $20.4 million of retail credit card loans during the
second quarter of 1999 which resulted in gains of $890 thousand
and $4.0 million, respectively. Service charges on deposits were
$5.1 million for the first half of 2000 compared to $5.0 million
for the first half of 1999. Other income for the first six
months of 2000 was $7.6 million reflecting an increase of $1.6
million compared to the first six months of 1999. Other income
for the 2000 period reflected increases in gains on sale of fixed
assets of $515 thousand, merchant discount of $267 thousand and
reinsurance income of $73 thousand. Other income for the 2000
period also included an increase in income from bank owned life
insurance resulting in part from claim income.
Noninterest expense was $50.2 million for the six months of 2000
reflecting an increase of $1.5 million over the 1999 level of
$48.7 million. Total noninterest expense as a percent of average
assets was 2.34% for the 2000 period and 2.35% for the 1999
period. Employee costs were $26.8 million in 2000, representing
1.25% of average assets on an annualized basis compared to $25.6
million or 1.23% of average assets on an annualized basis for
1999. The number of full time equivalent employees at June 30,
2000 was 1,469 compared to 1,476 at June 30, 1999.
Other operating expenses for the 2000 period were $12.7 million
reflecting an increase of $294 thousand over the 1999 amount of
$12.4 million. The first six months of 2000 included increases
in charge card interchange expenses, collection and repossession
expenses and telephone expense of $105 thousand, $227 thousand
and $129 thousand, respectively. The 2000 period also reflected
an increase in FDIC expenses resulting from rate changes as the
FDIC Bank Insurance Fund and Savings and Loan Insurance Fund
rates were standardized. Legal fees, other professional fees,
stationery and supplies expenses and postage expenses reflected
decreases for the first half of 2000 compared to the 1999 period.
Other operating expenses for the first six months of 2000 also
included a decrease in the write-down of mortgage servicing
rights in the amount of $336 thousand related to the disposition
of BSI in 1999.
13
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Six Months of 2000 as Compared to the First Six Months of
1999 (Continued)
Income tax expense was $8.0 million for the six months of 2000
compared to $10.5 million for the same period of 1999. The
Corporation's effective tax rate was 24.5% for the 2000 period
compared to 28.1% for 1999. The reduction of the Corporation's
effective tax rate for 2000 was primarily the result of increased
tax free income from municipal loans and bank owned life
insurance during 2000 compared to the 1999 period.
Three Months ended June 30, 2000 as Compared to the Three Months
Ended June 30, 1999
Net income was $13.1 million for the second quarter of 2000, a
decrease of $1.7 million over 1999 results of $14.8 million. Net
income excluding the impact of securities transactions and gain
on sale of loans reflected a decrease of $292 thousand when
comparing the second quarter of 2000 to the second quarter of
1999. Basic earnings per share was $0.23 during the 2000 quarter
compared to $0.24 for the same period of 1999. Basic earnings
per share excluding the impact of securities transactions and
gains on sale of loans was $0.21 during the 2000 quarter compared
to $0.20 for the same period of 1999. Return on average assets
was 1.22% and return on average equity was 18.03% during the 2000
quarter, compared to 1.41% and 16.42% respectively, during the
1999 quarter. Net interest income for the second quarter of 2000
of $34.9 million represented a decrease of $1.4 million over the
second quarter of 1999. Net interest margin (net interest
income, on a tax-equivalent basis, as a percentage of average
earning assets) for the 2000 period was 3.68%, reflecting a
decrease of 14 basis points (0.14%) from 3.82% reported in 1999.
The reduction in net interest margin was related to the interest
expense on funds borrowed to acquire treasury shares.
Interest and fees on loans for the three months ended June 30,
2000 increased $3.9 million compared to the three months ended
June 30, 1999. The increase in interest and fees on loans for
2000 over 1999 levels was primarily a result of volume increases
and rate increases for commercial loans. Average loans for the
second quarter of 2000 increased $134.2 million compared to
averages for the second quarter of 1999 and included increases in
commercial loans and municipal loans which were partially offset
by decreases in average mortgage loans and credit card loans.
