<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 0-13882
FIRST WESTERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 25-1461570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 EAST WASHINGTON STREET, NEW CASTLE, PENNSYLVANIA 16101
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (724) 652-8550
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $5 PER SHARE
------------------
Title of each class
Indicate by 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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of Common Stock, par value $5 per share, held by
non-affiliates (based upon the closing sale price on the Nasdaq Stock Market on
March 11, 1999), was approximately $361,880,000.
As of March 11, 1999, there were 11,156,229 shares of Common Stock, par
value $5 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE> 2
FIRST WESTERN BANCORP, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 33
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 33
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 34
Item 11. Executive Compensation...................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 42
Item 13. Certain Relationships and Related Transactions.............. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 45
Signatures............................................................ 46
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
First Western Bancorp, Inc. ("First Western"), headquartered in New Castle,
Pennsylvania, is a holding company which provides retail and commercial banking
and trust services through 47 community banking offices in western Pennsylvania
and northeastern Ohio. First Western was incorporated under the laws of the
Commonwealth of Pennsylvania in 1982. First Western has one wholly-owned banking
subsidiary: First Western Bank, National Association ("First Western Bank,
N.A."), (This subsidiary is referred to as the "Banking Subsidiary"). Effective
September 5, 1997, First Western Bank, Federal Savings Bank ("First Western
Bank, F.S.B.") was merged into First Western Bank, N.A. First Western also has
two wholly-owned nonbank subsidiaries: First Western Investment Services Company
("Investment Services") and First Western Capital Trust I, a Delaware business
trust. (The Banking Subsidiary and the nonbanking subsidiaries are collectively
referred to as the "Subsidiaries"). Effective September 10, 1998, First Western
Trust Services Company ("Trust Services") was merged into First Western Bank,
N.A. At December 31, 1998, First Western had total assets of $2.2 billion, net
loans (including loans held for sale) of $1.1 billion, deposits of $1.5 billion
and shareholders' equity of $149 million.
First Western offers a variety of financial services through its
Subsidiaries. The Banking Subsidiary provides a full range of retail and
commercial banking products including personal and commercial checking accounts,
savings and time deposit accounts, money market demand accounts, safe deposit
facilities, insurance, installment and other consumer loans, short and long-term
credit facilities, and consumer and commercial mortgages to individuals and
small to medium sized businesses. First Western Bank, N.A. also offers a number
of trust products including corporate trust, personal trust, custody and account
administration services and financial services such as investment planning,
managed assets, mutual fund sales and annuity sales.
RECENT DEVELOPMENTS
On December 13, 1998, First Western's Board of Directors approved a
definitive agreement pursuant to which First Western will be merged with and
into Sky Financial Group, Inc. ("Sky Financial"). Under the terms of the
agreement, First Western's shareholders will receive 1.211 shares of Sky
Financial common stock for each share of First Western common stock in a
transaction intended to be a tax-free exchange. The merger is intended to be
accounted for as a pooling of interests. In connection with this agreement,
First Western has issued an option to Sky Financial to purchase up to 19.9% of
outstanding shares of First Western, at an exercise price of $28.50 per share,
which is exercisable only upon the occurrence of certain events. The merger is
subject to shareholder and regulatory approval and is expected to be completed
during the third quarter of 1999.
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, the matters discussed
in this report contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), that involve substantial risks and uncertainties. When used in this
report, or in the documents incorporated by reference herein, the words
"anticipate," "believe," "estimate," "may," "intend," "expect" and similar
expressions identify certain of such forward-looking statements. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied by the forward-looking statements contained herein. Factors
that could cause future results to vary from current expectations include, but
are not limited to, the following: changes in economic conditions (both
generally and more specifically in the markets in which First Western operates);
changes in interest rates, deposit flows, loan demand, real estate values and
competition; changes in accounting principles, policies or guidelines and in
government legislation and regulation (which change from time to time and over
which First Western has no control); other factors affecting First Western's
operations, markets, products and services, including but not limited to, year
2000 compliance issues; and other risks detailed in this Form 10-K and in First
Western's other Securities and
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Exchange Commission filings. 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 Company undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof.
THE SUBSIDIARIES
First Western Bank, N.A.
First Western Bank, N.A., traces its history in New Castle, Pennsylvania to
1855. First Western Bank, N.A. is a member of the Federal Reserve System, and
its deposits are insured by the Bank Insurance Fund ("BIF") of the Federal
Deposit Insurance Corporation ("FDIC"), with certain deposits acquired from
First Western Bank, F.S.B and the Resolution Trust Corporation insured by the
Savings Association Insurance Fund ("SAIF") of the FDIC. As of March 1, 1999,
First Western Bank, N.A. had 47 community banking offices in Lawrence, Beaver,
Butler, Allegheny, Erie, Mercer and Washington Counties, Pennsylvania and
Ashtabula County, Ohio. At December 31, 1998, First Western Bank, N.A. had total
assets of $2.2 billion.
On October 14, 1998, First Western announced the sale of its recently
acquired Punxsutawney, Ebensburg, Barnesboro and Kiski Valley branches to three
banks that are unrelated to First Western. As part of this transaction, First
Western acquired the deposits and consumer loans of a branch in Moon Township,
Allegheny County, Pennsylvania from one of these banks. First Western sold these
branches because they were not located near First Western's core banking
markets. These branches were acquired in June 1998 from PNC Bank as part of a 16
branch purchase (see below). The four branches that were sold had approximately
$139 million of deposits and $25 million of consumer loans. The Moon Township
branch acquired by First Western had approximately $10 million of deposits and
$2.7 million of consumer loans. The sales and purchases were completed in
February 1999.
On June 19, 1998, First Western Bank, N.A. completed the purchase of 16
branches in western Pennsylvania from PNC Bank. The purchase included branches,
related deposits, consumer loans, small business banking relationships and
certain brokerage relationships. First Western acquired approximately $384
million in deposits, $74 million in consumer and small business loans, and $11
million in brokerage assets, along with related fixed assets, leases, safe
deposit business and other agreements.
In January 1998, First Western completed the sale of its three Lake County,
Ohio offices. These offices had approximately $47 million in deposits. During
1997, First Western completed the sale of its Slippery Rock and Oil City branch
offices. These branch offices had approximately $4 million and $12 million of
deposits, respectively.
On September 19, 1997, First Western completed the purchase of the Chicora,
Pennsylvania branch office of Mellon Bank. This branch had approximately $37
million of deposits.
During 1997, First Western Bank, N.A. formed a wholly-owned subsidiary,
First Western Insurance Services, Inc., to provide various insurance products
for First Western's customers.
During the first quarter of 1995, First Western Bank, N.A. purchased the
Andover, Ohio banking office of Peoples Bank, N.A. of Ashtabula, Ohio. This
branch had approximately $13 million of deposits at the time of acquisition.
Also during the first quarter of 1995, First Western Bank, N.A. purchased four
banking offices located in northeastern Ohio in Lake and Ashtabula Counties from
Union Federal Savings Bank of Indianapolis, Indiana. These branches had
approximately $84 million of deposits at the time of acquisition. All of the
acquired deposits are insured by the SAIF.
Effective September 10, 1998, Trust Services, a Pennsylvania trust company,
was merged into First Western Bank, N.A. At December 31, 1998, First Western
Bank, N.A. held, as agent or fiduciary, trust assets of approximately $808
million in market value. First Western Bank, N.A. maintains trust offices in New
Castle, Beaver, Hermitage and Erie, Pennsylvania. First Western Bank, N.A.
provides personal and corporate trust services as well as financial services
such as mutual fund and annuity sales, managed asset allocation, and other
investment services.
2
<PAGE> 5
Investment Services
Investment Services was formed on December 26, 1996 as a Delaware
investment company for the purpose of holding investment securities for First
Western.
First Western Capital Trust I
First Western Capital Trust I was formed in February 1997 in connection
with the private placement of $25 million of 9.875% Capital Securities due
February 1, 2027 of the trust.
COMPETITION
First Western's Subsidiaries are subject to intense competition in all
aspects and areas of their business from banks and other financial institutions,
including savings and loan associations, savings banks, finance companies,
credit unions and other providers of financial services, such as mutual funds,
brokerage firms, credit companies and insurance companies. The Subsidiaries also
compete with nonfinancial institutions, including retail stores that maintain
their own credit programs and governmental agencies that make available low cost
or guaranteed loans to certain borrowers. First Western competes in its market
areas with a number of much larger financial institutions with substantially
greater resources, larger lending limits and a wider array of commercial banking
services.
First Western's Subsidiaries have been able to compete effectively with
other financial institutions in their respective market areas. The Subsidiaries
emphasize customer service in an effort to establish long-term customer
relationships and to build customer loyalty. First Western provides personnel,
capital, and consolidated services such as data processing, accounting, loan
review, compliance and internal audit to the Banking Subsidiary to enhance its
ability to compete effectively in, and provide a wide variety of financial
services to, its respective markets. First Western provides overall direction to
the Banking Subsidiary in the areas of credit policy and administration,
strategic planning, investment portfolio management, asset/liability management,
human resource and benefit plan administration and other financial and
administrative services. With the centralization of these back-office and
administrative services, First Western refers to itself as a supercommunity
bank, providing efficient decentralized banking services and loan decision
making through community offices.
EMPLOYEES
First Western and its Subsidiaries had the following full-time equivalent
employees at December 31, 1998:
<TABLE>
<S> <C>
First Western............................................... 185
First Western Bank, N.A..................................... 433
---
Total..................................................... 618
===
</TABLE>
SUPERVISION AND REGULATION
First Western
Bank Holding Company Status. First Western is registered as a bank holding
company under the Bank Holding Company Act of 1956 (the "Bank Holding Company
Act"). As such, First Western is subject to the provisions of that legislation
and to supervision by the Federal Reserve Board. First Western is required to
obtain the prior approval of the Federal Reserve Board before it may acquire all
or substantially all of the assets of any bank, or acquire ownership or control
of any voting securities of any bank, if, after giving effect to such
acquisition, First Western would own or control more than 5% of the voting
shares of such bank. A registered bank holding company is also prohibited, with
limited exceptions, from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any company which is not a bank and from
engaging directly or indirectly in any business not closely related to the
business of banking or of managing or controlling banks. One of the exceptions
to these prohibitions permits ownership of the shares of any company the
activities of which the Federal Reserve Board, after due notice and opportunity
for hearing, by regulation
3
<PAGE> 6
or order has determined to be so closely related to the business of banking and
of managing or controlling banks as to be proper incident thereto. These
activities include operating a mortgage brokerage company, finance company,
credit card company, factoring company or securities brokerage company;
performing certain data processing and other back office operations; providing
investment and financial advice to financial and nonfinancial institutions and
to certain high net worth individuals; acting as an insurance agent for certain
types of credit-related insurance; leasing personal property on a full payout,
nonoperating basis; limited powers to underwrite the issuance of certain debt
instruments and certain equity offerings; and, as a result of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), the
ability to acquire and operate savings and loan associations.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board regulations
or both. This doctrine has become known as the "source of strength" doctrine.
Although the United States Court of Appeals for the Fifth Circuit struck down
the Federal Reserve Board's source of strength doctrine in 1990, saying the
Federal Reserve Board had no authority to assert the doctrine under the Bank
Holding Company Act, the decision was reversed by the United States Supreme
Court on procedural grounds. The validity of the source of strength doctrine is
likely to continue to be the subject of litigation until definitively resolved
by the courts or by Congress.
Effective in March 1990, the Pennsylvania Banking Code removed all
restrictions concerning the number of banks that a Pennsylvania bank holding
company may own or control in Pennsylvania.
The Pennsylvania Banking Code also provides for "reciprocal interstate
banking," which, under certain circumstances, allows a bank holding company
located in another state to acquire control of a bank or bank holding company in
Pennsylvania. The other jurisdiction must authorize Pennsylvania bank holding
companies to acquire banks or bank holding companies within its boundaries on
terms and conditions substantially no more restrictive than those imposed on its
own domestic bank holding companies. At present, a number of states have adopted
legislation permitting the acquisition by an out-of-state bank holding company
of the shares of an in-state bank.
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 was passed. This legislation significantly changes the
laws governing interstate banking. Beginning on September 29, 1995, bank holding
companies may acquire banks located in any state, despite former prohibitive
state statutes, subject to certain conditions. Beginning on June 1, 1997, banks
may merge or consolidate on an interstate basis. States may elect to "opt-out"
of this provision by enacting legislation before June 1, 1997 that expressly
prohibits interstate bank mergers. This act also permits banks to branch into
other states on a de novo basis provided that the state has enacted a law that
permits de novo interstate branch banking.
Securities Regulation. First Western Common Stock is registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, as such,
First Western is subject to various reporting and other requirements under the
Exchange Act and to regulation by the Securities and Exchange Commission (the
"Commission").
First Western Bank, N.A.
Federal and state laws and regulations govern many aspects of the business
of First Western Bank, N.A., including permissible types, amounts, and terms of
loans, investments, and acceptances, amounts of reserves against deposits and
restrictions on dividends and other intercompany transactions. The ability of
the banking subsidiary to pay dividends to First Western is described in Note 16
of the Notes to Consolidated Financial Statements. The operations of such
subsidiary are subject to examination and regulation by one or more of the
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following: the Federal Reserve Board, the Office of the Comptroller of the
Currency ("OCC") and the FDIC. First Western Bank, N.A. is a national bank and
is subject to the supervision of, and regulation by, the OCC.
First Western Bank, N.A. is subject to regulatory capital requirements that
are generally comparable to those imposed on First Western. See Note 16 of the
Notes to Consolidated Financial Statements. At December 31, 1998, First Western
Bank, N.A. met all applicable capital requirements.
The deposits of First Western Bank, N.A. are insured up to $100,000 per
insured depositor (as defined by law and regulation) by the FDIC through the
Bank Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF"),
respectively. The FDIC adopted regulations effective in 1993 that impose risk
based insurance premiums on all insured depository institutions.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 ("Funds Act") that, among other things, imposed a special
one-time assessment on SAIF member institutions to recapitalize the SAIF. As
required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis
points on SAIF assessable deposits held as of March 31, 1995, payable November
27, 1996 ("SAIF Special Assessments"). The SAIF Special Assessment was
recognized by First Western Bank, N.A., as a expense in the quarter ended
September 30, 1996 and was tax deductible. The SAIF Special Assessment recorded
by First Western amounted to approximately $3.3 million on a pre-tax basis and
approximately $2.0 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning on January
1, 1997, BIF deposits are assessed for FICO payments at a rate of 20% of the
rate assessed on SAIF deposits. BIF deposits will be assessed an annual FICO
payment of approximately 1.3 basis points, while SAIF deposits will be assessed
a payment of approximately 6.5 basis points. Full pro rata sharing of the FICO
payments by institutions with BIF and SAIF deposits will occur on the earlier of
January 1, 2000, or the date the BIF and SAIF are merged. As a result of the
Funds Act, SAIF assessments have been lowered to a range between 0 and 27 basis
points effective January 1, 1997, a range comparable to that paid with respect
to BIF deposits. However, SAIF deposits are currently subject to the higher FICO
payments described above.
First Western Bank, N.A. is subject to provisions of federal law
restricting various aspects of its operations, including its ability to extend
credit to, to engage in various other transactions with, or to invest in the
stock or securities of, First Western.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), enacted on December 19, 1991, recapitalized the BIF and imposed
certain supervisory and regulatory reforms on the banking industry. The
following is a summary of certain key provisions of the FDICIA.
The FDICIA increased the FDIC's authorization to borrow from the United
States Treasury from $5 billion to $30 billion for bank losses and authorized an
additional $40 billion in borrowings from the United States Treasury for working
capital purposes. Borrowings would be repaid from deposit insurance assessments,
including special assessments, on banks such as First Western Bank, N.A., and
the issuance of FDIC obligations to BIF member banks.
The FDICIA required the federal bank regulators to establish specific
capital standards for five categories of insured depository institutions: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized". Any institution classified
as "undercapitalized," is required to submit a capital restoration plan to its
federal bank regulator and is subject to operational restrictions. Greater
restrictions, and ultimately, receivership, may be imposed with respect to
institutions that are "significantly undercapitalized" or "critically
undercapitalized". First Western Bank, N.A. is currently classified as "well
capitalized". See Note 16 of the Notes to Consolidated Financial Statements.
The federal bank regulatory agencies are required to adopt uniform capital
and accounting rules. The accounting rules require supplemental disclosure in
reports to the banking agencies of mark to market valuation of assets and
liabilities and of contingent assets and liabilities.
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STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
The required information is presented as part of "Managements's Discussion
and Analysis of Financial Condition and Results of Operations" (Item 7).
II. INVESTMENT PORTFOLIO
A. Book Value of Investment Portfolio:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Held to Maturity:
U.S. Government agencies and corporations...... $ -- $ 14,154 $ 21,051
Mortgage-backed securities..................... -- 132,673 169,467
Obligations of states and political
subdivisions................................ -- 85,247 85,341
Other securities............................... -- 750 700
-------- -------- --------
Total.................................. $ -- $232,824 $276,559
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Available for sale:
U.S. Treasury securities....................... $ 7,421 $ 7,786 $ 2,068
U.S. Government agencies and corporations...... 205,911 92,590 79,251
Mortgage-backed securities..................... 498,383 163,326 102,416
Obligations of states and political
subdivisions................................ 84,396 -- --
Other securities............................... 72,588 60,819 17,547
-------- -------- --------
Total.................................. $868,699 $324,521 $201,282
======== ======== ========
</TABLE>
B. Maturity and Yield Information
The required information is presented as part of "Managements's Discussion
and Analysis of Financial Condition and Results of Operations" (Item 7).
C. There are no issues included in obligations of states and political
subdivisions or other securities which exceed ten percent of shareholders'
equity.
III. LOAN PORTFOLIO
A. Types of Loans
The required information is presented as part of "Management's Discussion
and Analysis of Financial Condition and Results of Operations" (Item 7).
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B. Maturities and sensitivities of loans to interest rates at December 31,
1998:
<TABLE>
<CAPTION>
DUE AFTER
DUE IN 1 BUT DUE
1 YEAR WITHIN AFTER
OR LESS 5 YEARS 5 YEARS TOTAL
------- ------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural.......... $46,497 $ 99,699 $40,934 $187,130
Real estate--construction....................... 2,731 2,166 6,342 11,239
------- -------- ------- --------
Total.................................... $49,228 $101,865 $47,276 $198,369
======= ======== ======= ========
Sensitivity of loans to interest rates:
Predetermined interest rates.................. $ 7,491 $ 28,503 $ 7,555 $ 43,549
Floating interest rates....................... 41,737 73,362 39,721 154,820
------- -------- ------- --------
Total.................................... $49,228 $101,865 $47,276 $198,369
======= ======== ======= ========
</TABLE>
C. Risk Elements
The following table presents information concerning nonaccrual loans,
restructured loans and loans past due 90 days or more. Commercial and mortgage
loans are placed on nonaccrual status when in the opinion of management
collection of principal or interest is doubtful and the loan is not both well
secured and in the process of collection. Installment loans are generally
charged off between 90 and 120 days past due or when deemed uncollectible in the
opinion of management. Cash payments received while a loan is classified as
nonaccrual are recorded as a reduction to principal as long as doubt exists as
to collection. A loan is characterized as restructured if for reasons related to
the borrower's financial difficulties a concession is granted that would not
otherwise be considered.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual............................... $1,928 $2,634 $5,147 $4,959 $2,875
Restructured............................. -- -- -- -- --
Past due 90 days or more................. 2,879 2,466 1,427 2,648 1,870
------ ------ ------ ------ ------
Total............................... $4,807 $5,100 $6,574 $7,607 $4,745
====== ====== ====== ====== ======
</TABLE>
The gross interest income that would have been recorded for 1998 for
nonaccrual and restructured loans outstanding as of December 31, 1998 as though
the loans had been current in accordance with their original terms was
approximately $104,000. First Western recognized interest income of $40,000
during 1998 for nonaccrual and restructured loans.