The total yield on loans for the second quarter of 2000 was 8.47%
representing an increase of 26 basis points (0.26%) compared to
the second quarter of 1999.
14
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended June 30, 2000 as Compared to the Three Months
Ended June 30, 1999 (Continued)
Interest income on investments for the three months ended
June 30, 2000 was $25.3 million, reflecting an increase of $89
thousand over the three months ended June 30, 1999. Rate
increases for investments during the second quarter of 2000 were
offset by volume decreases compared to the 1999 period. Yields
on investments for the 2000 quarter were 6.90% compared to 6.48%
for the same period of 1999 reflecting an increase of 42 basis
points (0.42%).
Interest on deposits for the second quarter of 2000 was $27.5
million reflecting an increase of $2.0 million compared to the
second quarter of 1999. Interest on total savings deposits for
the three months ended June 30, 2000 increased $67 thousand
compared to the same period of 1999, as rate increases were
partially offset by volume decreases. Interest on time deposits
for the 2000 quarter increased $1.9 million over 1999 levels of
$19.3 million as both rates and volumes increased. The cost of
time deposits increased 32 basis points (0.32%) for the second
quarter of 2000 compared to the second quarter of 1999. Average
time deposits for the three months ended June 30, 2000 were $1.6
billion, representing an increase of $54.8 million over 1999
averages. Total cost of deposits for the second quarter of 2000
was 3.75% compared to 3.47% for the second quarter of 1999, an
increase of 29 basis points (0.29%).
Interest on short-term borrowings for the second quarter of 2000
increased $2.8 million compared to the second quarter of 1999,
primarily as a result of volume increases for repurchase
agreements. Average repurchase agreements for the three months
ended June 30, 2000 were $266.1 million compared to averages for
the three months ended June 30, 1999 of $85.2 million. Interest
on short-term borrowings during the second quarter of 2000 also
reflected rate increases in all categories. The cost of short-
term borrowings for the second quarter of 2000 was 5.97% compared
to 4.66% for the second quarter of 1999. Interest on long-term
debt for the three months ended June 30, 2000 increased $723
thousand over the three months ended June 30, 1999. Long term
debt increases during 2000 were primarily the result of capital
securities issued during the third quarter of 1999 as partial
funding for the previously discussed "modified Dutch Auction"
tender offer.
15
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended June 30, 2000 as Compared to the Three Months
Ended June 30, 1999 (Continued)
Provision for credit losses was $2.4 million for the three months
ended June 30, 2000 compared to $2.3 million for the three months
ended June 30, 1999. Net charge-offs for the second quarter of
2000 were $2.5 million, compared to net charge-offs of $1.8
million for the second quarter of 1999. Net charge-offs for the
second quarter of 2000 included increases in net charge-offs of
commercial loans not secured by real estate of $1.1 million which
were partially offset by decreases in net charge-offs of consumer
real estate loans and loans to individuals compared to 1999
levels.
Securities gains were $1.7 million for the second quarter of
2000. There were no securities gains during the second quarter
of 1999. The securities gains during 2000 resulted primarily
from the sale of Pennsylvania bank stocks with a book value of
$14.2 million. Trust income was $1.4 million for the second
quarter of 2000 compared to $1.2 million for the second quarter
of 1999. During the three months ended June 30, 2000 gains on
the sale of loans were $70 thousand compared to gains on sale of
loans of $4.0 million for the three months ended June 30, 1999.
Gains on sale of loans for the 1999 period resulted primarily
from the sale of $20.4 million of retail credit card loans which
resulted in a gain of $4.0 million.
Other income of $4.2 million for the second quarter of 2000
represented an increase of $1.1 million over 1999 levels. Other
income for the second quarter of 2000 included increases in
merchant discount, income from bank owned life insurance and
insurance commissions of $151 thousand, $659 thousand and $363
thousand, respectively, compared to the same period of 1999.
Total noninterest expense for the three months ended June 30,
2000 was $25.0 million reflecting an increase of $1.0 million
over the $24.0 million that was reported for the corresponding
period of 1999. Employee costs were $12.9 million during the
second quarter of 2000 reflecting an increase of $410 thousand
over 1999 levels.
Outside data processing costs for the second quarter of 2000
increased to $924 thousand, from $863 thousand reported for the
second quarter of 1999. Other operating expenses for the three
months ended June 30, 2000 increased $511 thousand compared to
the three months ended June 30, 1999. Collection and repo
expenses reflected increases of $86 thousand for the 2000 quarter
as collection efforts for delinquent loans were accelerated.
Express, freight and storage expenses for the second quarter of
2000 increased $70 thousand over the second quarter of 1999,
partially as a result of higher gas prices being passed on from
carriers. Additional cost increases for the second quarter of
2000 compared to the corresponding period of 1999 occurred in
FDIC expense, other professional fees and telephone expenses.
16
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended June 30, 2000 as Compared to the Three Months
Ended June 30, 1999 (Continued)
Income taxes decreased $1.7 million for the second quarter of
2000 compared to the 1999 quarter as income before income taxes
decreased $3.4 million for the corresponding period. The
Corporation's effective tax rate was 24.6% for the 2000 period
compared to 28.6% for the 1999 period. The Corporation's
effective tax rate was impacted by an increase in tax free income
for the second quarter of 2000 compared to the second quarter of
1999.
LIQUIDITY
Liquidity is a measure of the Corporation's ability to
efficiently meet normal cash flow requirements of both borrowers
and depositors. In the ordinary course of business, funds are
generated from deposits (primary source) and the maturity or
repayment of earning assets, such as securities and loans. As an
additional secondary source, short-term liquidity needs may be
provided through the use of overnight Federal funds purchased,
borrowings through the use of lines available for repurchase
agreements, and borrowings from the Federal Reserve Bank.
Additionally, the banking subsidiaries are members of the Federal
Home Loan Bank and may borrow under overnight and term borrowing
arrangements. The sale of earning assets may also provide an
additional source of liquidity.
The Corporation monitors liquidity through regular computations
of prescribed liquidity ratios. The Corporation actively manages
liquidity within a defined range and has developed liquidity
contingency plans, including ensuring availability of alternate
funding sources to maintain liquidity under a variety of business
conditions. In addition to the previously described funding
sources the Corporation's ability to access the capital markets
was demonstrated during 1999 through the issuance of $35 million
of capital securities.
Net loans remained flat in the first six months of 2000 as
increases in commercial loans secured by real estate and
increases in municipal loans were offset by decreases in
residential real estate loans, loans to individuals and
commercial loans not secured by real estate. Although end of
period loan balances at June 30, 2000 compared to December 31,
1999 have not increased, both end of period and average loans
outstanding have increased since June 30, 1999.
17
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY (Continued)
Total deposits increased $61.5 million for the first six months
of 2000 and included increases in noninterest-bearing deposits of
$7.7 million and increases in time deposits of $61.8 million
since year-end. Total savings deposits decreased $8.0 million
during the same time period. Customers continue to reinvest
savings deposits in higher yielding investments both within and
outside the commercial banking industry. Included in the
increase in time deposits during the first half of 2000 was the
issuance of brokered time deposits in the amount of $26.1
million. Although the Corporation's primary source of funds
remains traditional deposits from within the communities served
by its banking subsidiaries, future sources of deposits utilized
could include the use of brokered time deposits offered outside
the Corporation's traditional market area.
Marketable securities that the Corporation holds in its
investment portfolio are an additional source of liquidity.
These securities are classified as "securities available for
sale" and while the Corporation does not have specific intentions
to sell these securities they have been designated as "available
for sale" because they may be sold for the purpose of obtaining
future liquidity, for management of interest rate risk or as part
of the implementation of tax management strategies. As of
June 30, 2000 securities available for sale had an amortized cost
of $1,193.9 million and an approximate fair value of $1,131.8
million.