The following table presents First Western's investment in loans considered
to be impaired (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Commercial, financial and agricultural......... $ 202 $ 193 $1,003 $2,804
Real estate--mortgage.......................... 1,746 3,083 2,856 3,136
------ ------ ------ ------
Total investment in loans considered to be
impaired..................................... $1,948 $3,276 $3,859 $5,940
====== ====== ====== ======
</TABLE>
First Western has not presented impaired loan information for periods prior
to the effective date of FAS 114 "Accounting by Creditors for the Impairment of
a Loan", as amended, which was effective in 1995. All of the loans deemed to be
impaired were evaluated using the fair value of the collateral as the
measurement standard.
There were no potential problem loans outstanding at the end of any period
presented for which there was serious doubt as to the ability of the borrower to
comply with present loan repayment terms except as discussed above.
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<PAGE> 10
At December 31, 1998, First Western did not have any concentrations of
loans to borrowers engaged in similar activities exceeding 10% of total loans,
net of unearned income.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. Analysis of Loan Loss Experience
The required information is presented as part of "Management's Discussion
and Analysis of Financial Condition and Results of Operations" (Item 7).
B. Allocation of the Allowance for Possible Loan Losses:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural........... $ 682 16.3% $1,227 13.1% $1,907 10.9% $2,847 11.7%
Real
estate--construction... -- 1.0 -- 1.4 -- 1.5 -- 2.4
Real estate--mortgage.... 1,310 58.0 1,869 59.3 1,747 61.0 1,610 56.0
Installment.............. 6,706 24.7 5,117 26.2 7,248 26.6 5,197 29.9
Unallocated.............. 9,599 N/A 9,864 N/A 5,152 N/A 4,494 N/A
------- ----- ------- ----- ------- ----- ------- -----
Total.................. $18,297 100.0% $18,077 100.0% $16,054 100.0% $14,148 100.0%
======= ===== ======= ===== ======= ===== ======= =====
<CAPTION>
1994
-------------------
PERCENT
OF LOANS
IN EACH
CATEGORY
TO TOTAL
AMOUNT LOANS
<S> <C> <C>
Commercial, financial and
agricultural........... $2,855 10.2%
Real
estate--construction... -- 1.9
Real estate--mortgage.... 1,045 57.8
Installment.............. 4,020 30.1
Unallocated.............. 5,023 N/A
------- -----
Total.................. $12,943 100.0%
======= =====
</TABLE>
For additional information see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (Item 7).
V. DEPOSITS
A. Average deposits and rates paid by type:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits....................... $ 121,013 -- $ 94,514 -- $ 97,891 --
Interest-bearing deposits:
Demand and money market
deposits.................. 287,820 2.35% 223,356 2.29% 211,587 2.18%
Savings deposits............ 178,501 2.44 160,147 2.21 170,480 2.23
Time deposits............... 754,044 5.52 685,979 5.66 674,522 5.59
---------- ---- ---------- ---- ---------- ----
Total.................. $1,341,378 3.93% $1,163,996 4.08% $1,154,480 3.99%
========== ==== ========== ==== ========== ====
</TABLE>
B. Maturities of time deposits of $100,000 or more at December 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
3 months or less...................................... $51,389
Over 3 through 6 months............................... 17,971
Over 6 through 12 months.............................. 16,504
Over 12 months........................................ 13,959
-------
Total............................................ $99,823
=======
</TABLE>
8
<PAGE> 11
VI. RETURN ON EQUITY AND ASSETS
The required information is presented as part of "Selected Financial Data"
(Item 6).
VII. SHORT-TERM BORROWINGS
The required information is presented as part of "Management's Discussion
and Analysis of Financial Condition and Results of Operations" (Item 7).
ITEM 2. PROPERTIES
The principal executive offices of First Western and the administrative
offices of First Western Bank, N.A. are located at 101 East Washington Street,
New Castle, Pennsylvania. First Western also owns two other buildings in
downtown New Castle which contain data processing, loan processing and certain
other operations.
First Western also owns property in Lawrence County, Pennsylvania for
possible future use. First Western has entered into an agreement with a local
development authority to sell this property for commercial development.
First Western Bank, N.A., together with First Western, occupies
approximately 75% of its six story headquarters building. In addition to its
main office, First Western Bank, N.A. owns an attached office building which
houses First Western Bank, N.A.'s, dealer center, marketing and other
administrative departments. First Western also owns office buildings in Beaver,
Pennsylvania and Sharon, Pennsylvania which used to serve as the headquarters of
First Western's formerly separate subsidiaries. First Western Bank, N.A. has
branch offices located in these buildings and leases the remaining space,
approximately three-fourths of the total space available, to unrelated parties.
First Western also owns the office building adjacent to the office building in
Beaver and First Western Bank, N.A. occupies approximately one-fourth of this
office building with the remaining space leased to unrelated parties. In
addition to these buildings, First Western owns the following branch offices (as
of March 1, 1999):
<TABLE>
<CAPTION>
NUMBER
COUNTY STATE OF OFFICES
--------- ------------ ----------
<S> <C> <C>
Beaver Pennsylvania 9
Butler Pennsylvania 2
Erie Pennsylvania 3
Lawrence Pennsylvania 5
Mercer Pennsylvania 6
Washington Pennsylvania 1
Ashtabula Ohio 4
--
30
==
</TABLE>
9
<PAGE> 12
First Western Bank, N.A. leases the following offices (as of March 1,
1999):
<TABLE>
<CAPTION>
EXPIRATION ANNUAL LEASE RENEWAL
DATE COST OPTIONS
---- ---- -------
<S> <C> <C> <C>
LAWRENCE COUNTY, PENNSYLVANIA:
North City 2002 $ 9,690 three 5-year terms
Shenango Twp. 2000 40,901 one 5-year term
Union Twp. 1999 24,300 two 5-year terms
ALLEGHENY COUNTY, PENNSYLVANIA:
Coraopolis 2004 36,700 three 10-year terms
BUTLER COUNTY, PENNSYLVANIA:
Butler--South Main St. 2004 25,920 none
Butler Twp.--Stirling 2006 37,812 three 5-year terms
Clearview Mall 2002 27,880 one 5-year term
Cranberry Twp. 2002 17,125 two 5-year terms
Zelienople 2006 11,280 one 10-year term
BEAVER COUNTY, PENNSYLVANIA:
Chippewa 2001 31,900 one 5-year term
ERIE COUNTY, PENNSYLVANIA:
Erie--State St. 2001 41,537 seven 5-year terms
MERCER COUNTY, PENNSYLVANIA:
Farrell 2003 10,210 none
Transfer 2000 30,000 none
Grove City 1999 33,554 none
ASHTABULA COUNTY, OHIO:
Andover 2000 10,620 one 5-year term
</TABLE>
The following branches are located on leased ground and these leases have
the following expirations, costs and renewal options:
<TABLE>
<CAPTION>
EXPIRATION ANNUAL LEASE RENEWAL
DATE COST OPTIONS
---- ---- -------
<S> <C> <C> <C>
BEAVER COUNTY, PENNSYLVANIA:
Aliquippa (Hopewell) 2002 $33,516 one 5-year term
ERIE COUNTY, PENNSYLVANIA:
Peach St. 2008 43,315 one 5-year term
Pittsburgh Ave. 2004 33,876 two 10-year terms
</TABLE>
In February 1999, First Western sold its branches located in Punxsutawney,
Ebensburg, Barnesboro and Kiski Valley, Pennsylvania.
In January 1998, First Western sold its three branch offices located in
Lake County, Ohio.
During the fourth quarter of 1996, First Western closed its Butler Township
(Point Plaza) office and transferred the deposits to the Butler Township
(Stirling Village) office. The lease on the former Point Plaza office expires in
2000 and has an annual cost of $21,153.
First Western leases office space in Hermitage, Pennsylvania to house
certain of the retail administration functions. This office space has an annual
lease cost of $40,578 and the lease expires in 2004.
ITEM 3. LEGAL PROCEEDINGS
There were no material legal proceedings pending against First Western or
its Subsidiaries as of December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock, par value $5.00 per share ("Common Stock"), of First
Western is traded on the Nasdaq Stock Market under the symbol "FWBI." As of
March 1, 1999, there were 11,156,000 shares of Common Stock outstanding held by
approximately 3,000 holders of record. The following table sets forth the high
and low sales prices for the Common Stock, as reported by the Nasdaq Stock
Market, and the cash dividends declared per share on the Common Stock, for the
periods indicated. The prices and dividends set forth below have been adjusted
to reflect the three-for-two stock split effected in the form of a 50% stock
dividend paid on August 15, 1997.
<TABLE>
<CAPTION>
CASH
SALES PRICE PERIOD DIVIDENDS
--------------- END DECLARED
HIGH LOW CLOSE PER SHARE
---- --- ----- ---------
<S> <C> <C> <C> <C>
1998:
First Quarter.......................... $31.50 $25.50 $30.19 $0.15
Second Quarter......................... 32.50 29.13 29.44 0.15
Third Quarter.......................... 31.00 21.50 24.25 0.15
Fourth Quarter......................... 35.00 20.50 31.75 0.25
1997:
First Quarter.......................... $21.00 $17.33 $21.00 $0.13
Second Quarter......................... 25.17 20.00 25.17 0.13
Third Quarter.......................... 28.50 23.75 27.00 0.15
Fourth Quarter......................... 29.13 25.38 28.50 0.15
</TABLE>
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Interest income.......................... $ 139,733 $ 127,323 $ 125,483 $ 119,832 $ 99,167
Interest expense......................... 77,633 67,619 67,214 64,872 46,613
---------- ---------- ---------- ---------- ----------
Net interest income...................... 62,100 59,704 58,269 54,960 52,554
Provision for possible loan losses....... 4,000 4,836 8,288 3,982 3,650
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
possible loan losses................... 58,100 54,868 49,981 50,978 48,904
Other income............................. 17,241 17,231 15,714 11,021 8,649
Other expenses........................... 50,646 42,995 42,264 38,027 35,275
---------- ---------- ---------- ---------- ----------
Income before income taxes............... 24,695 29,104 23,431 23,972 22,278
Income taxes............................. 6,772 8,822 6,304 7,226 6,718
---------- ---------- ---------- ---------- ----------
Net income............................... $ 17,923 $ 20,282 $ 17,127 $ 16,746 $ 15,560
========== ========== ========== ========== ==========
PER SHARE DATA:
Basic earnings per share................. $ 1.61 $ 1.80 $ 1.49 $ 1.44 $ 1.34
Basic weighted average shares
outstanding............................ 11,150 11,242 11,510 11,649 11,636
Diluted earnings per share............... $ 1.58 $ 1.77 $ 1.47 $ 1.42 $ 1.32
Diluted average shares outstanding....... 11,369 11,446 11,669 11,773 11,783
Cash dividends per share................. $ 0.70 $ 0.56 $ 0.49 $ 0.46 $ 0.41
Book value per share at year-end......... $ 13.37 $ 12.47 $ 11.16 $ 10.45 $ 9.10
Tangible book value per share at
year-end............................... $ 7.95 $ 11.64 $ 10.56 $ 9.77 $ 9.00
BALANCE SHEET DATA:
(At year-end)
Assets................................... $2,227,351 $1,744,077 $1,695,778 $1,603,264 $1,454,573
Investment securities, held to
maturity............................... -- 100,151 107,092 114,015 134,356
Mortgage-backed securities, held to
maturity............................... -- 132,673 169,467 145,550 202,041
Securities available for sale............ 868,699 324,521 201,282 246,980 67,670
Loans and loans held for sale, net of
unearned income........................ 1,146,681 1,086,203 1,114,425 1,027,616 978,562
Allowance for possible loan losses....... 18,297 18,077 16,054 14,148 12,943
Deposits................................. 1,488,756 1,192,339 1,148,903 1,177,683 1,029,409
Advances from the Federal Home Loan
Bank................................... 178,400 156,000 144,000 111,670 128,121
Federal funds purchased and other
short-term borrowings.................. 61,078 81,773 33,202 3,598 34,847
Repurchase agreements and secured lines
of credit.............................. 222,620 121,756 212,070 121,658 128,461
Long-term debt........................... 23,600 4,258 5,967 8,133 10,318
Trust preferred securities............... 23,877 23,837 -- -- --
Shareholders' equity..................... 149,021 138,842 127,721 121,688 106,079
SIGNIFICANT RATIOS:
Return on average assets................. 0.90% 1.19% 1.02% 1.06% 1.12%
Return on average equity................. 12.37 15.40 14.06 14.79 15.19
Average loans as a percent of average
deposits............................... 80.13 90.24 93.54 90.32 89.64
Shareholders' equity as a percent of
year-end assets........................ 6.69 7.96 7.53 7.59 7.29
Average shareholders' equity to average
total assets........................... 7.29 7.75 7.27 7.16 7.37
Tier I capital to risk-weighted assets... 8.42 13.60 11.43 11.25 11.69
Total capital to risk-weighted assets.... 9.79 14.85 12.68 12.51 12.97
Tier I leverage ratio.................... 5.00 8.73 7.10 6.99 7.60
Allowance for possible loan losses as a
percent of net loans................... 1.60 1.66 1.44 1.38 1.32
Net charge-offs as a percent of average
loans.................................. 0.35 0.27 0.59 0.27 0.20
Dividends as a percent of net income..... 43.54 31.38 33.30 32.18 31.25
Net interest margin...................... 3.48 3.80 3.78 3.78 4.12
Effective tax rate....................... 27.42 30.31 26.90 30.14 30.15
</TABLE>
12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the financial
condition and results of operations of First Western for the years ended
December 31, 1998, 1997 and 1996. The discussion should be read in conjunction
with the consolidated financial statements and notes thereto and the summary
financial information included elsewhere in this annual report on Form 10-K. All
per share amounts have been restated for the effect of a three-for-two stock
split effected in the form of a 50% stock dividend declared on July 15, 1997 and
distributed on August 15, 1997.
Certain information in "Management's Discussion and Analysis" and other
statements contained in this report which are not historical facts may be
forward-looking statements that involve risks and uncertainties. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied by the forward-looking statements contained herein. Factors
that could cause future results to vary from current expectations include, but
are not limited to, the following: changes in economic conditions (both
generally and more specifically in the markets in which First Western operates);
changes in interest rates, deposit flows, loan demand, real estate values and
competition; changes in accounting principles, policies or guidelines and in
government legislation and regulation (which change from time to time and over
which First Western has no control); other factors affecting First Western's
operations, markets, products and services, including but not limited to, year
2000 compliance issues; and other risks detailed in this Form 10-K and in First
Western's other Securities and Exchange Commission filings.
RECENT DEVELOPMENTS
On December 13, 1998, First Western's Board of Directors approved a
definitive agreement pursuant to which First Western will be merged with and
into Sky Financial Group, Inc. ("Sky Financial"). Under the terms of the
agreement, First Western's shareholders will receive 1.211 shares of Sky
Financial common stock for each share of First Western common stock in a
transaction intended to be a tax-free exchange. The merger is intended to be
accounted for as a pooling-of-interests. In connection with this agreement,
First Western has issued an option to Sky Financial to purchase up to 19.9% of
outstanding shares of First Western, at an exercise price of $28.50 per share,
which is exercisable only upon the occurrence of certain events. The merger is
subject to shareholder and regulatory approval and is expected to be completed
during the third quarter of 1999.
OVERVIEW
First Western's net income for 1998 was $17.9 million, decreasing 11.6%
from $20.3 million for 1997, primarily due to lower gains on loan sales and a
$1.5 million restructuring charge recorded in 1998. Diluted earnings per share
decreased 10.7% from $1.77 for 1997 to $1.58 for 1998. The key performance
highlights for 1998 were:
-- First Western continued to grow its retail delivery system with the
acquisition of 16 branches from PNC Bank in June 1998. Most of these
branches were located within First Western's core banking markets.
First Western sold four of the branches which were not located within
its core market. In addition, First Western sold its three branches in
Lake County, Ohio since they were not located in an area of growth for
First Western. The result of these transactions was the growth of
First Western's deposit base and market share within First Western's
existing markets along with the elimination of some outlying branches
where First Western did not have significant market share.
-- First Western completed an internal evaluation of its operations and
staffing ("Profit Improvement Initiative") which resulted in the
elimination of approximately 70 positions during the fourth quarter of
1998. First Western recognized a $1.5 million restructuring charge
during 1998 which represents the severance benefits paid to the
affected employees.
-- In September 1998, First Western Trust Services Company was merged
into First Western Bank, N.A., eliminating the separate trust company
charter.
13
<PAGE> 16
PERFORMANCE SUMMARY
First Western's net income was $17.9 million for 1998, decreasing $2.4
million, or 11.6%, from $20.3 million for 1997, with this decrease primarily due
to a $3.5 million decrease in net gains on loan sales along with the $1.5
million restructuring charge. During 1997, First Western completed the sale of
its credit card portfolio which resulted in most of the $5.9 million of gains on
loan sales recorded during 1997. The gains on loan sales recognized during 1998
consisted primarily of gains on the sales of mortgage loans. The acquisition of
the 16 PNC Bank branches did not have a significant impact on First Western's
net income for this first partial year, however, these branches did have an
impact on the components of the income statement resulting in increases in net
interest income and service charges on deposit accounts along with increases in
operating expenses and the amortization of intangible assets expense. The
profitability of the branches acquired from PNC Bank is dependent upon First
Western combining branches that are located close to existing First Western
branches, most of which were combined during the fourth quarter of 1998, along
with the redeployment of the funds acquired with these branches from securities
into higher yielding loans. Diluted earnings per share were $1.58 for 1998,
decreasing 10.7% from $1.77 for 1997, based on diluted weighted average shares
outstanding of 11,369,000 and 11,446,000 in 1998 and 1997, respectively. The
decrease in weighted average shares outstanding from 1997 to 1998 was due to the
purchase of treasury shares.
First Western's net income was $20.3 million for 1997, increasing $3.2
million, or 18.4%, from $17.1 million for 1996, with this increase primarily due
to a $4.0 million decrease in Federal Deposit Insurance Corporation ("FDIC")
insurance expense and a $3.5 million decrease in the provision for loan losses.
First Western also realized net gains of $608,000 during 1997 from the sale of
two small branch offices and a gain of $267,000 from the sale of First Western's
credit card merchant transaction processing business. Partially offsetting these
increases in income was the $2.3 million minority interest expense on the trust
preferred securities that were issued in February 1997. Diluted earnings per
share were $1.77 for 1997, increasing 20.4% from $1.47 for 1996, based on
diluted average shares outstanding of 11,446,000 and 11,669,000 in 1997 and
1996, respectively.
The following table presents First Western's net income, earnings per
share, return on average assets and return on average equity for the last three
years:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (in thousands)..................... $17,923 $20,282 $17,127
======= ======= =======
Diluted earnings per share.................... $ 1.58 $ 1.77 $ 1.47
======= ======= =======
Return on average assets...................... 0.90% 1.19% 1.02%
======= ======= =======
Return on average equity...................... 12.37% 15.40% 14.06%
======= ======= =======
</TABLE>
First Western's return on average assets decreased from 1.19% for 1997 to
0.90% for 1998 due to the decrease in net gains from loan sales, the $1.5
million restructuring charge and also due to the acquisition of the PNC Bank
branches which added approximately $200 million to First Western's average
assets without adding significantly to First Western's net income in this first
partial year of operation. First Western's return on average assets increased
from 1.02% in 1996 to 1.19% in 1997, primarily due to the decrease in the
provision for loan losses and a decrease in FDIC insurance expense.
First Western's return on average equity decreased from 15.40% in 1997 to
12.37% in 1998 due to a decrease in net income combined with a $13.2 million
increase in average equity. The significant increase in assets, especially
intangible assets, resulting from the acquisition of the PNC Bank branches
necessitated that First Western increase its capital which resulted in the
curtailment of a share repurchase program. First Western's return on average
equity increased from 14.06% in 1996 to 15.40% in 1997 due to the 18.4% increase
in net income.