Interest Sensitivity
The objective of interest rate sensitivity management is to
maintain an appropriate balance between the stable growth of
income and the risks associated with maximizing income through
interest sensitivity imbalances. While no single number can
accurately describe the impact of changes in interest rates on
net interest income, interest rate sensitivity positions, or
"gaps", when measured over a variety of time periods, may be
helpful.
An asset or liability is considered to be interest-sensitive if
the rate it yields or bears is subject to change within a
predetermined time period. If interest-sensitive assets ("ISA")
exceed interest-sensitive liabilities ("ISL") during the
prescribed time period, a positive gap results. Conversely, when
ISL exceeds ISA during a time period, a negative gap results.
A positive gap tends to indicate that earnings will be impacted
favorably if interest rates rise during the period and negatively
when interest rates fall during the time period. A negative gap
tends to indicate that earnings will be affected inversely to
interest rate changes. In other words, as interest rates fall, a
negative gap should tend to produce a positive effect on
earnings, and when interest rates rise, a negative gap should
tend to affect earnings negatively.
18
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Sensitivity (Continued)
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 June 30, 2000 and December 31, 1999
(Dollar amounts in thousands):
June 30, 2000
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans....................$ 584,016 $134,836 $237,862 $ 956,714
Investments.............. 44,229 37,770 67,996 149,995
Other interest-earning
assets.................. 2,177 -0- -0- 2,177
Total interest-sensitive
assets................ 630,422 172,606 305,858 1,108,886
Certificates of deposits. 260,495 153,448 366,218 780,161
Other deposits........... 1,059,469 -0- -0- 1,059,469
Borrowings............... 357,503 450 1,174 359,127
Total interest-sensitive
liabilities........... 1,677,467 153,898 367,392 2,198,757
GAP....................$(1,047,045) $ 18,708 $(61,534) $(1,089,871)
ISA/ISL.................. 0.38 1.12 0.83 0.50
Gap/Total assets......... 24.36% 0.44% 1.43% 25.36%
December 31, 1999
0-90 91-180 181-365 Cumulative
Days Days Days 0-365 Days
Loans....................$ 697,645 $113,547 $ 204,090 $ 1,015,282
Investments.............. 44,666 39,497 66,465 150,628
Other interest-earning
assets.................. 18,799 2,759 4,532 26,090
Total interest-sensitive
assets................ 761,110 155,803 275,087 1,192,000
Certificates of deposits. 325,985 231,804 277,769 835,558
Other deposits........... 1,074,451 -0- -0- 1,074,451
Borrowings............... 467,255 961 127,108 595,324
Total interest-sensitive
liabilities........... 1,867,691 232,765 404,877 2,505,333
GAP....................$(1,106,581) $(76,962) $(129,790) $(1,313,333)
ISA/ISL.................. 0.41 0.67 0.68 0.48
Gap/Total assets......... 25.49% 1.77% 2.99% 30.26%
19
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<PAGE>
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Sensitivity (Continued)
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 June 30, 2000, indicated that a 300 basis point
(3.00%) movement in interest rates in either direction over the
next twelve months would not have a significant impact on the
Corporation's anticipated net interest income over that time
frame nor over the next twenty-four months and the Corporation's
position would remain well within current policy guidelines.
The Corporation's "Asset/Liability Management Committee" ("ALCO")
is responsible for the identification, assessment and management
of interest rate risk exposure, liquidity, capital adequacy and
investment portfolio position. The primary objective of the ALCO
process is to ensure that the Corporation's balance sheet
structure maintains prudent levels of risk within the context of
currently known and forecasted economic conditions and to
establish strategies which provide the Corporation with
appropriate compensation for the assumption of those risks. The
ALCO attempts to mitigate interest rate risk through the use of
strategies such as asset disposition, asset and liability pricing
and matched maturity funding. The ALCO strategies are
established by the Corporation's senior management and are
approved by the Corporation's board of directors.
20
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW
The following table identifies amounts of loan losses and
nonperforming loans. Past due loans are those which were
contractually past due 90 days or more as to interest or
principal payments but are well secured and in the process of
collection. Renegotiated loans are those loans which terms have
been renegotiated to provide a reduction or deferral of principal
or interest as a result of the deteriorating financial position
of the borrower and are in compliance with the restructured
terms.
At June 30,
2000 1999
(amounts in thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ 11,427 $ 9,869
Past due loans 15,360 12,507
Renegotiated loans 1,638 63
Total Nonperforming Loans $ 28,425 $ 22,439
Other real estate owned $ 1,752 $ 1,808
Loans outstanding at end of period $2,500,422 $2,369,905
Average loans outstanding (year-to-date) $2,511,020 $2,382,276
Nonperforming loans as percent of
total loans 1.14% 0.95%
Provision for credit losses $ 4,920 $ 4,550
Net charge-offs $ 4,738 $ 3,210
Net charge-offs as percent of
average loans outstanding 0.19% 0.13%
Provision for credit losses as percent
of net charge-offs 103.84% 141.74%
Allowance for credit losses as percent
of average loans outstanding 1.34% 1.41%
Allowance for credit losses as percent
of end-of-period loans outstanding 1.35% 1.42%
Allowance for credit losses as percent
of nonperforming loans 118.63% 149.94%
21
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW (Continued)
The Corporation considers a loan to be impaired when, based on
current information and events, it is probable that the
Corporation will be unable to collect principal or interest due
according to the contractual terms of the loan. Loan impairment
is measured based on the present value of expected cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.
Payments received on impaired loans are applied against the
recorded investment in the loan. For loans other than those that
the Corporation expects repayment through liquidation of the
collateral, when the remaining recorded investment in the
impaired loan is less than or equal to the present value of the
expected cash flows, income is recorded on a cash basis.
Impaired loans include loans on a nonaccrual basis and
renegotiated loans.
The following table identifies impaired loans, and information
regarding the relationship of impaired loans to the reserve for
credit losses at June 30, 2000 and June 30, 1999:
2000 1999
(amounts in thousands)
Recorded investment in impaired loans at end
of period $13,065 $ 9,932
Year to date average balance of impaired loans $13,023 $10,252
Allowance for credit losses related to impaired
loans $ 2,696 $ 2,299
Impaired loans with an allocation of the allowance
for credit losses $ 5,192 $ 4,392
Impaired loans with no allocation of the allowance
for credit losses $ 7,873 $ 5,540
Year to date income recorded on impaired loans on
a cash basis $ 277 $ 124
Other than those described above, there are no material credits
that management has serious doubts as to the borrower's ability
to comply with the present loan repayment terms. Additionally,
the portfolio is well diversified and as of June 30, 2000, there
were no significant concentrations of credit.
Nonperforming loans at June 30, 2000 increased $6.0 million
compared to 1999 levels and included increases in nonaccrual
loans, past due loans and renegotiated loans of $1.5 million,
$2.9 million and $1.6 million, respectively. Nonaccrual loans
reflected increases in nonaccrual loans secured by commercial
real estate of $1.1 million and increases in nonaccrual
commercial loans not secured by real estate of $1.2 million.
Increases in nonaccrual commercial loans for 2000 were partially
22
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW (Continued)
offset by decreases in nonaccrual loans secured by residential
real estate of $631 thousand. Past due loans reflected increases
in past due loans secured by residential real estate of $2.9
million. The increase in renegotiated loans at June 30, 2000
compared to the corresponding period of 1999 were the result of
the modification of loan terms for one commercial borrower.
Although nonperforming loans as a percent of total loans have
increased from 0.95% at June 30, 1999 to 1.14% at June 30, 2000
this ratio has remained stable since year-end 1999 amounts of
1.15%. The allowance for credit losses as a percent of
nonperforming loans at June 30, 2000 has increased over year-end
1999 levels of 117.10%.
The Corporation's loan portfolio continues to be monitored by
senior management to identify potential portfolio risks and
detect potential credit deterioration in the early stages.