NET INTEREST INCOME
Net interest income represents the amount by which interest income on
earning assets, including securities and loans, exceeds interest paid on
interest-bearing liabilities, including deposits and other borrowed
14
<PAGE> 17
funds. Net interest income is the principal source of a financial institution's
earnings. Interest rate fluctuations as well as changes in the amounts and types
of earning assets and interest-bearing liabilities combine to affect net
interest income. Tax-exempt securities and loans carry pre-tax yields lower than
comparable taxable assets. Therefore, it is more meaningful to analyze net
interest income on a tax-equivalent basis. The tax-equivalent adjustment is
based on the federal corporate income tax rate of 35%. The following table shows
the increases over the last three years in actual and tax-equivalent net
interest income:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net interest income, actual................... $62,100 $59,704 $58,269
Tax-equivalent adjustment..................... 2,544 2,616 2,668
------- ------- -------
Net tax-equivalent interest income............ $64,644 $62,320 $60,937
======= ======= =======
Increase in actual net interest income........ $ 2,396 $ 1,435 $ 3,309
======= ======= =======
Percentage increase........................... 4.0% 2.5% 6.0%
======= ======= =======
Increase in tax-equivalent interest income.... $ 2,324 $ 1,383 $ 3,439
======= ======= =======
Percentage increase........................... 3.7% 2.3% 6.0%
======= ======= =======
</TABLE>
First Western's tax-equivalent net interest income increased $2.3 million
or 3.7% from 1997 to 1998 due to a $219 million or 13.4% increase in average
earning assets, primarily as a result of the acquisition of the PNC Bank
branches which was partially offset by a decline in First Western's net interest
margin from 3.80% in 1997 to 3.48% in 1998. The growth in average earning assets
from 1997 to 1998 was due to a $269 million or 84.8% increase in average
securities available for sale along with a $24.5 million or 2.3% increase in
average loans. The increase in average securities available for sale and
investment securities was primarily due to First Western investing the excess
funds provided by the acquisition of the PNC Bank branches. This increase in
average assets was funded by a $151 million increase in interest-bearing
deposits and a $91 million increase in borrowed funds.
First Western's tax-equivalent net interest income increased $1.4 million,
or 2.3%, from 1996 to 1997 due to a $27.8 million, or 1.7%, increase in average
earning assets, with the net interest margin increasing from 3.78% in 1996 to
3.80% in 1997. The growth in average earning assets from 1996 to 1997 was due to
a $69.8 million, or 28.3%, increase in average securities available for sale,
partially offset by a $29.5 million, or 2.7%,decrease in average loans and a
$26.5 million, or 9.3%, decrease in average investment securities. Average loans
decreased from 1996 to 1997 due to First Western selling its $48 million credit
card loan portfolio during the fourth quarter of 1996 and the first quarter of
1997, and also due to the first-quarter 1997 sale of approximately $100 million
of residential mortgage loans. The increase in average earning assets was funded
by a $25 million trust preferred securities offering in February 1997, along
with a $9.9 million increase in average equity and a $9.5 million increase in
average deposits. First Western's average borrowed funds decreased $26.6
million, or 7.1%, during 1997 compared with 1996 due to the funds provided by
the loan sales and the increase in average deposits and other funding sources.
The net interest margin or net interest income expressed as a percentage of
average earning assets was 3.48% in 1998 compared with 3.80% in 1997. The
decrease in First Western's net interest margin was due to a 27 basis point
decrease in First Western's yield on earning assets along with a decrease in net
funds provided by noninterest bearing sources. These decreases in the net
interest margin were partially offset by a nine basis point decrease in First
Western's cost of funds. The decline in the yield on earning assets was due to a
decrease in loan yields caused by falling interest rates throughout 1998 along
with an increase in the portion of earning assets invested in securities which
have lower yields than loans. During 1998, securities comprised 42% of First
Western's average earning assets compared with 35% for 1997 with this increase
due to First Western investing the excess funds provided by the PNC Bank
branches. The increase in intangible assets resulting from the premium paid for
the PNC Bank branches contributed to a net decrease in First Western's funding
from noninterest-bearing sources. These "free funds" decreased from 14% of First
Western's average earning assets for 1997 to 11% for 1998 which also contributed
to the decline in First Western's net interest margin from 1997 to 1998. The
purchase of bank-owned life insurance ("BOLI") also reduced First Western's net
15
<PAGE> 18
interest margin since the earnings on BOLI are included in other income while
the cost of funding BOLI is included in interest expense.
The net interest margin was 3.80% in 1997, compared with 3.78% in 1996. The
improvement in First Western's net interest margin was due to an increase in net
funds provided by noninterest-bearing sources, primarily as a result of the
issuance of the trust preferred securities. The payments made to the holders of
the trust preferred securities are included in other expense as minority
interest expense. First Western's yield on earning assets decreased three basis
points primarily due to the sale of the credit card portfolio, which had a
higher yield than other loan types. First Western's cost of funds increased
seven basis points primarily due to an eight basis point increase in the cost of
interest-bearing deposits, with this increase partially offset by a decrease in
the portion of funding provided by wholesale borrowed funds, which have a higher
cost than deposits. See "Market Risk" for a further discussion of the impact of
interest rate changes on First Western's financial performance.
To provide a more in-depth analysis of net interest income, the following
average balance sheets and net interest income analysis detail the contribution
of earning assets to overall net interest income and the impact of cost of
funds. The rate/volume analysis shows the portions of the net change in interest
income due to changes in volume or rate. Average yields are calculated using
tax-equivalent interest income. The changes in interest due to both rate and
volume in the rate/volume analysis table have been allocated to changes due to
rate and volume in proportion to the absolute amounts of changes in each. Since
changes in interest income and expense are independently calculated, the totals
for the volume and rate columns are not the sum of the individual lines.
16
<PAGE> 19
AVERAGE BALANCE SHEETS/NET INTEREST INCOME ANALYSIS (1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits with
other banks.................. $ 2,006 $ 95 4.74% $ 5,535 $ 260 4.70%
---------- -------- ---- ---------- -------- ----
Federal funds sold............. 321 18 5.43 10,362 554 5.35
---------- -------- ---- ---------- -------- ----
Securities available for
sale......................... 585,857 38,346 6.55 316,955 21,946 6.92
---------- -------- ---- ---------- -------- ----
Investment securities, held to
maturity..................... 196,102 12,865 6.56 256,688 16,969 6.61
---------- -------- ---- ---------- -------- ----
Loans(net)(2).................. 1,074,905 90,953 8.46 1,050,382 90,210 8.59
---------- -------- ---- ---------- -------- ----
Total interest-earning
assets..................... 1,859,191 142,277 7.65 1,639,922 129,939 7.92
---------- -------- ---- ---------- -------- ----
Noninterest-earning assets:
Cash and due from banks........ 36,538 30,139
Premises and equipment......... 22,315 20,034
Intangible assets.............. 35,584 7,340
Other assets................... 52,556 19,948
Allowance for loan losses...... (18,407) (17,257)
---------- ----------
Total assets................. $1,987,777 $1,700,126
========== ==========
Interest-bearing sources:
Deposits:
Interest-bearing demand
deposits................... $ 48,402 1,120 2.31 $ 39,954 890 2.23
Savings deposits............. 178,501 4,361 2.44 160,147 3,538 2.21
Money market deposits........ 239,418 5,637 2.35 183,402 4,224 2.30
Time deposits................ 754,044 41,627 5.52 685,979 38,812 5.66
---------- -------- ---- ---------- -------- ----
Total deposits............... 1,220,365 52,745 4.32 1,069,482 47,464 4.44
---------- -------- ---- ---------- -------- ----
Federal funds purchased and
other short-term
borrowings................... 87,194 4,927 5.65 53,226 3,136 5.89
---------- -------- ---- ---------- -------- ----
Repurchase agreements and
secured lines of credit...... 179,505 10,270 5.72 141,569 8,110 5.73
---------- -------- ---- ---------- -------- ----
Advances from the Federal Home
Loan Bank.................... 157,657 8,744 5.55 147,729 8,526 5.77
---------- -------- ---- ---------- -------- ----
Long-term debt................. 14,022 947 6.75 5,230 383 7.32
---------- -------- ---- ---------- -------- ----
Total interest-bearing
sources.................... 1,658,743 77,633 4.68 1,417,236 67,619 4.77
---------- -------- ---- ---------- -------- ----
Noninterest-bearing sources:
Demand deposits................ 121,013 94,514
Other liabilities.............. 39,244 35,445
Trust preferred securities..... 23,855 21,187
Shareholders' equity........... 144,922 131,744
---------- ----------
Total liabilities and
shareholders' equity....... $1,987,777 $1,700,126
========== ==========
Net interest rate
spread(3).................... 2.97% 3.15%
---- ----
Net interest income............ $ 64,644 $ 62,320
======== ========
Net yield on earning assets
(Net interest margin)(4)..... 3.48% 3.80%
==== ====
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE
------- -------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits with
other banks.................. $ 1,348 $ 61 4.53%
---------- -------- ----
Federal funds sold............. 595 34 5.71
---------- -------- ----
Securities available for
sale......................... 247,116 16,868 6.83
---------- -------- ----
Investment securities, held to
maturity..................... 283,141 18,435 6.51
---------- -------- ----
Loans(net)(2).................. 1,079,881 92,753 8.59
---------- -------- ----
Total interest-earning
assets..................... 1,612,081 128,151 7.95
---------- -------- ----
Noninterest-earning assets:
Cash and due from banks........ 33,616
Premises and equipment......... 18,865
Intangible assets.............. 7,369
Other assets................... 17,949
Allowance for loan losses...... (15,148)
----------
Total assets................. $1,674,732
==========
Interest-bearing sources:
Deposits:
Interest-bearing demand
deposits................... $ 97,088 1,362 1.40
Savings deposits............. 170,480 3,801 2.23
Money market deposits........ 114,499 3,255 2.84
Time deposits................ 674,522 37,693 5.59
---------- -------- ----
Total deposits............... 1,056,589 46,111 4.36
---------- -------- ----
Federal funds purchased and
other short-term
borrowings................... 55,731 3,096 5.56
---------- -------- ----
Repurchase agreements and
secured lines of credit...... 194,006 10,898 5.62
---------- -------- ----
Advances from the Federal Home
Loan Bank.................... 117,721 6,620 5.62
---------- -------- ----
Long-term debt................. 6,904 489 7.08
---------- -------- ----
Total interest-bearing
sources.................... 1,430,951 67,214 4.70
---------- -------- ----
Noninterest-bearing sources:
Demand deposits................ 97,891
Other liabilities.............. 24,089
Trust preferred securities..... --
Shareholders' equity........... 121,801
----------
Total liabilities and
shareholders' equity....... $1,674,732
==========
Net interest rate
spread(3).................... 3.25%
----
Net interest income............ $ 60,937
========
Net yield on earning assets
(Net interest margin)(4)..... 3.78%
====
</TABLE>
- ---------------
(1) In order to make pre-tax income and resultant yields comparable to
taxable-equivalent loans and investments, a tax-equivalent adjustment is
made equally to interest income and income tax expense with no effect on
after-tax income. The tax-equivalent adjustment has been computed using a
federal income tax rate of 35% and has increased interest income by $2.5
million, $2.6 million and $2.7 million for the years ended December 31,
1998, 1997 and 1996, respectively.
(2) Loan fees net of related origination costs are accreted over the average
lives of the related loans and are considered adjustments to interest
income. These net fees (costs) aggregated $(9,000), $48,000 and $421,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. For the
purpose of calculating loan yields, average loan balances include nonaccrual
loans with no related interest income.
(3) Represents the difference between the yield on earning assets and the cost
of funds.
(4) Represents tax-equivalent net interest income divided by average
interest-earning assets.
17
<PAGE> 20
RATE/VOLUME ANALYSIS (1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
CHANGE FROM 1997 IN CHANGE FROM 1996 IN
INTEREST INCOME INTEREST INCOME
OR EXPENSE DUE TO OR EXPENSE DUE TO
--------------------------- --------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits with other
banks.............................. $ (167) $ 2 $ (165) $ 197 $ 2 $ 199
------- ------- ------- ------- ------ -------
Federal funds sold.................... (562) 26 (536) 522 (2) 520
------- ------- ------- ------- ------ -------
Securities available for sale......... 17,662 (1,262) 16,400 4,833 245 5,078
------- ------- ------- ------- ------ -------
Investment securities, held to
maturity........................... (3,976) (128) (4,104) (1,745) 279 (1,466)
------- ------- ------- ------- ------ -------
Loans (net) (2)....................... 2,087 (1,344) 743 (2,533) (10) (2,543)
------- ------- ------- ------- ------ -------
Total interest income.............. 16,901 (4,563) 12,338 2,207 (419) 1,788
------- ------- ------- ------- ------ -------
Interest-bearing sources:
Deposits:
Interest-bearing demand deposits... 194 36 230 (1,038) 566 (472)
Savings deposits................... 427 396 823 (228) (35) (263)
Money market deposits.............. 1,317 96 1,413 1,676 (707) 969
Time deposits...................... 3,776 (961) 2,815 645 474 1,119
------- ------- ------- ------- ------ -------
Total deposits..................... 6,548 (1,267) 5,281 567 786 1,353
------- ------- ------- ------- ------ -------
Federal funds purchased and other
short-term borrowings................. 1,924 (133) 1,791 (143) 183 40
------- ------- ------- ------- ------ -------
Repurchase agreements and secured lines
of credit............................. 2,170 (10) 2,160 (3,000) 212 (2,788)
------- ------- ------- ------- ------ -------
Advances from the Federal Home Loan
Bank.................................. 559 (341) 218 1,728 178 1,906
------- ------- ------- ------- ------ -------
Long-term debt.......................... 596 (32) 564 (123) 17 (106)
------- ------- ------- ------- ------ -------
Total interest expense............. 11,325 (1,311) 10,014 (648) 1,053 405
------- ------- ------- ------- ------ -------
Net interest income................ $ 7,900 $(5,576) $ 2,324 $ 1,057 $ 326 $ 1,383
======= ======= ======= ======= ====== =======
</TABLE>
- ---------------
(1) In order to make pre-tax income and resultant yields comparable to
tax-equivalent loans and investments, a tax-equivalent adjustment is made
equally to interest income and to income tax expense with no effect on
after-tax income. The tax-equivalent adjustment has been computed using a
federal income tax rate of 35% and has increased interest income by $2.5
million, $2.6 million and $2.7 million for the years ended December 31,
1998, 1997 and 1996, respectively.
(2) Loan fees net of related origination costs are accreted over the average
lives of the related loans and are considered adjustments to interest
income. These net fees (costs) aggregated $(9,000), $48,000 and $421,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. For the
purpose of calculating loan yields, average loan balances include nonaccrual
loans with no related interest income.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $4.0 million in 1998, compared with $4.8
million in 1997 and $8.3 million in 1996. The $3.5 million decrease in the
provision for loan losses from 1996 to 1997 reflects a $3.6 million decrease in
net charge-offs and an improvement in First Western's nonperforming loans during
1997. Net charge-offs in 1998 were $3.8 million, or 0.35%, of average loans,
compared with $2.8 million, or 0.27%, in 1997 and $6.4 million, or 0.59%, in
1996. Most of the loans charged off by First Western for the past three years
were loans that were originated through automobile dealers. Management
attributes the high
18
<PAGE> 21
indirect automobile loan charge-offs during 1996 to an aggressive expansion of
First Western's automobile loan program into new market areas. First Western
responded to the increase in consumer loan charge-offs by investing in
technology to improve both the underwriting and collection operations.
Additionally, First Western also introduced credit scoring for loan
applications, tiered pricing based on risk and collateral, and increased the
number of employees handling collections and recoveries. Installment loan net
charge-offs also increased during 1996 due to an $880,000, or 115.7%, increase
in credit card loan charge-offs. Most of the increase in credit card charge-offs
was due to First Western charging-off any past-due credit card accounts that
were not sold in the December 1996 transaction.
First Western's net charge-offs by loan type and changes in the allowance
for loan losses for each of the past five years were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of
period..................................... $18,077 $16,054 $14,148 $12,943 $11,102
Charge-offs:
Commercial, financial and agricultural
loans................................... 44 4 72 44 123
Real estate construction loans............. -- -- -- -- --
Real estate mortgage loans................. 187 141 26 18 206
Installment loans.......................... 4,377 3,776 6,958 3,005 2,149
------- ------- ------- ------- -------
Total charge-offs....................... 4,608 3,921 7,056 3,067 2,478
------- ------- ------- ------- -------
Recoveries:
Commercial, financial and agricultural
loans................................... 23 38 73 88 390
Real estate construction loans............. -- -- -- -- --
Real estate mortgage loans................. 141 172 69 30 125
Installment loans.......................... 664 898 532 172 154
------- ------- ------- ------- -------
Total recoveries........................ 828 1,108 674 290 669
------- ------- ------- ------- -------
Net charge-offs.............................. 3,780 2,813 6,382 2,777 1,809
------- ------- ------- ------- -------
Provision for loan losses.................... 4,000 4,836 8,288 3,982 3,650
------- ------- ------- ------- -------
Allowance for loan losses at end of period... $18,297 $18,077 $16,054 $14,148 $12,943
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans.... 0.35% 0.27% 0.59% 0.27% 0.20%
======= ======= ======= ======= =======
</TABLE>
The provision for loan losses less net charge-offs added $220,000 to the
allowance for loan losses, which increased to $18.3 million at year-end 1998.
See "Financial Condition -- Loan Quality" for further discussion.
OTHER INCOME
First Western's other income was $17.2 million in both 1997 and 1998.
During 1998, First Western experienced increases in service charges on deposit
accounts, income from bank-owned life insurance, trust fees and gains on branch
sales with these increases offset by decreases in gains on loan sales and loan
servicing income. Other income increased $1.5 million, or 9.7% from 1996 to
1997, due to increased gains on loan sales and gains from the sales of branches
and the sale of First Western's credit card merchant transaction processing
program, with these increases partially offset by a $1.5 million decrease in
credit card program fees and a $708,000 decrease in net securities gains.
Trust fees increased $514,000 or 22.3% from 1997 to 1998 primarily due to
an increase in trust fees on personal trust accounts and employee benefit
accounts. Trust fees increased $291,000, or 14.5%, from $2.0 million in 1996 to
$2.3 million in 1997 due to a $131,000 increase in estate fees, with the
remaining increase resulting from an increase in trust assets managed by First
Western.
Service charges on deposit accounts increased $1.1 million or 26.2% from
$4.2 million for 1997 to $5.3 million for 1998. The branches acquired from PNC
Bank in June 1998 contributed $620,000 of this increase with the remaining
increase due to First Western increasing its service charges beginning in March
1998. Service charges on deposit accounts increased $484,000, or 13.1%, in 1997
compared with 1996
19
<PAGE> 22
due to a $427,000 increase in service charges on interest-bearing demand
accounts and an increase in insufficient funds and returned check service
charges. First Western had been promoting its "Active Lifestyles" account, which
resulted in this increase in service charges on interest-bearing demand
accounts.
First Western realized gains on loan sales of $2.3 million during 1998
resulting from the sale of residential mortgage loans in a bulk sale during the
first quarter of 1998 along with the sale of First Western's monthly production
of conforming residential mortgage loans. First Western realized net gains on
loan sales of $5.9 million during 1997 primarily as a result of the sale of the
remaining portion of the credit card portfolio during the first quarter of 1997.
First Western's net gains on loan sales were $4.6 million in 1996, primarily due
to the gain realized on the partial sale of the credit card portfolio, partially
offset by a $2.9 million loss on the sale of $100 million of residential
mortgage loans, with this mortgage loan sale settling during the first quarter
of 1997. During the fourth quarter of 1996, First Western sold approximately
two-thirds of its credit card portfolio with a principal balance of $30.4
million, realizing a gain of approximately $7.2 million, net of certain costs
incurred by First Western in connection with the credit card sale.
During the fourth quarter of 1997, First Western purchased $25 million of
bank-owned life insurance. The increase in the cash surrender value of BOLI,
$1.4 million in 1998, is included in other income.
Other operating income increased $830,000 from 1997 to 1998 due to a
$463,000 increase in gains recognized on the sale of branch offices, a $393,000
increase in fees earned on check card transactions and automated teller machine
transactions, a $207,000 increase in insurance commissions and a $165,000
increase in fees earned on the sales of mutual funds and annuities with these
increases offset by a $622,000 decrease in loan servicing income due to the
completion of the sale of the credit card portfolio in 1997 and also due to a
$199,000 decrease in credit card program fees. Other operating income increased
$154,000 from 1996 to 1997, primarily due to gains of $608,000 realized on the
sale of two branch offices, a $408,000 increase in loan servicing income as a
result of First Western servicing the credit card loans and mortgage loans that
were sold until the servicing could be transferred to the purchasers, and a
$267,000 gain realized on the sale of the credit card merchant transaction
processing program with these increases partially offset by a $1.5 million
decrease in credit card processing fees.
OTHER EXPENSES
Other Expenses increased $7.6 million or 17.8% from $43.0 million for 1997
to $50.6 million for 1998 with the expenses of the branches acquired from PNC
Bank accounting for $4.5 million of this increase and the restructuring charge
accounting for $1.5 million. Other expenses increased $731,000, or 1.7%, from
$42.3 million in 1996 to $43.0 million in 1997 due to a $2.3 million increase in
minority interest expense, along with increases in salaries and employee
benefits expense, higher marketing expense and increased professional fees, with
these increases partially offset by a $4.0 million decrease in FDIC insurance
expense.
First Western's salaries and employee benefits expense increased a combined
$2.2 million or 11.1% from 1997 to 1998 with the PNC branches accounting for
$955,000 of the increase. The remaining increase of $1.2 million was due to
normal salary and wage increases and increased medical insurance expense. During
the fourth quarter of 1998, First Western eliminated approximately 70 positions
as part of its Profit Improvement Initiative. The objective of this program was
to reduce operating expenses by $3.5 million to $4.5 million annually with the
largest part of the cost savings coming from decreased salary and benefits
expense. The cost of the severance benefits for the terminated employees of $1.5
million was recorded during the fourth quarter of 1998 as a restructuring
charge. First Western's salaries and employee benefits expense increased a
combined $1.2 million, or 6.8%, from $18.5 million in 1996 to $19.7 million in
1997 primarily due to normal salary and wage increases along with increased
personnel. First Western had 618 full-time equivalent employees at December 31,
1998, compared with 635 and 625 at December 31, 1997 and 1996, respectively.
Expenses related to operating First Western's branches and other
facilities, including all equipment, occupancy and depreciation charges,
increased $923,000 from 1997 to 1998 with the branches acquired from PNC Bank
accounting for $517,000 of this increase. The remaining increase in occupancy
and equipment expense from 1997 to 1998 was due to the full-year operation of
the facilities that were opened during the second half of 1997. First Western's
occupancy and equipment expense increased $391,000 from $5.1 million
20
<PAGE> 23
in 1996 to $5.5 million in 1997, primarily as a result of First Western opening
two additional supermarket branches and a new loan processing center during
1997.
First Western's amortization of intangible assets expense increased from
$1.1 million in 1997 to $3.3 million in 1998 due to the premium paid for the
branches that were acquired from PNC Bank along with the full year impact of the
acquisition of the Chicora, Pennsylvania branch in 1997. First Western recorded
an intangible asset of $59 million in June 1998 related to the branches acquired
from PNC Bank with this intangible asset being amortized over a 12 year period
on a straight-line basis. First Western's amortization of intangible assets
expense should increase in 1999 due to the full year impact of the branches
acquired from PNC Bank with this increase partially offset by a reduction in
intangible assets in the first quarter of 1999 as a result of the sale of four
of the branches that were acquired from PNC Bank.
First Western's supplies expense increased $470,000 from $1.6 million for
1997 to $2.1 million in 1998 due to the supplies necessary to convert the PNC
Bank branches to First Western's data processing systems. The expenses related
to the PNC Bank branches consisted of the costs to produce and mail brochures to
the former PNC Bank customers to explain First Western's products and services,
the cost to replace the former PNC Bank customers' checks and various expenses
to add these branches to the First Western data processing system.
First Western's marketing expense decreased $664,000 from 1997 to 1998 due
to First Western sharply curtailing its marketing expenditures during the second
half of 1998. First Western's marketing expenditures also decreased from 1997 to
1998 due to First Western beginning a corporate image campaign during the fourth
quarter of 1997 with most of the production costs to develop the campaign being
incurred during the fourth quarter of 1997. Marketing expense increased
$820,000, or 67.9%, from $1.2 million in 1996 to $2.0 million in 1997, primarily
due to First Western beginning the corporate image campaign.
First Western's professional fees increased $529,000 from 1996 to 1997 due
to increased legal and consulting expense related to the merger of First Western
Bank, F.S.B. into First Western Bank, N.A., along with the start-up of First
Western's insurance business.
First Western's data processing services expense increased $307,000 or
19.9% from 1997 to 1998 primarily due to an increase in First Western's cost for
processing automated teller machine transactions. First Western's outside data
processing expense decreased $288,000, or 15.7%, from $1.8 million in 1996 to
$1.5 million in 1997 primarily due to the sale of the credit card portfolio in
late 1996 and early 1997. First Western used a third-party servicer for
processing credit card transactions.
In February 1997, First Western completed the private placement of $25
million of trust preferred capital securities issued by First Western's Delaware
trust subsidiary, First Western Capital Trust I. The distributions payable on
the securities, which totaled $2.5 million for 1998 and $2.3 million for 1997,
have been recorded as minority interest expense.
First Western's federal deposit insurance expense decreased $4.0 million,
or 91.5%, from $4.4 million in 1996 to $376,000 in 1997 due to a $3.3 million
special assessment that was paid during 1996 and also due to a reduction in
insurance rates in late 1996. The one-time special assessment of thrift deposits
was done in order to recapitalize the Savings Association Fund of the Federal
Deposit Insurance Corporation.
Other operating expenses increased $796,000 or 11.5% from 1997 to 1998
primarily due to a $450,000 increase in Pennsylvania bank shares tax expense.
This increase in Pennsylvania bank shares tax expense was a result of the merger
of First Western's former thrift subsidiary into the Banking Subsidiary in
September 1997. As a thrift, First Western Bank, F.S.B. formerly paid state
income taxes instead of shares tax. Other operating expenses decreased $302,000,
or 4.2%, from $7.2 million in 1996 to $6.9 million in 1997 due to a $651,000
decrease in credit card program expenses, with this decrease partially offset by
a $139,000 increase in fees paid to a third-party provider of services in
connection with First Western's "Active Lifestyles" account and a $111,000
increase in software maintenance expense.
21
<PAGE> 24
INCOME TAXES
First Western's income tax expense was $6.8 million in 1998, decreasing
$2.0 million, or 23.2%, from $8.8 million in 1997. The decrease in First
Western's income tax expense was due to a decrease in pre-tax earnings along
with the elimination of the state income taxes paid by First Western's former
thrift subsidiary. First Western's income tax expense increased $2.5 million or
39.9% from 1996 to 1997 due to a 24.2% increase in pre-tax earnings and also due
to a reduction in First Western's income tax expense in 1996 as a result of a
settlement reached with the Internal Revenue Service during 1996 concerning an
audit of prior years' tax returns. Excluding the impact of the settlement
reached with the Internal Revenue Service during 1996, First Western's effective
tax rate was 27.4% in 1998, compared with 30.3% in 1997 and 29.0% in 1996. The
decrease in First Western's effective tax rate from 1997 to 1998 was due to
First Western having a decreased level of fully-taxable income as compared with
pre-tax earnings as a result of the decrease in gains on loan sales along with
the increase in tax-exempt income as a result of the BOLI purchased in late
1997, and also due to the elimination of the state income tax on the former
thrift subsidiary.
YEAR 2000 CONSIDERATIONS
First Western has reviewed its mission critical systems to determine its
readiness for the year 2000. The mission critical systems identified by First
Western include: the mainframe computer hardware and operating system, the item
capture system, the core banking software applications and the trust department
accounting system.
First Western performs its own data processing for most bank operations
using an IBM AS/400 computer and the OS/400 operating system. First Western has
completed testing on its AS/400 computer and OS/400 operating system and has
determined that they will process year 2000 dates correctly.
First Western processes its own checks for collection from other financial
institutions ("item capture"). The hardware and software used to perform First
Western's item capture have been tested for year 2000 compliance and certain
minor modifications were required. These modifications were made and tested
during the fourth quarter of 1998 with no additional modifications necessary.
First Western uses the Fiserve CBS software for its core banking systems
such as loan and deposit processing. First Western's core banking system
software provider has provided First Western with year 2000 compliant software.
Installation of this software was completed during the fourth quarter of 1998.
First Western has received reports from other financial institutions that use
this software that it has passed their year 2000 testing. First Western tested
its version of this software during the fourth quarter of 1998 and has
determined that it will process year 2000 dates correctly.
First Western's trust department uses an outside vendor for data
processing. The trust department will be changing data processing vendors during
the second quarter of 1999, therefore, First Western has not tested the year
2000 readiness of its current trust data processing provider. The trust data
processing provider that First Western will be changing to in 1999 has certified
its year 2000 compliance.
Although First Western believes that its mission critical systems will be
year 2000 compliant, any undetected flaws could result in a business
interruption that could have a material adverse effect on First Western's
financial condition or results of operations.
First Western has prepared a remediation contingency plan to be followed if
any of its mission critical systems cannot be updated to achieve year 2000
compliance. As of December 31, 1998, progress in correcting the mission critical
systems was sufficient that none of the actions in the contingency plan have
been triggered. First Western is in the process of preparing a year 2000
business recovery plan to address potential failures of automated information
systems; intermittent and isolated failures in public infrastructure (electric,
telephone, water, gas, etc.) and liquidity concerns due to public demand for
cash.
First Western is currently in the process of testing its non-mission
critical systems for year 2000 compliance. Any systems that are found to be
non-compliant will be replaced.
First Western has reviewed its non-information technology ("non-IT")
systems and has not found any significant year 2000 problems. Most of the non-IT
year 2000 problems discovered by First Western consisted
22
<PAGE> 25
of non-compliant security systems and automated teller machines. This
non-compliant equipment has either already been replaced or will be replaced
before the year 2000. The estimated cost of replacing the non-compliant
equipment is less than $100,000.
First Western has contacted all of its significant commercial loan
customers to alert them to the importance of being prepared for year 2000 issues
and to determine the state of their year 2000 readiness. If a loan customer
suffers a business interruption as a result of a year 2000 problem it could
result in a loss for First Western which could be material. First Western is not
aware of any of its loan customers having a significant year 2000 compliance
problem. However, there is no assurance that these customers will not have year
2000 related business interruptions that may have a material adverse effect on
First Western's financial condition or results of operations.
First Western has contacted all of its material vendors and correspondent
banks to determine their year 2000 readiness. First Western has not been
notified by any third party vendor or correspondent bank of a year 2000
compliance problem. However, there is still a risk that a provider of services
to First Western, such as telecommunications or electricity, may suffer a
business interruption which, may in turn, result in a business interruption for
First Western that may have a material adverse effect on First Western's
financial condition or results of operations.
As of December 31, 1998, First Western has incurred cumulative year 2000
compliance costs of approximately $391,000, of which $16,000 was for outside
consultants to test First Western's mission critical systems and the remaining
$375,000 represented the salaries and benefit costs of First Western's employees
working on year 2000 issues. For the past 12 months, approximately one-half of
First Western's computer programming and systems personnel have been working on
year 2000 testing and remediation. First Western estimates that the remaining
year 2000 testing will result in additional expenditures of approximately
$383,000 over the next 12 months with this amount consisting primarily of the
salaries and benefits of First Western's employees. Since the amount expended by
First Western for year 2000 compliance consisted primarily of the salaries and
benefits of existing First Western employees, First Western has not experienced
a significant increase in other operating expenses as a result of year 2000
remediation efforts. Most of the corrections to First Western's year 2000
problems were incorporated into regularly scheduled software and hardware
upgrades, therefore there were not significant expenditures above First
Western's regular software and hardware costs. First Western did not postpone
any specific projects as a result of dedicating certain employees to year 2000
concerns. However, it is impossible to measure what these employees could have
accomplished if they had not been dedicated to year 2000 concerns.
IMPACT OF INFLATION
The effects of inflation on the local economy and on First Western's
operating results have been relatively modest for the past several years. Since
substantially all of First Western's assets and liabilities are monetary in
nature, such as cash, investments, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. First Western tries
to control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities. See "Market Risk"
for further discussion.
FINANCIAL CONDITION
First Western's total assets increased $483.3 million, or 27.7%, from
$1.744 billion at December 31, 1997 to $2.227 billion at December 31, 1998, with
most of this increase due to an increase in securities available for sale funded
by increased deposits. Average total assets increased $287.7 million, or 16.9%,
from $1.700 billion for 1997 to $1.988 billion for 1998, with most of this
increase occurring in the portfolio of securities available for sale.
LOAN PORTFOLIO
Loans and loans held for sale increased $60.5 million during 1998 with this
increase in loans primarily due to an increase in commercial loans along with
the acquisition of $74 million of consumer and commercial loans from PNC Bank
with these increases partially offset by the sale of approximately $92 million
of
23
<PAGE> 26
residential mortgage loans during the first quarter of 1998. The loans acquired
from PNC Bank consisted of $54 million of consumer installment loans, $10
million of home equity loans, $6 million of commercial mortgage loans and $4
million of commercial loans. During 1998, First Western emphasized its lending
program for commercial and industrial customers resulting in commercial time and
demand loans increasing $36.2 million or 34.3% and automobile floorplan loans
growing $11.0 million or 35.4%. First Western decreased its residential mortgage
loan portfolio during 1998 by selling conforming residential mortgage loans when
they are originated and also by bulk residential mortgage loan sales. Partially
offsetting the sales of residential mortgage loans has been the growth of
consumer second mortgage loans which increased by $50.6 million during 1998. In
the table below, consumer second mortgage loans are classified as one-to-four
family residential mortgage loans.
During the fourth quarter of 1998, First Western sold most of its mortgage
servicing rights at a small loss. Prior to the sale, First Western serviced
approximately $214 million of residential mortgage loans for other investors.
First Western decided to sell its servicing portfolio because First Western's
management believed that selling residential mortgage loans with their servicing
will be more profitable than selling the loans and retaining the servicing.
Included in the $383.4 million of one-to-four family residential mortgage
loans at December 31, 1998 are approximately $44.5 million of purchased mortgage
loans serviced by others. These purchased loans are secured by real estate
outside of First Western's primary market areas with no significant
concentrations in any state or region.
The portfolio of loans held for sale at December 31, 1998 consisted of
residential mortgage loans with a carrying value of $15.5 million and an
estimated market value of $15.7 million. The following table shows the
composition of First Western's portfolio of loans and loans held for sale for
the last five years (in thousands):
24
<PAGE> 27
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Amounts of Loans by Type:
Commercial, financial and
agricultural:
Automobile floorplan loans...... $ 41,995 $ 31,013 $ 26,668 $ 26,775 $ 25,229
Loans to municipalities......... 3,643 6,140 11,446 13,893 10,307
Other commercial loans.......... 141,492 105,323 83,645 79,491 63,662
---------- ---------- ---------- ---------- --------
Subtotal..................... 187,130 142,476 121,759 120,159 99,198
---------- ---------- ---------- ---------- --------
Real estate construction.......... 11,239 14,450 16,289 24,501 18,721
---------- ---------- ---------- ---------- --------
Real estate mortgage:
1-4 family residential.......... 383,429 385,702 433,813 357,004 370,582
Multi-family residential........ 25,902 29,331 37,173 35,088 30,923
Home equity..................... 72,008 56,811 49,653 41,417 37,129
Commercial and other............ 183,987 172,559 159,470 141,667 127,176
---------- ---------- ---------- ---------- --------
Subtotal..................... 665,326 644,403 680,109 575,176 565,810
---------- ---------- ---------- ---------- --------
Installment:
Credit cards.................... -- -- 17,328 45,226 39,412
Installment and other........... 282,986 284,874 278,940 262,554 255,421
---------- ---------- ---------- ---------- --------
Subtotal..................... 282,986 284,874 296,268 307,780 294,833
---------- ---------- ---------- ---------- --------
Total........................ $1,146,681 $1,086,203 $1,114,425 $1,027,616 $978,562
========== ========== ========== ========== ========
Percent of Loans by Type:
Commercial, financial and
agricultural:
Automobile floorplan loans...... 3.7% 2.8% 2.4% 2.6% 2.6%
Loans to municipalities......... 0.3 0.6 1.0 1.4 1.1
Other commercial loans.......... 12.3 9.7 7.5 7.7 6.5
---------- ---------- ---------- ---------- --------
Subtotal..................... 16.3 13.1 10.9 11.7 10.2
---------- ---------- ---------- ---------- --------
Real estate construction.......... 1.0 1.4 1.5 2.4 1.9
---------- ---------- ---------- ---------- --------
Real estate mortgage:
1-4 family residential.......... 33.4 35.5 38.9 34.8 37.8
Multi-family residential........ 2.3 2.7 3.3 3.4 3.2
Home equity..................... 6.3 5.2 4.5 4.0 3.8
Commercial and other............ 16.0 15.9 14.3 13.8 13.0
---------- ---------- ---------- ---------- --------
Subtotal..................... 58.0 59.3 61.0 56.0 57.8
---------- ---------- ---------- ---------- --------
Installment:
Credit cards.................... -- -- 1.6 4.4 4.0
Installment and other........... 24.7 26.2 25.0 25.5 26.1
---------- ---------- ---------- ---------- --------
Subtotal..................... 24.7 26.2 26.6 29.9 30.1
---------- ---------- ---------- ---------- --------
Total........................ 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ========
</TABLE>
LOAN QUALITY
First Western has several policies and procedures in place to assist in
maintaining and monitoring the overall quality of its loan portfolio. First
Western has established underwriting guidelines to be followed by its banking
subsidiary. In addition, a formal, ongoing loan review program (discussed
below), which concentrates principally on commercial credits, has been
established to help monitor the loan portfolio of the banking subsidiary. First
Western also regularly monitors its delinquency and nonperforming levels for any
negative or adverse trends and particularly monitors credits which have total
exposure of $1.5 million or more. However,
25
<PAGE> 28
there can be no assurance that First Western's loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to
general economic conditions.
First Western's delinquent loans, nonaccrual loans and nonperforming assets
consisted of the following for the last five years (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans delinquent and still accruing interest:
Loans past due 30 to 89 days............ $ 6,419 $ 8,703 $ 8,080 $10,420 $ 7,370
Loans past due 90 days or more.......... 2,879 2,466 1,427 2,648 1,870
------- ------- ------- ------- -------
Total loan delinquencies................ $ 9,298 $11,169 $ 9,507 $13,068 $ 9,240
======= ======= ======= ======= =======
Nonaccrual loans............................. $ 1,928 $ 2,634 $ 5,147 $ 4,959 $ 2,875
Other real estate owned...................... 617 382 471 165 1,185
------- ------- ------- ------- -------
Total nonperforming assets.............. $ 2,545 $ 3,016 $ 5,618 $ 5,124 $ 4,060
======= ======= ======= ======= =======
Total nonperforming assets and loans
past due 90 days or more.............. $ 5,424 $ 5,482 $ 7,045 $ 7,772 $ 5,930
======= ======= ======= ======= =======
Nonaccrual loans to total loans.............. 0.17% 0.24% 0.46% 0.48% 0.29%
Nonperforming assets to total loans and other
real estate owned.......................... 0.22% 0.28% 0.50% 0.50% 0.41%
Nonperforming assets to total assets......... 0.11% 0.17% 0.33% 0.32% 0.28%
Nonperforming assets and loans past due 90
days or more to total assets............... 0.24% 0.31% 0.42% 0.48% 0.41%
Nonaccrual loans and loans past due 90 days
or more to total loans..................... 0.42% 0.47% 0.59% 0.74% 0.48%
Allowance for loan losses to nonaccrual
loans...................................... 949.01% 686.33% 311.91% 285.31% 450.16%
Allowance for loan losses to loans past due
90 days or more and nonaccrual loans....... 380.61% 354.43% 244.20% 185.98% 272.78%
Allowance for loan losses to total loans..... 1.60% 1.66% 1.44% 1.38% 1.32%
</TABLE>
First Western's total delinquencies decreased $1.9 million, or 16.8%, from
$11.2 million at December 31, 1997 to $9.3 million at December 31, 1998, with
this decrease primarily due to a $1.2 million decrease in delinquent commercial
mortgage loans and a $420,000 decrease in delinquent commercial loans. First
Western's nonaccrual loans decreased $706,000 during 1998 due to the pay-off of
several commercial loans that were on nonaccrual status. First Western's
coverage ratio of the allowance for loan losses to nonaccrual loans increased
from 686% at December 31, 1997 to 949% at December 31, 1998, due to the 26.8%
decrease in nonaccrual loans during 1998.