Credit risk is mitigated through the use of sound underwriting
policies and collateral requirements. Management attempts to
minimize loan losses by analyzing and modifying collection
techniques on a periodic basis. Management believes that the
allowance for credit losses and nonperforming loans remain safely
within acceptable levels.
CAPITAL RESOURCES
Equity capital increased $7.7 million in the first half of 2000.
Dividends declared reduced equity by $16.3 million during the
2000 period, while earnings retention was $8.3 million,
representing an earnings retention rate of 33.7%. The retained
net income remains in permanent capital to fund future growth and
expansion. Payments by the Corporation's Employee Stock
Ownership Plan ("ESOP") to reduce debt it incurred to acquire the
Corporation's common stock for future distribution as employee
compensation, net of fair value adjustments to Unearned ESOP
shares, increased equity by $286 thousand. Amounts paid to fund
the discount on reinvested dividends reduced equity by $294
thousand. The market value adjustment to securities available for
sale decreased equity by $110 thousand. The cost of purchasing
treasury shares decreased equity by $873 thousand while proceeds
from the reissuance of treasury shares to provide for stock
options exercised increased equity by $299 thousand during 2000.
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.
23
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ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CAPITAL RESOURCES (Continued)
The Federal Reserve Board has issued risk-based capital adequacy
guidelines which are designed principally as a measure of credit
risk. These guidelines require: (1) at least 50% of a banking
organization's total capital be common and other "core" equity
capital ("Tier I Capital"); (2) assets and off-balance-sheet
items be weighted according to risk; (3) the total capital to
risk-weighted assets ratio be at least 8%; and (4) a minimum
leverage ratio of Tier I capital to average total assets. The
minimum leverage ratio is not specifically defined, but is
generally expected to be 3-5 percent for all but the most highly
rated banks, as determined by a regulatory rating system.
The table below presents the Corporation's capital position at
June 30, 2000:
Percent
Amount of Adjusted
(in thousands) Assets
Tier I Capital $359,782 13.3%
Risk-Based Requirement 108,115 4.0
Total Capital 393,503 14.6
Risk-Based Requirement 216,231 8.0
Minimum Leverage Capital 359,782 8.4
Minimum Leverage Requirement 128,697 3.0
At June 30, 2000 the Corporation's banking subsidiaries are
considered well capitalized as defined by the Federal Deposit
Insurance Corporation Improvement Act of 1991.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Information appearing in Item 2 of this report under the caption
"Interest Sensitivity" is incorporated herein by reference in
response to this item.
24
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FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceedings to which
the Corporation or its subsidiaries are a party, or
of which any of their property is the subject,
except proceedings which arise in the normal course
of business and, in the opinion of management, will
not have a material adverse effect on the
consolidated operations or financial position of the
Corporation and its subsidiaries.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
On April 24, 2000, the Corporation held its
regularly scheduled annual meeting of shareholders.
The following proposals were scheduled to be acted
upon. Due to lack of required proxy response only
proposal 1 was considered and acted upon during the
April 24, 2000 meeting of shareholders. Voting on
proposal 2 was adjourned to a meeting held on
May 11, 2000.
Proposal 1
The following directors were elected for terms to
expire in 2003:
E.H. Brubaker
Thomas J. Hanford
H.H. Heilman, Jr.
James W. Newill
John A. Robertshaw, Jr.
Laurie Stern Singer
Robert C. Williams
Proposal 2
A proposal to amend the Corporation's 1995
Compensatory Stock Option Plan to increase the
number of shares of the Corporation's stock
available for grant under the Option Plan from
2,000,000 to 4,500,000, an increase of 2,500,000
was approved.
For 30,129,187
Against 3,784,704
Abstain 1,194,469
Non-voting 23,034,488
25
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<PAGE>
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
26
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
DATED: AUGUST 11, 2000 /S/JOSEPH E. O'DELL
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: AUGUST 11, 2000 /S/ JOHN J. DOLAN
John J. Dolan, Executive Vice
President and Chief Financial
Officer
27