Commercial and mortgage loans are placed on nonaccrual status when, in the
opinion of management, collection of principal or interest is doubtful and the
loan is not both well secured and in the process of collection. Installment
loans are generally charged off between 90 and 120 days past due or when deemed
uncollectible in the opinion of management. Cash payments received while a loan
is classified as nonaccrual are recorded as a reduction to principal as long as
doubt exists as to collection.
First Western maintains a loan review program to evaluate the credit risk
in its commercial loan portfolio for substantially all commercial loans and
commercial mortgage loans greater than $200,000. Through the loan review
process, First Western maintains a classified account list which, along with the
nonperforming and delinquency lists of loans, helps management assess the
overall quality of the loan portfolio and the adequacy of the allowance for loan
losses. Loans classified as "substandard" are those loans with clear and defined
weaknesses, such as highly leveraged positions, unfavorable financial ratios,
uncertain repayment sources or poor financial condition, which may jeopardize
recoverability of the debt. Loans classified as "doubtful" are those loans which
have characteristics similar to the substandard accounts but with an increased
risk that a loss may occur, or at least a portion of the loan may require a
charge-off if liquidated at present. Both
26
<PAGE> 29
substandard and doubtful loans include some loans that are delinquent or on
nonaccrual status. As of December 31, 1998, substandard and doubtful loans
totaled $5.5 million.
In addition to its classified account list and delinquency list of loans,
First Western maintains a separate list of "Other Loans Especially Mentioned"
("OLEM"), which further aids First Western in monitoring its loan portfolio.
These OLEM loans do not have all the characteristics of a classified loan
(substandard or doubtful), but do show potentially weak elements as compared
with those of a satisfactory credit. First Western reviews these loans in
assessing the adequacy of the allowance for loan losses. Substantially all of
the loans on the OLEM list as of December 31, 1998 are current and paying in
accordance with loan terms. As of December 31, 1998, OLEM list loans totaled
$8.2 million.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classifications of loans, delinquency trends,
charge-off experience, credit concentrations, economic conditions and other
factors. Specific reserves are established for each classified credit, taking
into consideration the credit's delinquency status, current operating status,
pledged collateral and plan of action for resolving any deficiencies. For
nonclassified loans and smaller loans not individually reviewed, management
considers historical charge-off experience in determining the amounts to be
allocated to the allowance. An unallocated or general reserve is also
established which takes into consideration, among other things, concentrations
of credit, economic conditions, delinquency and nonaccrual trends, management
experience and trends in volume and terms of loans. The allowance for loan
losses is maintained at the level determined according to this methodology by
charging a provision to operations.
First Western believes that the allowance for loan losses of $18.3 million
at December 31, 1998 is adequate to cover losses inherent in the portfolio as of
such date. However, there can be no assurance that First Western will not
sustain losses in future periods, which could be substantial in relation to the
size of the allowance at December 31, 1998.
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
On December 1, 1998, First Western transferred all of its securities that
were classified as held to maturity to available for sale. At the time of the
transfer, these securities had an amortized cost of $193.0 million and a market
value of $193.9 million. This transfer was made in order to give First Western's
management more flexibility in managing the total investment securities
portfolio. In addition, because of the growth of the available for sale
portfolio during 1998 resulting from the investment of the funds from the PNC
Bank branches and a leverage strategy implemented by First Western, as of
December 1, 1998, approximately 78% of First Western's securities were already
classified as available for sale and management did not believe that it was
strategically important to maintain the held to maturity portfolio.
First Western's portfolio of securities that were classified as available
for sale or held to maturity increased a combined $311.4 million or 55.9% during
1998 primarily due to the investment of the funds provided by the purchase of
the PNC Bank branches along with the implementation of a $102 million leverage
strategy in July 1998. The leverage strategy involved the purchase of U.S.
government agency securities which were funded with repurchase agreements.
At December 31, 1998, the market value of First Western's portfolio of
securities available for sale was $868.7 million, which was $8.4 million or 1.0%
greater than the amortized cost of these securities of $860.3 million. At
December 31, 1997, First Western's combined portfolios of securities held to
maturity and securities available for sale had a market value of $557.8 million,
$8.8 million or 1.6% greater than the amortized cost of these securities of
$549.0 million.
27
<PAGE> 30
The following table presents the contractual maturities of securities
available for sale and their weighted average yields as of December 31, 1998, on
a tax-equivalent basis using a 35% federal income tax rate. The maturity
distribution of mortgage-backed securities is based on the weighted average
lives of these securities.
<TABLE>
<CAPTION>
AFTER AFTER
1 BUT 5 BUT WEIGHTED
WITHIN WITHIN WITHIN AFTER AVERAGE
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL YIELD
------ ------- -------- -------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities......... $ 7,421 $ -- $ -- $ -- $ 7,421 6.03%
U.S. Government agencies and
corporations................... 168,569 37,342 -- -- 205,911 6.17%
Mortgage-backed securities....... 1,898 334,678 114,958 46,849 498,383 7.35%
States and political
subdivisions................... 17,576 54,837 11,703 280 84,396 7.38%
Other securities, including
corporate bonds and notes...... 1,160 778 2,071 68,579 72,588 6.45%
-------- -------- -------- -------- -------- ----
Total....................... $196,624 $427,635 $128,732 $115,708 $868,699 6.99%
======== ======== ======== ======== ======== ====
Weighted average yield........... 6.22% 7.41% 7.09% 6.63% 6.99%
======== ======== ======== ======== ========
</TABLE>
BANK-OWNED LIFE INSURANCE
In December 1997, First Western purchased $25 million of life insurance on
the officers of First Western with First Western as the beneficiary. The
increase in the cash surrender value of the insurance policies is recorded as
other income. The increase in the cash surrender value and death benefits paid
to First Western are currently not included in taxable income.
DEPOSITS
First Western's total deposits increased $296.4 million, or 24.9%, during
1998, primarily due to the purchase of the PNC Bank branches with this increase
partially offset by the sale of First Western's three branches in Lake County,
Ohio. The PNC Bank branches had approximately $384 million of deposits and the
Lake County branches had approximately $47 million of deposits.
First Western primarily relies on its retail deposit base to fund its
credit needs. Deposits provided 67.5% of First Western's funding during 1998,
based on average balances of deposits and total assets. First Western's total
average deposits during 1998 were $1.341 billion, increasing 15.2% from $1.164
billion in 1997.
<TABLE>
<CAPTION>
DEPOSIT SUMMARY
DECEMBER 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits....... $ 142,162 9.5% $ 100,653 8.5% $ 93,163 8.1% $ 102,864 8.7% $ 97,242 9.4%
Interest-bearing demand
deposits.............. 54,668 3.7 38,539 3.2 53,946 4.7 110,703 9.4 101,659 9.9
Money market deposits... 272,339 18.3 229,046 19.2 163,602 14.2 98,605 8.4 113,914 11.1
Savings deposits........ 207,305 13.9 156,317 13.1 165,930 14.4 172,837 14.7 168,039 16.3
Time deposits less than
$100,000.............. 712,459 47.9 575,676 48.3 585,465 51.0 625,865 53.1 498,566 48.4
Time deposits of
$100,000 or more...... 99,823 6.7 92,108 7.7 86,797 7.6 66,809 5.7 49,989 4.9
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total deposits...... $1,488,756 100.0% $1,192,339 100.0% $1,148,903 100.0% $1,177,683 100.0% $1,029,409 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
BORROWED FUNDS
First Western's Bank Subsidiary uses various funding sources other than
deposits to provide the funds necessary for the loan and securities portfolios.
First Western's total borrowed funds increased $102.6 million,
28
<PAGE> 31
or 28.5%, during 1998 from $359.5 million at December 31, 1997 to $462.1 million
at December 31, 1998, primarily as a result of the leverage strategy that was
implemented in July 1998.
First Western's borrowings with original maturities of one year or less
include overnight advances from the Federal Home Loan Bank, repurchase
agreements, customer repurchase agreements, and federal funds purchased. First
Western's borrowings with an original maturity of one year or less and rates
paid are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
At year-end.............................. $ 67,498 5.09% $ 97,229 6.05% $138,582 5.65%
Average during year...................... 116,328 5.62% 101,678 5.70 163,117 5.59
Maximum month-end balance................ 255,115 5.62% 150,488 5.48 219,189 5.44
</TABLE>
First Western Bank, N.A. is a member of the Federal Home Loan Bank of
Pittsburgh and, as such, it has the ability to obtain advances from the FHLB. At
December 31, 1998, First Western had advances from the FHLB (original maturity
in excess of one year) of $178.4 million, with a weighted average rate of 4.97%,
compared with advances of $156.0 million at December 31, 1997. The advances from
the FHLB are secured by certain qualifying residential mortgage loans, stock in
the FHLB, investment securities and securities available for sale.
During 1998, First Western entered into a revolving credit note with an
unrelated bank. The maximum available to First Western under this line is $25
million. First Western took an initial draw from this line of $23 million and
used $3 million of the proceeds to pay-off an existing loan from another bank
and used the remaining funds to provide a capital contribution to First Western
Bank, N.A. As a result of acquisition of the PNC Bank branches, the parent
company had to make a capital contribution to First Western Bank, N.A. totaling
$37 million in order to restore First Western Bank, N.A.'s capital levels to
"well capitalized" under the regulatory framework for prompt corrective action.
MARKET RISK
As a financial institution, First Western is subject to market risk,
primarily interest rate risk. First Western does not have significant exposure
to foreign currency risk, commodity price risk or equity price risk. First
Western has an asset/liability management committee which manages the risks
associated with changing interest rates and the resulting impact on net interest
income. The management of interest rate risk at First Western is performed (i)
by analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at a specific point in time ("GAP"); and
(ii) by using a simulation model which analyzes the effects of interest rate
changes on net interest income over specified periods of time by projecting the
performance of the mix of assets and liabilities in varied interest rate
environments.
The tables below present First Western's GAP at December 31, 1998 and 1997.
In preparing these tables, management has anticipated prepayments for
mortgage-backed securities and mortgage loans according to standard industry
prepayment assumptions in effect at year-end. Money market deposits and
interest-bearing demand accounts have been included in the under-three-months
category. Assets with daily floating rates are included in the
under-three-months category. Assets and liabilities are included in the table
based on their maturities or period of first repricing, subject to the foregoing
assumptions.
29
<PAGE> 32
INSTRUMENTS MATURING OR REPRICING
<TABLE>
<CAPTION>
UNDER THREE SIX TO ONE TO OVER
THREE TO SIX TWELVE FIVE FIVE
MONTHS MONTHS MONTHS YEARS YEARS TOTAL
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998:
Rate-sensitive assets:
Money market assets........... $ 2,960 $ -- $ -- $ -- $ -- $ 2,960
Securities.................... 61,269 125,935 65,175 324,316 292,004 868,699
Loans......................... 404,659 80,807 137,328 434,558 89,329 1,146,681
--------- --------- --------- --------- -------- ----------
Total.................... $ 468,888 $ 206,742 $ 202,503 $ 758,874 $381,333 $2,018,340
========= ========= ========= ========= ======== ==========
Rate-sensitive liabilities:
Deposits...................... $ 811,909 $ 161,041 $ 210,351 $ 145,490 $ 17,803 $1,346,594
Borrowed funds................ 112,498 21,200 22,500 108,400 221,100 485,698
--------- --------- --------- --------- -------- ----------
Total.................... $ 924,407 $ 182,241 $ 232,851 $ 253,890 $238,903 $1,832,292
========= ========= ========= ========= ======== ==========
Period GAP...................... $(455,519) $ 24,501 $ (30,348) $ 504,984 $142,430 $ 186,048
========= ========= ========= ========= ======== ==========
Ratio of period GAP to total
rate-sensitive assets......... (22.6)% 1.2% (1.5)% 25.0% 7.1% 9.2%
========= ========= ========= ========= ======== ==========
Cumulative GAP.................. $(455,519) $(431,018) $(461,366) $ 43,618 $186,048
========= ========= ========= ========= ========
Ratio of cumulative GAP to total
rate-sensitive assets......... (22.6)% (21.4)% (22.9)% 2.1% 9.2%
========= ========= ========= ========= ========
DECEMBER 31, 1997:
Rate-sensitive assets:
Money market assets........... $ 6,836 $ -- $ -- $ -- $ -- $ 6,836
Securities.................... 90,953 43,652 42,518 206,178 174,044 557,345
Loans......................... 327,929 74,272 121,885 417,613 144,504 1,086,203
--------- --------- --------- --------- -------- ----------
Total.................... $ 425,718 $ 117,924 $ 164,403 $ 623,791 $318,548 $1,650,384
========= ========= ========= ========= ======== ==========
Rate-sensitive liabilities:
Deposits...................... $ 556,784 $ 126,769 $ 211,443 $ 192,172 $ 4,518 $1,091,686
Borrowed funds................ 154,437 1,000 92,650 115,700 -- 363,787
--------- --------- --------- --------- -------- ----------
Total.................... $ 711,221 $ 127,769 $ 304,093 $ 307,872 $ 4,518 $1,455,473
========= ========= ========= ========= ======== ==========
Period GAP...................... $(285,503) $ (9,845) $(139,690) $ 315,919 $314,030 $ 194,911
========= ========= ========= ========= ======== ==========
Ratio of period GAP to total
rate-sensitive assets......... (17.3)% (0.6)% (8.5)% 19.2% 19.0% 11.8%
========= ========= ========= ========= ======== ==========
Cumulative GAP.................. $(285,503) $(295,348) $(435,038) $(119,119) $194,911
========= ========= ========= ========= ========
Ratio of cumulative GAP to total
rate-sensitive assets......... (17.3)% (17.9)% (26.4)% (7.2)% 11.8%
========= ========= ========= ========= ========
</TABLE>
In analyzing its GAP position, although all time periods are considered,
First Western emphasizes the next 12-month period. An institution is considered
to be liability-sensitive, or as having a negative GAP, when the amount of its
interest-bearing liabilities maturing or repricing within a given time period
exceeds the amount of its earning assets also repricing within that time period.
Conversely, an institution is considered to be asset-sensitive, or as having a
positive GAP, when the amount of its interest-bearing liabilities maturing or
repricing is less than the amount of its interest-earning assets also maturing
or repricing during the same period. Generally, in a falling interest rate
environment, a negative GAP should result in an increase in net interest income,
and in a rising interest rate environment, this negative GAP should adversely
affect net interest income. The converse would be true for a positive GAP.
However, shortcomings are inherent in a simplified GAP analysis that may
result in changes in interest rates affecting net interest income more or less
than the GAP analysis would indicate. For example, although certain assets and
liabilities may have the similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Furthermore,
repricing characteristics of certain assets and
30
<PAGE> 33
liabilities may vary substantially within a given time period. In the event of a
change in interest rates, prepayment and early withdrawal levels could also
deviate significantly from those assumed in calculating GAP. Also, GAP does not
permit analysis of how changes in the mix of various assets and liabilities on
growth rate assumptions impact net interest income.
Due in part to the shortcomings of GAP analysis, the asset/liability
committee of First Western believes that simulation modeling more accurately
estimates the effects of and exposure to interest rate changes.
The simulation modeling performed by First Western measures the change in
net interest income over the next 12- and 24-month periods resulting from
hypothetical market interest rate changes. The simulation model includes all
financial instruments including derivative financial instruments. First
Western's simulation model includes assumptions on balance sheet changes and
growth. Prepayments on loans and mortgage-backed securities have been estimated
in the model based on industry prepayment trends.
As of December 31, 1998, First Western's simulation modeling indicates that
with a 200 basis point increase in interest rates, First Western's net interest
income would be 0.4% and 0.6% less than if rates had not changed for the next
12- and 24-month periods, respectively; and with a 200 basis point decrease in
interest rates, net interest income would be 2.1% and 6.4% less. As of December
31, 1997, First Western's simulation modeling indicated that with a 200 basis
point increase in interest rates, First Western's net interest income would have
been 0.1% and 1.6% less than if rates had not changed for the next 12- and
24-month periods, respectively; and with a 200 basis point decrease in interest
rates, net interest income would have been 2.6% and 4.8% less. The December 31,
1998 and 1997 simulation models were prepared with the assumption that the
change in interest rates would occur over the first 12 months and remain flat
thereafter.
LIQUIDITY AND CASH FLOWS
Liquidity is the ability to provide the cash necessary to meet customer
credit needs and satisfy depositor withdrawal requirements. One source of
liquidity is cash and short-term assets, such as interest-bearing deposits in
other banks and the Federal Home Loan Bank and federal funds sold, which totaled
$49.0 million at December 31, 1998, compared with $47.8 million at December 31,
1997. Another source of liquidity is borrowing capability. First Western's
banking subsidiary has a variety of sources of short-term liquidity available to
it, including federal funds purchased from correspondent banks, sales of
securities available for sale, sales of securities under agreements to
repurchase, the Federal Reserve discount window, interbank deposits, FHLB
advances and loan participations or sales. At December 31, 1998, First Western
had $34.5 million of unused overnight credit lines available. First Western's
portfolio of securities available for sale is another source of liquidity. This
portfolio of securities of $475.6 million at December 31, 1998, excluding
pledged securities of $393.1 million, is recorded at current market value with a
corresponding adjustment to equity, net of income tax effects. Therefore, these
securities may be sold to meet liquidity needs if necessary without impacting
First Western's equity. First Western also generates liquidity from the regular
principal payments and prepayments made on its portfolio of loans and
mortgage-backed securities.
First Western's operating activities generated cash flows of $185.9 million
in 1998, compared with $157.4 million in 1997 and $56.0 million in 1996. The
primary source of operating cash flows for 1998, 1997 and 1996 was the sale of
mortgage loans and net income combined with noncash expenses, such as the
amortization of intangible assets, provision for loan losses and depreciation.
Investing activities used cash flows of $254.2 million in 1998, compared
with $152.6 million in 1997 and $171.4 million in 1996. During 1998, the growth
of the loan portfolio used net cash flows of $153.5 million, compared with
$126.0 million in 1997 and $157.8 million in 1996. Net securities activities
used $313.7 million of cash flows during 1998, primarily as a result of the
investment of the $251.2 million received from the purchase of the PNC Bank
branches. During the first quarter of 1998, First Western sold its Lake County,
Ohio branches which used cash flows of $40.9 million.
Financing activities provided cash flows of $73.4 million in 1998 compared
with $192,000 in 1997 and $112.0 million in 1996. An increase in borrowings
provided cash flows of $121.9 million in 1998, compared with using cash flows of
$31.5 million in 1997. First Western increased its borrowings during 1998 in
order to
31
<PAGE> 34
fund the leverage strategy implemented in July 1998 and also in order to provide
a capital contribution to its bank subsidiary. First Western reduced borrowings
during 1997 with the funds provided by loan sales.
SHAREHOLDERS' EQUITY AND CAPITAL RESOURCES
Shareholders' equity at December 31, 1998 was $149.0 million, increasing
$10.2 million or 7.3% from $138.8 million at December 31, 1997 primarily due to
the retention of earnings. As a result of the pending acquisition by Sky
Financial, First Western's Board of Directors changed the schedule for First
Western's quarterly dividends. Prior to the agreement with Sky Financial, First
Western paid dividends in February, May, August and November. As called for in
the merger agreement, First Western changed its quarterly dividend schedule to
match Sky Financial's schedule. Therefore, beginning in January 1999, First
Western will pay its dividends in January, April, July and October. In order to
accommodate this change in the dividend schedule, First Western's Board of
Directors declared a dividend of $0.10 in December 1998 with this dividend
payable in January 1999. The dividend was set at $0.10 instead of First
Western's regular dividend of $0.15 since it was paid one month in advance of
when it otherwise would have been paid.
First Western's ratio of shareholders' equity to total assets was 6.69% at
December 31, 1998, compared with 7.96% and 7.53% at December 31, 1997 and 1996,
respectively. The book value per share was $13.37 at December 31, 1998, compared
with $12.47 and $11.16 at December 31, 1997 and 1996, respectively.
On February 11, 1997, First Western completed the private placement of $25
million of 9.875% capital securities due February 1, 2027. Securities of this
type received approval in October 1997 from the Federal Reserve Bank to qualify
as Tier I capital, and the interest payable thereon is currently considered to
be tax-deductible.
First Western, as a bank holding company, is required to meet certain
risk-based capital and leverage requirements. The risk-based capital
requirements redefine the components of capital, categorize assets into
different risk classes, and include certain off-balance sheet items in the
calculation of the adequacy of capital. A financial institution's capital is
divided into two classes, Tier I and Tier II.
First Western's Tier I and Tier II capital consisted of the following at
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
TIER I:
Common shareholders' equity..................... $ 149,021 $ 138,842
Non-exempt intangible assets.................... (60,389) (9,262)
Trust preferred capital securities.............. 23,877 23,837
Unrealized appreciation in securities available
for sale..................................... (5,435) (5,443)
---------- ----------
Total Tier I................................. 107,074 147,974
---------- ----------
TIER II:.......................................... 17,349 13,658
---------- ----------
Total capital................................ $ 124,423 $ 161,632
========== ==========
Risk-weighted assets.............................. $1,271,390 $1,088,249
========== ==========
Tier I capital ratio.............................. 8.42% 13.60%
========== ==========
Required Tier I capital ratio..................... 4.00% 4.00%
========== ==========
Total capital ratio............................... 9.79% 14.85%
========== ==========
Required total capital ratio...................... 8.00% 8.00%
========== ==========
</TABLE>
First Western's regulatory capital ratios decreased from December 31, 1997
to December 31, 1998 primarily as a result of the intangible assets that
resulted from the premium paid for the PNC Bank branches along with the increase
in First Western's total assets.
32
<PAGE> 35
First Western is also subject to a minimum Tier I leverage ratio based on
Tier I capital to total average assets. The required ratio for each financial
institution is determined based on the financial institution's relative
soundness. A minimum ratio of Tier I capital to total assets of 3% has been
established for top-rated financial institutions, with less highly rated
institutions or those with higher levels of risk required to maintain ratios of
100 to 200 basis points above the minimum level. First Western's Tier I leverage
ratio was 5.00% at December 31, 1998, compared with 8.73% at December 31, 1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required information is presented as part of "Management's Discussion
and Analysis of Financial Condition and Results of Operations" (Item 7).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data of First Western are included
herein beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
<PAGE> 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION, BUSINESS EXPERIENCE DURING PAST FIVE YEARS AND DIRECTORSHIPS(1) AGE(1)
- ------------------------------------------------------------------------------------------- ------
<S> <C>
Wendell H. Boyd 59
Partner, D.M. Boyd Co. (manufacturer of modified soils for golf course industry); Member,
Audit and Loan Review Committees of First Western; Director of First Western since 1995
James M. Campbell 55
President, Shenango Steel Buildings, Inc. (steel fabrication company); Member,
Compensation and Asset/Liability Committees of First Western; Director of First Western
since 1990(2)
Robert C. Duvall 56
Vice President of Finance, Wampum Hardware Co. (explosives distributor for the blasting
industry); Director, Nobel Insurance Limited; Officer and Director of IRECO Midwest, Inc.
(affiliated with Wampum Hardware Co.); Chairman, Compensation Committee and Member,
Nominating/Corporate Governance and Asset/Liability Committees of First Western; Director
of First Western since 1995
Louis J. Kasing, Jr. 70
President, Kasing Auto Sales, Inc.; Member, Asset/Liability, Loan Review and Dealer
Center Committees of First Western; Director of First Western since 1990
John W. Lehman, M.D. 66
Physician, Beaver Valley Orthopedics Association; Member, Audit, Nominating/Corporate
Governance and Asset/Liability Committees of First Western; Director of First Western
since 1986(2)
Thomas S. Mansell 59
Senior Vice President, Secretary and Legal Counsel of First Western; Director of First
Western since 1990(4)
Floyd H. McElwain 52
President, McElwain Oldsmobile-Cadillac, Inc.; Chairman, Audit Committee and Member,
Dealer Center Committee of First Western; Director of First Western since 1990
Richard C. McGill 62
Retired; Former Managing Partner, McGill, Power, Bell and Co., Certified Public
Accountants; Chairman, Loan Review Committee and Member, Audit Committee of First
Western; Director of First Western since 1990(2)
Thomas J. O'Shane 51
Chairman, First Western since April, 1996 and Chief Executive Officer; Director, Nobel
Insurance Limited; Director, Federal Reserve Bank of Cleveland-Pittsburgh Branch;
Chairman, First Western Bank, N.A.; Chairman, Asset/Liability Committee and Member,
Nominating/Corporate Governance and Loan Review Committees of First Western; Director of
First Western since 1988
Harold F. Reed, Jr. 71
Partner, Reed, Luce, Tosh, Wolford and Douglass (law firm); Director, Tuscarora
Incorporated (manufacturer of custom molded products); Member, Compensation Committee of
First Western; Director of First Western since 1986(2)
John W. Sant 78
Retired; Chairman, First Western through April 1995; President and Chief Executive
Officer, First Western through 1990; Chairman, Nominating/Corporate Governance Committee
and Member, Compensation and Asset/Liability Committees of First Western; Director of
First Western since 1966(2),(3)
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION, BUSINESS EXPERIENCE DURING PAST FIVE YEARS AND DIRECTORSHIPS(1) AGE(1)
- ------------------------------------------------------------------------------------------- ------
<S> <C>
Fiona M. Scott Morton 31
Assistant Professor of Economics and Strategy at the University of Chicago's Graduate
School of Business; Director of First Western since 1998(4)
</TABLE>
- ---------------
(1) As of January 31, 1999.
(2) Years served as a director of First Western include years served as a
director of First Western Bank, N.A. or its predecessors.
(3) John W. Sant is the uncle of Stephen R. Sant, President and Chief Executive
Officer of First Western Bank, N.A. and Executive Vice-President of First
Western.
(4) Thomas S. Mansell is the uncle of Fiona M. Scott Morton.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the federal securities laws, First Western's directors, its executive
officers, and any persons holding more than ten percent of the Common Stock are
required to report their initial ownership of the Common Stock and any
subsequent changes in that ownership to the Securities and Exchange Commission
and NASDAQ. Specific due dates for these reports have been established and First
Western is required to disclose in this report any failure to file by those
dates during or for 1998. All of these filing requirements were satisfied during
1998. In making the foregoing disclosure, First Western has relied solely on
representations of its directors and executive officers and copies of the
reports that they have filed with the Commission.
EXECUTIVE OFFICERS
The following table sets forth the names, ages (as of January 31, 1999),
present positions and business experience of all executive officers of First
Western.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
FIRST WESTERN
Thomas J. O'Shane 51 Chairman of the Board and Chief Executive
Officer, First Western; Chairman of the
Board, First Western Bank, N.A.
Richard L. Stover 56 President and Chief Operating Officer
Kenneth J. Romig 35 Chief Financial Officer and Treasurer
Thomas S. Mansell 59 Senior Vice President, Legal Counsel and
Secretary
Donald D. Wehn 44 Senior Vice President-Mortgage and
Consumer Lending
John A. Zercher 46 Senior Vice President-Management
Information Systems
FIRST WESTERN BANK, N.A
Stephen R. Sant(1) 52 President and Chief Executive Officer,
First Western Bank, N.A. and Executive
Vice President First Western
</TABLE>
- ---------------
(1) Stephen R. Sant, President and Chief Executive Officer of First Western
Bank, N.A., is the nephew of John W. Sant, Director and former Chairman of
First Western.
FIRST WESTERN
Thomas J. O'Shane
Chairman of the Board, First Western and First Western Bank, N.A. since
April 1996; Vice Chairman, Trust Services from April 1996 until September 1998;
Chief Executive Officer, First Western since January 1991; President, First
Western from February 1990 until August 1998; Director, First Western Bank,
35
<PAGE> 38
N.A.; Chairman, Asset/Liability Committee of First Western and Member of the
Nominating/Corporate Governance and Loan Review Committees of First Western;
Director of First Western since 1988.
Richard L. Stover
President and Chief Operating Officer, First Western since August 1998;
Executive Vice President, Chief Lending Officer, First Western from November
1996 until August 1998; Principal, Stover & Associates from March 1994 until
November 1996; Managing Director--Portfolio & Credit, Corporate Finance Group,
General Electric Capital Corporation from March 1993 until March 1994; Executive
Vice President and Chief Credit Officer, Equimark Corporation from January 1991
until March 1993.
Kenneth J. Romig
Chief Financial Officer and Treasurer, First Western since October 1998;
Vice President, First Western since January 1992; Controller, First Western
since June 1989; Treasurer, Trust Services from January 1991 until September
1998.
Thomas S. Mansell
Senior Vice President and Legal Counsel, First Western since January 1991;
Secretary, First Western since October 1998; Senior Vice President-Officer in
Charge of Trusts and Legal Counsel to First National, prior to 1991; Director,
First Western since 1990.
Donald D. Wehn
Senior Vice President-Mortgage and Consumer Lending, First Western since
January 1994; President and Chief Executive Officer, Residential Mortgage
Company of America from May 1994 until December 1995; Vice President-Mortgage
Lending, Strategic Planning and Special Projects, First Western from October
1992 until December 1993; Senior Vice President, Beaver Trust Company ("Beaver
Trust") a predecessor of First Western Bank, N.A., from January 1991 until
September 1992.
John A. Zercher
Senior Vice President-Management Information Services, First Western since
January 1994; Vice President-Management Information Services, First Western from
April 1989 until December 1993.
FIRST WESTERN BANK, N.A.
Stephen R. Sant
President and Chief Executive Officer, First Western Bank, N.A. since
September 1993; Executive Vice President, First Western since April 1996; Chief
Operating Officer, First Western from April 1996 until August 1998; Senior Vice
President-Retail Banking, First Western from January 1993 until April 1996;
President and Chief Executive Officer, Beaver Trust from April 1992 until
September 1993; President and Chief Executive Officer, First Federal of Western
Pennsylvania ("First Federal"), a predecessor of First Western Bank, N.A., from
December 1990 until April 1992.
36
<PAGE> 39
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the compensation for services rendered
during the years ended December 31, 1998, 1997 and 1996 paid by First Western or
its subsidiaries to the Chief Executive Officer and the four other most highly
compensated executive officers of First Western whose annual salary and bonus
exceeded $100,000 for the year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION OTHER COMPENSATION
---------------------------------- ANNUAL SECURITIES ALL OTHER
NAME, AGE AND YEAR ENDED SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION(1) DECEMBER 31 (2) (3) (4) OPTIONS (5)
--------------------- ----------- --- --- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Thomas J. O'Shane (51)
Chairman and 1998 $329,990 $140,250 $ -- 12,000 $37,766
Chief Executive Officer, 1997 298,000 160,920 -- 10,500 88,457
First Western 1996 281,000 94,837 -- -- 47,597
Richard L. Stover (56)
President and 1998 175,600 68,000 -- 17,000 16,049
Chief Operating Officer 1997 143,300 51,531 -- 3,750 --
First Western 1996 22,897(6) 5,093 5,596 22,500 --
Stephen R. Sant (52)
President and Chief 1998 155,000 49,151 -- 5,000 13,942
Executive Officer, FW Bank 1997 137,000 49,697 -- 3,750 17,022
and Executive Vice President-First Western 1996 135,800 33,555 -- -- 11,497
John A. Zercher (46)
Senior Vice President- 1998 124,000 33,294 -- 2,250 12,476
Management Information Systems, 1997 114,050 40,716 -- 1,800 14,511
First Western 1996 105,600 25,344 -- -- 9,838
Donald D. Wehn (44)
Senior Vice President-Mortgage and 1998 120,000 30,600 -- 2,250 8,881
Consumer Lending 1997 111,400 38,299 -- 1,800 14,158
First Western 1996 103,200 29,533 -- -- 9,821
</TABLE>
- ---------------
(1) As of January 31, 1999.
(2) Includes salary only. Officers who are also Directors received no
compensation for acting as Directors or for attendance at Committee meetings
in 1998.
(3) Includes payments under the Incentive Compensation Plan, which are made in
cash as soon as practicable after the close of the fiscal year. Amounts
shown for 1998 include the amount of bonus accrued for 1998 as determined in
January 1999, and excludes the bonus paid in January 1998 for 1997.
(4) Noncash compensation, in the case of each individual for each of the three
years in the table, did not exceed the lesser of $50,000 or 10% of total
compensation, except for Mr. Stover, who in 1996 received a taxable personal
benefit of $786 for a company vehicle, and a country club membership for
$4,810.
(5) Includes 401(k) Profit-Sharing and Stock Bonus Plan contributions by First
Western, which includes a total of 438 shares (excluding forfeitures) of
Common Stock with a market value of $13,896 as of December 31, 1998. Messrs.
O'Shane and Sant each received 89 shares, Mr. Zercher received 87 shares and
Mr. Wehn received 84 shares. Also includes contributions by First Western to
the Supplemental Executive Retirement Plan determined and made in 1998 on
behalf of Messrs. O'Shane, Stover and Sant totaling $29,851 for 1998.
(6) Mr. Stover became an executive officer on November 4, 1996.
PENSION PLAN
The following table shows annual pension benefits payable under the First
Western Bancorp, Inc. Pension Plan (the "Pension Plan") upon retirement at age
65, in various remuneration and years-of-service
37
<PAGE> 40
classifications, assuming the election of a retirement allowance payable as a
straight life annuity with retirement on January 1, 1999. Remuneration for these
purposes is the same as the total of salary and bonus as disclosed in the
Summary Compensation Table. Annual benefits payable are not subject to any
deduction for Social Security or other offset amounts.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
- ------------------------------------------------------------------------------
YEARS OF SERVICE
REMUNERATION(1)(2) 15 20 25 30 35
- -------------------------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$150,000.................. 22,500 30,000 37,500 45,000 52,500
175,000.................. 26,250 35,000 43,750 52,500 61,250
200,000.................. 30,000 40,000 50,000 60,000 70,000
225,000.................. 33,750 45,000 56,250 67,500 78,750
250,000.................. 37,500 50,000 62,500 75,000 87,500
300,000.................. 45,000 60,000 75,000 90,000 105,000
350,000.................. 52,500 70,000 87,500 105,000 122,500
400,000.................. 60,000 80,000 100,000 120,000 140,000
450,000.................. 67,500 90,000 112,500 135,000 157,500
500,000.................. 75,000 100,000 125,000 150,000 175,000
550,000.................. 82,500 110,000 137,500 165,000 192,500
</TABLE>
- ---------------
(1) Section 401(a)(17) of the Internal Revenue Code contains an annual limit on
the amount of compensation covered for purposes of accruing benefits under
the Pension Plan. For 1998, this limit was $160,000. Since such limit is
subject to future adjustments, the benefit amounts shown in the table have
been calculated without regard to this limit.
(2) Thomas J. O'Shane, Richard L. Stover, Stephen R. Sant, John A. Zercher and
Donald D. Wehn have 26, 2, 8, 26 and 19 whole years of service under the
plan, respectively, as of January 31, 1999. All such persons are fully
vested in their accrued benefits as of January 31, 1999, with the exception
of Mr. Stover.
Mr. Stover, as part of his employment agreement, will be eligible to
receive a retirement benefit based upon a two times years of service multiple
for each actual year worked and credited under terms of the Pension Plan,
provided his employment equals or exceeds five consecutive years worked. The
additional multiple can not be funded through the Pension Plan, and is instead
recorded as an unfunded, nonqualified accrued liability by First Western.
OPTION GRANTS
The following table sets forth as to persons named in the Summary
Compensation Table additional information with respect to stock options granted
during 1998, including the potential realizable value from the stock options
assuming the options are exercised at the end of the option term and assuming 5%
and 10% annual rates of stock price appreciation during the option term:
38
<PAGE> 41
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
--------------------------------------------------------- OF ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM
UNDERLYING OPTIONS EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) IN 1998 SHARE DATE 5%(2) 10%(2)
---- ---------- ------- /SHAR ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. O'Shane.......... 12,000 17.9% $30.19 4/21/08 $227,817 $577,333
Richard L. Stover.......... 5,000 7.4 30.19 4/21/08 94,924 240,555
Richard L. Stover.......... 12,000 17.9 23.56 9/14/08 177,820 450,631
Stephen R. Sant............ 5,000 7.4 30.19 4/21/08 94,924 240,555
John A. Zercher............ 2,250 3.4 30.19 4/21/08 42,716 108,250
Donald D. Wehn............. 2,250 3.4 30.19 4/21/08 42,716 108,250
</TABLE>
- ---------------
(1) The stock options for Mr. O'Shane were granted on April 21, 1998 and are
exercisable between December 2000 and January 1, 2003. The stock options for
Mr. Sant were granted on April 21, 1998 and are exercisable between December
2000 and January 1, 2002. The stock options for Mr. Stover were granted on
April 21, 1998 and September 14, 1998 and are exercisable between January 1,
2002 and January 1, 2003. For the other named officers, options will vest on
April 21, 2001. These options are intended to be incentive stock options.
The exercise price per share is $30.19 and $23.56 for the options granted in
April 1998 and September 1998, respectively, which was equal to the fair
market value of the Common Stock at the date of grant. Fair market value was
the average of the high and low sales prices of the Common Stock on the date
of grant on the Nasdaq Stock Market. The exercise price may be paid in cash,
in shares of Common Stock, or a combination of cash and such shares. The
options have a term of ten years.
(2) The 5% and 10% assumed annual rates of stock price appreciation do not
reflect actual changes in the fair market value of the Common Stock since
the date of grant. The information in the table is provided in accordance
with the rules of the Securities and Exchange Commission regarding the
disclosure of compensation of executive officers, and is not intended to
forecast possible future stock price appreciation, if any.
AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES
The following table sets forth the aggregated option exercises during the
year ended December 31, 1998, and the year-end value of options held by each of
the named executive officers of First Western in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END AT YEAR-END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED(1) UNEXERCISABLE (#) UNEXERCISABLE ($)(2)
---- ----------- ----------- ----------------- --------------------
<S> <C> <C> <C> <C>
Thomas J. O'Shane............ -- $-- 128,760/17,052 $2,820,671/$71,375
Richard L. Stover............ -- -- 16,332/26,918 228,648/231,477
Stephen R. Sant.............. -- -- 59,709/8,750 1,428,265/46,875
John A. Zercher.............. -- -- 14,625/4,050 269,344,/22,266
Donald D. Wehn............... -- -- 3,000/4,050 55,250/22,266
</TABLE>
- ---------------
(1) Value realized for options exercised but not sold was determined based on
the average of the high and low price of the Common Stock on the day prior
to exercise minus the exercise price, multiplied by the number of shares
acquired. If shares were sold simultaneously upon exercise, value realized
was determined based upon the sales price.
(2) The value of unexercised in-the-money options is calculated by determining
the difference between the fair market value of the securities underlying
the options at year-end ($31.75 per share based on the closing price of the
Common Stock at year-end) and the exercise price of the options ($4.50 per
share for
39
<PAGE> 42
1991-granted options, $13.33 per share for 1995-granted options, $17.75 per
share for 1996-granted options, $21.33 per share for 1997-granted options,
$30.19 for the April 1998-granted options and $23.56 for the September
1998-granted options), multiplied by the number of underlying securities.
CHANGE IN CONTROL AGREEMENTS
Certain executive officers of the Company, including four named in the
Summary Compensation Table (Messrs. O'Shane, Stover, Sant and Zercher), have
entered into change in control agreements with the Company (the "Agreements").
The Agreements operate only upon the occurrence of a "change in control" as
described below. Absent a "change in control," the Agreements do not require the
Company to retain the executives in its employ or to pay them any specified
level of compensation or benefits. Each Agreement provides that if a change in
control of the Company or any of its bank subsidiaries (collectively, the
"Subsidiary") occurs, the Company and the Subsidiary will be obligated to
continue to employ the executive during the time period starting upon the
occurrence of a change in control and ending three years thereafter (or, if
earlier, at the executive's early retirement date or attainment of age 65) (the
"Term of Employment"). The Agreement specifies the compensation and benefits
required to be provided to the executive during the Term of Employment. If,
during the Term of Employment, the executive is discharged by the Company or the
Subsidiary without cause or resigns for good reason, then the executive shall
receive within 30 days of the date of termination a lump sum payment equal to
the present value of monthly payments, calculated using an appropriate discount
rate, from the date of termination until the earlier of (a) the date that is 36
months after the change in control and (b) the executive's attainment of age 65
(the "Calculation Period"), of (i) salary at a rate equal to the highest salary
in effect during the 12 months immediately preceding the change in control or
the date of termination and (ii) bonus at a rate equal to the greater of the
annual bonuses received during the three calendar years immediately preceding
the change in control or the date of termination. If the executive is terminated
during the Term of Employment for any reason other than cause, then until the
executive reaches or would have reached normal retirement age, (a) the executive
and/or his spouse will continue to receive insurance and health care benefits
equivalent to those in effect immediately prior to the date of termination or
the date of the change in control (whichever is more favorable), subject to
reduction to avoid duplication with benefits of a subsequent employer, (b) at
and after normal retirement age, health and life insurance benefits equivalent
to those afforded retired executives under programs in effect immediately prior
to the date of termination or the date of the change in control (whichever is
more favorable) and (c) the executive will also receive supplemental retirement
benefits equal to the extra pension benefits he would have earned had employment
been continued for the entire Calculation Period.
Generally, and subject to certain exceptions, a "change in control" shall
be deemed to have occurred if (a) final regulatory approval is obtained for any
party to acquire securities of the Company and/or the Subsidiary representing
20% or more of the combined voting power of the Company's or the Subsidiary's
then outstanding securities; (b) there is a significant change in the Company's
or the Subsidiary's board of directors not approved by the incumbent board; or
(c) final regulatory approval is obtained for a plan of complete liquidation or
dissolution or sale of all or substantially all of the Company's or the
Subsidiary's assets or certain significant reorganizations, mergers and similar
transactions involving the Company or the Subsidiary.
The merger with Sky Financial, if approved, will constitute a change in
control under these contracts.
EMPLOYMENT AGREEMENT
First Western entered into an at-will employment agreement with Richard L.
Stover on October 25, 1996. The agreement provides that Mr. Stover will receive
a base annual salary of $135,800 and normal employee benefits, that he will
participate in First Western's Incentive Compensation Plan, Stock Option Plan
and Supplemental Executive Retirement Plan and will receive a company automobile
and reimbursement for certain clubs' dues. The agreement provides for certain
benefits under the Pension Plan as described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Mr. Thomas J. O'Shane, Chairman, President and Chief Executive Officer of
First Western, is a director and a member of the Compensation Committee of Nobel
Insurance Limited. Mr. Robert C. Duvall, a director
40
<PAGE> 43
of Nobel Insurance Limited, is also a director of First Western, and is Chairman
of First Western's Compensation Committee.
Mr. John W. Sant, formerly Chairman, President and Chief Executive Officer
of First Western, is a member of the Compensation Committee.
DIRECTORS' COMPENSATION
Directors of First Western who are not employees of First Western or its
subsidiaries receive $1,000 for each meeting of the Board of Directors attended
and $500 for each committee meeting attended, with the chairperson of each
committee receiving $1000 for each committee meeting attended. An annual
retainer of $6,000 is currently paid to all Board members. Occasionally,
individual directors are asked to meet with the Chairman of First Western on
matters of interest or importance or requiring the consultative services of such
director. In such situations, the per meeting rates applicable to a committee
member or committee chairperson, as the case may be, are paid to the individual.
Directors of First Western Bank, N.A. who are not employees of First
Western or its subsidiaries receive $500 for each Board meeting attended and
$350 for each committee meeting attended, with the chairperson of each committee
receiving $700 for each committee meeting attended. An annual retainer of $3,000
per member is also paid. The law firm of Reed, Luce, Tosh, Wolford and Douglass,
of which Harold F. Reed, Jr., a director, is a partner, served as an outside
legal counsel for First Western Bank, N.A., for which such firm received a
retainer of $20,000 plus fees for special legal work on an as-billed basis in
1998.
All Directors of First Western and/or its subsidiaries may defer the
receipt of their fees, according to the terms of the First Western Bancorp, Inc.
Deferred Compensation Plan for Directors, until the earlier of their retirement
from First Western and/or a subsidiary board or their death. The director may
choose to have deferred fees accrued with interest credited at market rates, or
to have such fees, plus prior plan balances, funded through a grantor trust
agreement, with Trust Services serving as trustee, and invested in First Western
Common Stock.
All directors of First Western and First Western Bank, N.A. as of February
17, 1998 ("Existing Directors") have the option of participating in the Equity
Compensation Plan for Non-Employee Directors of First Western Bancorp, Inc. and
First Western Bank, N.A. ("Equity Plan"). Any directors elected or appointed on
or after February 17, 1998 are required to participate in the Equity Plan. Under
the Equity Plan, directors do not receive a cash retainer fee, but instead
receive an annual retainer in the form of stock options. The directors
participating in the Equity Plan receive their meeting fees in the form of
restricted shares of common stock. In addition, all directors that participate
in both the retainer payment in stock options and the meeting fees paid in
restricted stock features of the Equity Plan receive an additional, one-time,
stock option grant for 1,000 shares. The election to participate in the Equity
Plan is irrevocable. The number of options granted to directors in 1998 were
determined by taking the directors' annual retainers and dividing this amount by
the fair market value of an option. The Equity Plan calls for the restricted
stock to be issued at discount to the fair market value of the common stock at
quarter end with this discount to be determined by the board and the discount
cannot exceed 50%. During 1998, the restricted stock was issued at a 25%
discount to fair market value.
41
<PAGE> 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 31, 1999, the beneficial
ownership of Common Stock of (i) those shareholders known to First Western to be
beneficial owners of more than 5% of outstanding Common Stock; (ii) each
director or nominee for election as a director of First Western individually;
(iii) all named executive officers of First Western; and (iv) all officers and
directors of First Western as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OF
CLASS OF BENEFICIAL OWNER OWNERSHIP(1)(2) CLASS
----- ------------------- --------------- -----
<S> <C> <C> <C>
Common Wendell H. Boyd 12,956 *
Common James M. Campbell 50,334(4)(9) *
Common Robert C. Duvall 46,308(6) *
Common Louis J. Kasing, Jr. 9,091 *
Common John W. Lehman, M.D. 29,791(3) *
Common Thomas S. Mansell 87,237(7)(8) *
Common Floyd H. McElwain 14,921(3) *
Common Richard C. McGill 55,500 *
Common Thomas J. O'Shane 185,001(10) 1.62
Common Harold F. Reed, Jr. 45,466(3) *
Common John W. Sant 90,023 *
Common Stephen R. Sant 85,492(11) *
Common Fiona M. Scott Morton 6,576(5) *
Common Richard L. Stover 20,312(12) *
Common Donald D. Wehn 13,072(13) *
Common John A. Zercher 60,618(14) *
All officers and directors as a group (17
persons) 813,263 7.13
</TABLE>
- ---------------
* Less than one percent.
(1) As of January 31, 1999.
(2) Includes shares of Common Stock owned by immediate families (spouses, minor
children and relatives sharing the same home) of the respective persons
and, if applicable, shares of Common Stock held in the First Western
Bancorp, Inc. 401(k) Profit-Sharing and Stock Bonus Plan, an individual
grantor trust related to the First Western Bancorp, Inc. Supplemental
Executive Retirement Plan, or the First Western Bancorp, Inc. Deferred
Compensation Plan for Directors.
(3) Includes options to purchase 1,882 shares of Common Stock which are
exercisable within 60 days of January 31, 1999.
(4) Includes options to purchase 882 shares of Common Stock which are
exercisable within 60 days of January 31, 1999.
(5) Includes options to purchase 1,598 shares of Common Stock which are
exercisable within 60 days of January 31, 1999.
(6) Includes 31,930 shares of Common Stock held beneficially in the name of
Wampum Hardware Co., with authority to vote such shares. Includes options
to purchase 1,882 shares of Common Stock which are exercisable within 60
days of January 31, 1999.
(7) Thomas S. Mansell disclaims beneficial ownership of 3,515 shares of Common
Stock owned by his spouse and his children which are included in the total
shares indicated.
(8) Includes options to purchase 16,605 shares of Common Stock which are
exercisable within 60 days of January 31, 1999.
(9) Includes 1,015 shares of Common Stock held beneficially in the name of
Shenango Steel Buildings, Inc., with authority to vote such shares.
(10) Includes options to purchase 128,760 shares of Common Stock which are
exercisable within 60 days of January 31, 1999.
42
<PAGE> 45
(11) Includes options to purchase 59,709 shares of Common Stock which are
exercisable within 60 days of January 31, 1999.
(12) Includes options to purchase 16,332 shares of Common Stock which are
exercisable within 60 days of January 31, 1999.
(13) Includes options to purchase 3,000 shares of Common Stock which are
exercisable within 60 days of January 31, 1999.
(14) Includes options to purchase 14,625 shares of Common Stock which are
exercisable within 60 days of January 31, 1999.
43
<PAGE> 46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and officers of First Western and its subsidiaries and
their associates were customers of First Western Bank, N.A. during 1998.
Transactions which involved loans or commitments by First Western Bank, N.A.
were made in the ordinary course of business and with substantially similar
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and did not involve more than
normal risk of collectibility or present other unfavorable features.
44
<PAGE> 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
The Consolidated Financial Statements of First Western Bancorp, Inc. and
its Subsidiaries together with the Independent Auditors' Report dated January
25, 1999 appear on pages F-1 through F-35.
(2) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is given in the Consolidated Financial Statements or notes thereto.
(3) Exhibits:
The exhibit index appears on page 47 of this Form 10-K.
(b) Reports on Form 8-K:
Two reports on Form 8-K were filed: one under Item 5 dated October 20, 1998
and a second under Item 5 dated December 14, 1998.
45
<PAGE> 48
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.
FIRST WESTERN BANCORP, INC.
By /s/ THOMAS J. O'SHANE
----------------------------------------
Thomas J. O'Shane
Chairman of the Board,
President and Chief Executive Officer
Date: March 10, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ THOMAS J. O'SHANE Chairman of the Board, March 10, 1999
- ------------------------------- and Chief Executive Officer;
Thomas J. O'Shane Director; Principal Executive
Officer
/s/ KENNETH J. ROMIG Chief Financial Officer March 10, 1999
- ------------------------------- and Treasurer;
Kenneth J. Romig Principal Financial Officer
Principal Accounting Officer
/s/ WENDELL H. BOYD Director March 10, 1999
- -------------------------------
Wendell H. Boyd
/s/ JAMES M. CAMPBELL Director March 10, 1999
- -------------------------------
James M. Campbell
/s/ ROBERT C. DUVALL Director March 10, 1999
- -------------------------------
Robert C. Duvall
/s/ LOUIS J. KASING, JR. Director March 10, 1999
- -------------------------------
Louis J. Kasing, Jr.
/s/ JOHN W. LEHMAN, M.D. Director March 10, 1999
- -------------------------------
John W. Lehman, M.D.
/s/ THOMAS S. MANSELL Senior Vice President, March 10, 1999
- ------------------------------- Legal Counsel and Secretary;
Thomas S. Mansell Director
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ FLOYD H. MCELWAIN Director March 10, 1999
- -------------------------------
Floyd H. McElwain
/s/ RICHARD C. MCGILL Director March 10, 1999
- -------------------------------
Richard C. McGill
/s/ HAROLD F. REED, JR. Director March 10, 1999
- -------------------------------
Harold F. Reed, Jr.
/s/ JOHN W. SANT Director March 10, 1999
- -------------------------------
John W. Sant
/s/ FIONA M. SCOTT MORTON Director March 10, 1999
- -------------------------------
Fiona M. Scott Morton
</TABLE>
47
<PAGE> 50
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PRIOR FILING OR SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
<C> <S> <C>
2.1 Agreement and Plan of Merger dated December 14, Incorporated herein by reference to
1998 by and between Sky Financial Group, Inc. and Exhibit 2.1 to First Western's Current
First Western Bancorp, Inc. Report on Form 8-K dated December 14,
1998
3.1 Articles of Incorporation Incorporated herein by reference to
Exhibit 3.1 to First Western's Quarterly
Report on Form 10-Q for the Quarter
ended March 31, 1993
3.2 Bylaws Incorporated herein by reference to
Exhibit 3.1 to First Western's Quarterly
Report on Form 10-Q for the Quarter
ended September 30, 1998
4.1 Stock Option Agreement dated December 14, 1998 by Incorporated herein by reference to
and between Sky Financial Group, Inc. and First Exhibit 4.1 to First Western's Current
Western Bancorp, Inc. Report on Form 8-K dated December 14,
1998
10.1 Revolving Credit Agreement between First Western Incorporated herein by reference to
Bancorp, Inc. and the Northern Trust Company Exhibit 10.1 to First Western's
Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1998
10.2 Incentive Stock Option Plan for Key Officers as Incorporated herein by reference to
amended effective February 21, 1995* Exhibit 10.5 to First Western's 1994
Form 10-K
10.3 First Western Bancorp, Inc. Annual Incentive Plan Incorporated herein by reference to
Exhibit 10.11 to First Western's 1992
Form 10-K
10.4 First Western Bancorp, Inc. Deferred Compensation Incorporated herein by reference to
Plan for Directors* Exhibit 10.1 to First Western's
Quarterly Report on Form 10-Q for the
Quarter ended March 31, 1995
10.5 First Western Bancorp, Inc. 1993 Supplemental Incorporated herein by reference to
Benefit Program* Exhibit 10.11 to First Western's 1993
Form 10-K
10.6 Supplemental Executive Retirement Plan* Incorporated herein by reference to
Exhibit 10.9 to First Western's 1995
Form 10-K
10.7 Equity Compensation Plan for Non-Employee Directors Incorporated herein by reference to
of First Western Bancorp, Inc. and First Western Exhibit 10.1 to First Western's
Bank, N.A.* Quarterly Report on Form 10-Q for the
Quarter ended March 31, 1998
10.8 Change in Control Agreement between Thomas J. Incorporated herein by reference to
O'Shane and First Western Bancorp, Inc.* Exhibit 10.10 to First Western's 1995
Form 10-K
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT PRIOR FILING OR SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
<C> <S> <C>
10.9 Change in Control Agreement between Stephen R. Sant Incorporated herein by reference to
and First Western Bancorp, Inc.* Exhibit 10.12 to First Western's 1995
Form 10-K
10.10 Change in Control Agreement between Richard L. Incorporated herein by reference to
Stover and First Western Bancorp, Inc.* Exhibit 10.12 to First Western's 1996
Form 10-K
10.11 Employment Agreement between Richard L. Stover and Incorporated herein by reference to
First Western Bancorp, Inc.* Exhibit 10.14 to First Western's 1997
Form 10-K
10.12 Change in Control Agreement between John A. Zercher Incorporated herein by reference to
and First Western Bancorp, Inc.* Exhibit 10.5 to First Western's
Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1998
10.13 Extension of Change in Control Agreement between Incorporated herein by reference to
Thomas J. O'Shane and First Western Bancorp, Inc.* Exhibit 10.1 to First Western's
Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1998
10.14 Extension of Change in Control Agreement between Incorporated herein by reference to
Stephen R. Sant and First Western Bancorp, Inc.* Exhibit 10.3 to First Western's
Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1998
10.15 Extension of Change in Control Agreement between Incorporated herein by reference to
Richard L. Stover and First Western Bancorp, Inc.* Exhibit 10.4 to First Western's
Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1998
21.1 Subsidiaries of the Registrant Filed Herewith
23.1 Consent of Deloitte & Touche LLP Filed Herewith
27.1 Financial Data Schedule Filed Herewith
</TABLE>
- ---------------
* Indicates Exhibit is a management contract or compensation plan or
arrangement.
49
<PAGE> 52
FIRST WESTERN BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Management's Report on the Internal Control Structure and
Compliance with Laws and Regulations...................... F-3
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-4
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-5
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1998, 1997 and 1996.............. F-6
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996...... F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of First Western Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of First
Western Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
First Western's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of First Western Bancorp, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 23 to the consolidated financial statements, on
December 13, 1998, First Western entered into a definitive agreement to be
acquired by Sky Financial Group, Inc.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------------------------
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
January 25, 1999
F-2
<PAGE> 54
MANAGEMENT'S REPORT ON THE INTERNAL CONTROL STRUCTURE AND
COMPLIANCE WITH LAWS AND REGULATIONS JANUARY 25, 1999
TO OUR SHAREHOLDERS
FINANCIAL STATEMENTS
The management of First Western Bancorp, Inc. and subsidiaries ("First
Western") is responsible for the preparation, integrity, and fair presentation
of its published financial statements and all other information presented in
this annual report. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts based on informed judgments and estimates made by management.
INTERNAL CONTROL
Management is responsible for establishing and maintaining an effective
internal control over financial reporting presented in conformity with both
generally accepted accounting principles and the Federal Reserve Board's
Y-Report Instructions. Internal control contains monitoring mechanisms, and
actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control can
provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control may vary over time.
Management assessed First Western's internal control over financial
reporting presented in conformity with both generally accepted accounting
principles and Y-Report Instructions as of December 31, 1998. This assessment
was based on criteria for effective internal control over financial reporting
described in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment,
management believes that First Western maintained an effective internal control
over financial reporting presented in conformity with both generally accepted
accounting principles and Y-Report Instructions, as of December 31, 1998.
COMPLIANCE WITH LAWS AND REGULATIONS
Management is also responsible for ensuring compliance with the federal
laws and regulations concerning loans to insiders and the federal and state laws
and regulations concerning dividend restrictions, both of which are designated
by the Federal Deposit Insurance Corporation ("FDIC") as safety and soundness
laws and regulations.
Management assessed its compliance with the designated safety and soundness
laws and regulations and has maintained records of its determinations and
assessment as required by the FDIC. Based on this assessment, management
believes that First Western has complied, in all material respects, with the
designated safety and soundness laws and regulations for the year ended December
31, 1998.
/s/ THOMAS J. O'SHANE
- ---------------------------------------------
Thomas J. O'Shane
Chairman of the Board,
President and Chief Executive Officer
/s/ KENNETH J. ROMIG
- ---------------------------------------------
Kenneth J. Romig
Chief Financial Officer
F-3
<PAGE> 55
FIRST WESTERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS:
Cash and due from banks..................................... $ 45,997 $ 40,973
---------- ----------
Interest-bearing deposits with other banks.................. 2,960 6,836
---------- ----------
Securities available for sale, at market value (amortized
cost of $860,338 and $316,146)............................ 868,699 324,521
---------- ----------
Investment securities, held to maturity (market value of
$233,231 at December 31, 1997)............................ -- 232,824
---------- ----------
Loans held for sale......................................... 15,475 39,840
---------- ----------
Loans (net of unearned income of $37,821, and $38,946)...... 1,131,206 1,046,363
Less: Allowance for loan losses............................. 18,297 18,077
---------- ----------
Net loans................................................. 1,112,909 1,028,286
---------- ----------
Premises and equipment...................................... 23,163 20,996
---------- ----------
Bank-owned life insurance................................... 26,410 25,000
---------- ----------
Intangible assets........................................... 60,389 9,280
---------- ----------
Other assets................................................ 71,349 15,521
---------- ----------
Total Assets............................................ $2,227,351 $1,744,077
========== ==========
LIABILITIES:
Deposits:
Noninterest-bearing demand................................ $ 142,162 $ 100,653
Interest-bearing demand................................... 54,668 38,539
Savings................................................... 479,644 385,363
Time...................................................... 812,282 667,784
---------- ----------
Total deposits.......................................... 1,488,756 1,192,339
---------- ----------
Borrowed funds:
Federal funds purchased and other short-term borrowings... 61,078 81,773
Repurchase agreements and secured lines of credit......... 222,620 121,756
Advances from the Federal Home Loan Bank.................. 178,400 156,000
---------- ----------
Total borrowed funds.................................... 462,098 359,529
---------- ----------
Long-term debt.............................................. 23,600 4,258
---------- ----------
Due to paying agent......................................... 53,385 1,299
---------- ----------
Other liabilities........................................... 26,614 23,973
---------- ----------
Total Liabilities....................................... 2,054,453 1,581,398
---------- ----------
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation................ 23,877 23,837
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock, no stated value, 4,000,000 shares
authorized, none issued................................... -- --
Common stock, $5.00 par value, 20,000,000 shares authorized,
11,866,002 and 11,786,811 shares issued and 11,146,443 and
11,132,253 shares outstanding............................. 59,330 58,934
Additional paid-in capital.................................. 4,239 2,611
Retained earnings........................................... 94,767 84,647
Accumulated other comprehensive income...................... 5,435 5,443
Treasury stock, 685,273 and 611,700 shares at cost.......... (14,150) (12,043)
Unallocated common stock held by ESOP (at cost)............. (600) (750)
---------- ----------
Total Shareholders' Equity.............................. 149,021 138,842
---------- ----------
Total Liabilities and Shareholders' Equity.............. $2,227,351 $1,744,077
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 56
FIRST WESTERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans.................................. $90,546 $89,831 $92,321
Interest on deposits with other banks....................... 95 260 61
Interest on securities available for sale................... 38,169 21,946 16,868
Interest and dividends on investment securities:
Taxable interest.......................................... 7,265 10,577 12,048
Tax-exempt interest....................................... 3,640 4,155 4,151
Interest on federal funds sold.............................. 18 554 34
------- ------- -------
Total Interest Income................................... 139,733 127,323 125,483
------- ------- -------
INTEREST EXPENSE:
Interest on deposits:
Demand.................................................... 1,120 890 1,362
Savings................................................... 9,998 7,762 7,056
Time...................................................... 41,627 38,812 37,693
Interest on borrowed funds:
Federal funds purchased and other short-term borrowings... 4,927 3,136 3,096
Repurchase agreements and secured lines of credit......... 10,270 8,110 10,898
Advances from the Federal Home Loan Bank.................. 8,744 8,526 6,620
Interest on long-term debt.................................. 947 383 489
------- ------- -------
Total Interest Expense.................................. 77,633 67,619 67,214
------- ------- -------
NET INTEREST INCOME......................................... 62,100 59,704 58,269
Provision for loan losses................................. 4,000 4,836 8,288
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 58,100 54,868 49,981
------- ------- -------
OTHER INCOME:
Trust fees.................................................. 2,815 2,301 2,010
Service charges on deposit accounts......................... 5,282 4,184 3,700
Net securities (losses) gains............................... (27) 276 984
Net gains on loan sales..................................... 2,320 5,859 4,563
Income from bank-owned life insurance....................... 1,410 -- --
Other operating income...................................... 5,441 4,611 4,457
------- ------- -------
Total Other Income...................................... 17,241 17,231 15,714
------- ------- -------
OTHER EXPENSES:
Salaries and wages.......................................... 17,157 15,395 14,515
Employee benefits........................................... 4,737 4,311 3,941
Net occupancy expense....................................... 3,586 3,156 2,913
Equipment rentals, depreciation and maintenance............. 2,831 2,338 2,190
Amortization of intangible assets........................... 3,343 1,112 1,024
Minority interest expense................................... 2,473 2,252 --
Supplies.................................................... 2,075 1,605 1,587
Data processing services.................................... 1,849 1,542 1,830
Professional fees........................................... 1,636 1,955 1,426
Marketing................................................... 1,363 2,027 1,207
Federal deposit insurance................................... 374 376 4,403
Provision for restructuring................................. 1,500 -- --
Other operating expense..................................... 7,722 6,926 7,228
------- ------- -------
Total Other Expenses.................................... 50,646 42,995 42,264
------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 24,695 29,104 23,431
Income Taxes.............................................. 6,772 8,822 6,304
------- ------- -------
NET INCOME.................................................. $17,923 $20,282 $17,127
======= ======= =======
BASIC EARNINGS PER SHARE.................................... $ 1.61 $ 1.80 $ 1.49
======= ======= =======
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING................... 11,150 11,242 11,510
======= ======= =======
DILUTED EARNINGS PER SHARE.................................. $ 1.58 $ 1.77 $ 1.47
======= ======= =======
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING................. 11,369 11,446 11,669
======= ======= =======
DIVIDENDS PER SHARE......................................... $ 0.70 $ 0.56 $ 0.49
======= ======= =======
</TABLE>
See Notes To Consolidated Financial Statements.
F-5
<PAGE> 57
FIRST WESTERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income.................................................. $17,923 $20,282 $17,127
Other comprehensive income, net of tax:
Unrealized holding (losses) gains arising during period... (645) 4,738 (968)
Transfer of securities from held to maturity to available
for sale............................................... 619 -- --
Less: reclassification adjustment for losses (gains)
included in net income................................. 18 (179) (640)
------- ------- -------
Other comprehensive income.................................. (8) 4,559 (1,608)
------- ------- -------
Comprehensive income........................................ $17,915 $24,841 $15,519
======= ======= =======
</TABLE>
See Notes To Consolidated Financial Statements.
F-6
<PAGE> 58
FIRST WESTERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
-------------------------------------------------------------------------------------
COMMON STOCK
ACCUMULATED HELD BY ESOP
COMMON STOCK OTHER (AT COST)
---------------- RETAINED COMPREHENSIVE TREASURY ----------------
SHARES AMOUNT SURPLUS EARNINGS INCOME STOCK SHARES AMOUNT
------ ------ ------- -------- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- January 1, 1996........ 7,817 $39,083 $ 21,811 $59,313 $2,492 $ (1,011) -- $ --
Net income........................ -- -- -- 17,127 -- -- -- --
Cash dividends paid ($0.49 per
share).......................... -- -- -- (5,704) -- -- -- --
Exercise of options, net of shares
redeemed........................ 18 90 200 -- -- -- -- --
Common stock issued for dividend
reinvestment.................... 1 6 29 -- -- -- -- --
Common stock purchased by ESOP.... -- -- -- -- -- -- (40) (1,050)
Purchased stock allocated to ESOP
participants.................... -- -- -- -- -- -- 6 150
Treasury stock purchased.......... -- -- -- -- -- (3,471) -- --
Treasury stock issued............. -- -- 24 -- -- 240 -- --
Net change in accumulated other
comprehensive income............ -- -- -- -- (1,608) -- -- --
------ ------- -------- ------- ------ -------- ---- -------
Balance -- December 31, 1996...... 7,836 39,179 22,064 70,736 884 (4,242) (34) $ (900)
Net income........................ -- -- -- 20,282 -- -- -- --
Cash dividends paid ($0.56 per
share).......................... -- -- -- (6,364) -- -- -- --
Exercise of options, net of shares
redeemed........................ 19 97 51 -- -- -- -- --
Common stock issued for dividend
reinvestment.................... 5 23 131 -- -- -- -- --
Purchased stock allocated to ESOP
participants.................... -- -- -- -- -- -- 8 150
Treasury stock purchased.......... -- -- -- -- -- (7,801) -- --
Fifty percent stock dividend
(including fractional shares
paid in cash)................... 3,927 19,635 (19,635) (7) -- -- (17) --
Net change in accumulated other
comprehensive income............ -- -- -- -- 4,559 -- -- --
------ ------- -------- ------- ------ -------- ---- -------
Balance -- December 31, 1997...... 11,787 58,934 2,611 84,647 5,443 (12,043) (43) (750)
Net income........................ -- -- -- 17,923 -- -- -- --
Cash dividends paid ($0.70 per
share).......................... -- -- -- (7,803) -- -- -- --
Exercise of options, net of shares
redeemed........................ 12 62 (21) -- -- -- -- --
Common stock issued for dividend
reinvestment.................... 63 316 1,458 -- -- -- -- --
Purchased stock allocated to ESOP
participants.................... -- -- 90 -- -- -- 9 150
Treasury stock purchased.......... -- -- -- -- -- (2,135) -- --
Treasury stock issued............. -- -- 14 -- -- 28 -- --
Restricted shares issued.......... 4 18 87 -- -- -- -- --
Net change in accumulated other
comprehensive income............ -- -- -- -- (8) -- -- --
------ ------- -------- ------- ------ -------- ---- -------
Balance -- December 31, 1998...... 11,866 $59,330 $ 4,239 $94,767 $5,435 $(14,150) (34) $ (600)
====== ======= ======== ======= ====== ======== ==== =======
</TABLE>
See Notes To Consolidated Financial Statements.
F-7
<PAGE> 59
FIRST WESTERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 17,923 $ 20,282 $ 17,127
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................ 2,631 2,312 2,205
Amortization and accretion.............................. 4,383 2,189 1,861
Income from bank owned life insurance................... (1,410) -- --
Provision for loan losses............................... 4,000 4,836 8,288
Loss (gain) on sale of securities....................... 27 (276) (984)
Gain on sale of loans................................... (2,320) (5,859) (4,563)
Gain on sale of branch offices.......................... (1,071) (608) --
Proceeds from loan sales................................ 163,703 137,241 39,144
Purchase of loans....................................... (187) (2,869) (7,894)
Provision for deferred taxes............................ 270 434 (2,093)
Increase in interest receivable......................... (1,351) (273) (193)
Increase in interest payable............................ 1,315 909 320
Other -- net............................................ (2,059) (936) 2,759
--------- --------- ---------
Total adjustments......................................... 167,931 137,100 38,850
--------- --------- ---------
Net cash provided by operating activities................... 185,854 157,382 55,977
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale........ 15,238 18,511 116,036
Proceeds from maturity or paydown of securities available
for sale.................................................. 209,977 121,330 73,228
Purchase of securities available for sale................... (579,252) (255,291) (182,745)
Proceeds from maturity or paydown of investment
securities................................................ 66,437 57,123 47,961
Purchase of investment securities........................... (26,111) (13,948) (65,746)
Proceeds from sale of credit card loan portfolio............ -- 21,801 37,188
Net increase in loans....................................... (153,501) (126,035) (157,790)
Decrease (increase) in deposits with other banks............ 3,876 (5,066) 354
Decrease (increase) in federal funds sold................... -- 37,400 (37,400)
Purchase of premises and equipment.......................... (4,383) (4,111) (3,450)
Proceeds from sale of premises and equipment................ 1,582 290 68
Proceeds from sale of other real estate owned............... 1,597 1,306 883
Purchase of bank-owned life insurance....................... -- (25,000) --
Cash paid for branch office sales........................... (40,884) (14,692) --
Cash received for branch office purchases................... 251,221 33,760 --
--------- --------- ---------
Net cash used in investing activities....................... (254,203) (152,622) (171,413)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits......................... (40,712) 21,564 (28,701)
Net (decrease) increase in federal funds purchased and other
short-term borrowings..................................... (20,695) 48,571 29,604
Net increase (decrease) in repurchase agreements and secured
lines of credit........................................... 100,864 (90,314) 90,412
Net increase in advances from the Federal Home Loan Bank.... 22,400 12,000 32,330
Proceeds from issuance of capital securities, net of
issuance costs............................................ -- 23,800 --
Proceeds from issuance of long-term debt.................... 23,000 -- 1,050
Payments on long-term debt.................................. (3,658) (1,709) (3,216)
Proceeds from exercise of stock options..................... 41 148 290
Proceeds from common stock issued........................... 1,774 154 35
Common stock purchased for ESOP............................. -- -- (1,050)
Stock allocated to ESOP participants........................ 150 150 150
Treasury stock purchased.................................... (2,135) (7,801) (3,471)
Treasury stock issued....................................... 42 -- 264
Restricted stock issued..................................... 105 -- --
Dividends paid on common stock.............................. (7,803) (6,371) (5,704)
--------- --------- ---------
Net cash provided by financing activities................... 73,373 192 111,993
--------- --------- ---------
NET INCREASE IN CASH AND DUE FROM BANKS..................... 5,024 4,952 (3,443)
CASH AND DUE FROM BANKS -- Beginning of year................ 40,973 36,021 39,464
--------- --------- ---------
CASH AND DUE FROM BANKS -- End of period.................... $ 45,997 $ 40,973 $ 36,021
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 76,318 $ 66,710 $ 66,894
========= ========= =========
Income taxes............................................ $ 7,670 $ 10,299 $ 6,405
========= ========= =========
</TABLE>
See Notes To Consolidated Financial Statements.
F-8
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of First Western
Bancorp, Inc. ("First Western") and its wholly owned subsidiaries: First Western
Bank, National Association ("First Western Bank, N.A."); First Western
Investment Services Company ("Investment Services") and First Western Capital
Trust I ("Capital Trust"). Capital Trust exists for the sole purpose of issuing
capital securities and investing the proceeds thereof in junior subordinated
debentures issued by First Western. Effective September 10, 1998, First Western
Trust Services Company ("Trust Services") was merged into First Western Bank,
N.A. Effective September 5, 1997, First Western Bank, Federal Savings Bank
("First Western Bank, F.S.B.") was merged into First Western Bank, N.A. All
significant intercompany transactions have been eliminated in consolidation.
Investments in subsidiaries on the parent company financial statements (see Note
25) are carried at the parent company's equity in the underlying net assets.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing such financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities, a disclosure of contingent
assets and liabilities as of the date of the balance sheet and revenues and
expenses for the reporting period. Actual results could differ from those
estimates.
The accompanying consolidated financial statements have been prepared on
the accrual basis, except for trust fees, which are recorded when received.
Reporting of trust fees on an accrual basis would not materially affect net
income. Assets held in an agency or fiduciary capacity by First Western for its
customers are not assets of First Western and are not included in the
accompanying consolidated balance sheets.
SECURITIES AVAILABLE FOR SALE
Securities to be held for indefinite periods of time, including securities
that management intends to use as part of its asset/liability strategy, and that
may be sold in response to changes in interest rates, changes in prepayment
risk, or other similar factors are classified as available for sale and are
recorded at market value. Unrealized appreciation or depreciation in market
value above or below amortized cost is included in shareholders' equity as a
component of other comprehensive income, net of income taxes. Premiums and
discounts are amortized and accreted to income over the life of the securities
using a method which approximates the level yield method. Gains or losses on the
sale of securities, if any, are based on the specific identification method.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY
Investments in debt securities and mortgage-backed securities which
management has the ability and intent to hold to maturity are carried at cost.
Premiums and discounts are amortized and accreted to income over the life of the
securities using a method which approximates the level yield method. Gains or
losses on the sale of investment securities, if any, are based on the specific
identification method.
LOANS HELD FOR SALE
Loans held for sale consist of those loans which management intends to sell
and are carried at the lower of aggregate cost or market value.
LOANS
Interest income is accrued using various methods that result in a level
yield on principal amounts outstanding. Loan origination fees, net of certain
related origination costs, are amortized over the average lives of the related
loans. For commercial and mortgage loans on which interest is more than 90 days
past due, or earlier, when in the opinion of management collection of principal
or interest is doubtful and the loan is not
F-9
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
well secured and in the process of collection, accrual of income is discontinued
and any previously accrued and unpaid interest for the current year is charged
against current income, and any interest accrued and unpaid for prior periods is
charged against the allowance for loan losses. Installment loans are generally
charged off between 90 and 120 days past due or when deemed uncollectible in the
opinion of management. Cash payments received while a loan is classified as
nonaccrual are recorded as a reduction to principal or reported as interest
income according to management's judgment as to the collectibility of principal.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is available to absorb future loan
charge-offs inherent in the current loan portfolio. The allowance is increased
by provisions charged to operations and reduced by losses, net of recoveries.
The amount charged to operations is based on several factors including: (1)
analytical reviews of significant commercial and commercial mortgage loans and
loan loss experience in relationship to outstanding loans to determine an
adequate allowance for loan losses required for outstanding loans; (2) a
continuing review of loans evaluated by the loan review process as less than
satisfactory, all nonperforming loans and overall portfolio quality; (3) regular
examinations and appraisals of the loan portfolio conducted by federal
supervisory authorities; and (4) management's judgment with respect to current
and expected economic conditions, the level of delinquencies and nonaccrual
loans, trends in the volume and term of loans, anticipated impact from changes
in lending policies and procedures, changes in lending management, and any
concentration of credit in certain industries or geographic areas. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change. The allowance for loan
losses related to loans that are considered to be impaired is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value of collateral for certain collateral-dependent loans.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification of loans, delinquency trends,
charge-off experience, credit concentrations, economic conditions and other
factors. Specific reserves are established for each classified credit, taking
into consideration the credit's delinquency status, current operating status,
pledged collateral and plan of action for resolving any deficiencies, For
nonclassified loans and smaller loans no individually reviewed, management
considers historical charge-off experience in determining the amounts to be
allocated to the allowance. An unallocated or general reserve is also
established which takes into consideration, among other things, concentrations
of credit, economic conditions, delinquency and nonaccrual trends, management
experience and trends in volume and terms of loans. The allowance for loan
losses is maintained at the level determined according to this methodology by
charging a provision to operations.
PREMISES AND EQUIPMENT
Premises and equipment, which are stated at cost less accumulated
depreciation and amortization, are depreciated using the straight-line method
over their estimated useful lives. Leasehold interests and improvements are
amortized using the straight-line method over the lease periods or the estimated
useful lives, whichever is shorter. When units or property are disposed of, the
premises and equipment accounts are relieved of the cost and accumulated
depreciation or amortization related to such units, and any resulting gains or
losses are credited to or charged against income. Cost of repairs and
maintenance is charged to expense as incurred. Major renewals and betterments
are capitalized at cost.
Long-lived assets to be held and those to be disposed of and certain
intangibles are evaluated for impairment using the guidance provided by
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" which was adopted on January 1, 1996. The
provisions of this statement establish when an impairment should be recognized
and how it should be measured. First Western has not recognized any impairments
on its long-lived assets.
F-10
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
REAL ESTATE OWNED
Real estate owned, which is included in other assets, consists of
properties acquired by foreclosure. These assets are carried at the lower of
cost or estimated fair value less estimated cost of disposal. Holding costs are
charged to expense when incurred. Any subsequent writedowns, and gains or losses
on property disposition, are charged to other income and expense.
INCOME TAXES
First Western recognizes deferred income taxes for the tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities.
GOODWILL AND OTHER INTANGIBLES
The excess of cost over net tangible assets and identified intangible
assets of acquired branches or subsidiaries is amortized over a period not to
exceed 15 years. Core deposit intangibles are amortized on a straight-line basis
over the shorter of the estimated average remaining lives of the acquired
deposits or 12 years. Other identified intangibles are amortized over the
benefited periods, not to exceed 12 years.
MORTGAGE SERVICING RIGHTS
The total cost of loans originated or purchased is allocated between loans
and servicing rights based on the relative fair values of each. The servicing
rights capitalized are amortized in proportion to and over the period of
estimated servicing income. Management stratifies servicing rights based on
origination period and interest rate and evaluates the recoverability in
relation to the impact of actual and anticipated loan portfolio prepayments,
foreclosure, and delinquency experience. During the fourth quarter of 1998,
First Western sold its mortgage servicing rights, incurring a small loss on the
sale.
ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank ("FHLB") include advances with an
original maturity greater than one year. Any borrowings from the FHLB with an
original maturity of one year or less are included with federal funds purchased
and other short-term borrowings.
OFF-BALANCE SHEET INSTRUMENTS
First Western has utilized interest rate swaps to synthetically alter the
cash flow characteristics of certain on-balance sheet liabilities. Interest rate
swaps are designated with the principal balances and terms of specific debt
obligations. These agreements involve the exchange of amounts based on fixed or
variable interest rates for amounts based on variable or fixed interest rates
over the life of the agreement without an exchange of the notional amount upon
which the payments are based. The differential to be paid or received as
interest rates change is accrued and recognized as an adjustment to interest
expense. The related amount payable to or receivable from counterparties is
included in other liabilities or assets. The fair values of the swap agreements
are not recognized in the financial statements.
STOCK OPTIONS
First Western has adopted the disclosure-only provisions of Statement No.
123, "Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
stock options.
EARNINGS AND DIVIDENDS PER SHARE
Earnings and dividends per share are calculated using the weighted average
number of shares outstanding and common share equivalents. All share information
and per share amounts have been restated for the effect
F-11
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
of a three-for-two stock split effected in the form of a 50 percent stock
dividend declared on July 15, 1997 and distributed on August 15, 1997.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share." Statement No. 128 requires the
presentation of basic and diluted earnings per share. First Western adopted
Statement No. 128 effective December 31, 1997, and all prior period amounts have
been restated to comply with Statement No. 128.
CASH FLOWS STATEMENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, FASB issued Statement No. 130, "Reporting Comprehensive
Income", which requires businesses to disclose comprehensive income and its
components in their general-purpose financial statements. This statement
requires the reporting of all items of comprehensive income in a financial
statement that is displayed with the same prominence as other financial
statements. This statement was effective beginning January 1, 1998. Prior year
comprehensive income amounts have been reclassified to conform to this
presentation.
First Western has disclosed comprehensive income in a separate income
statement, in which the components of comprehensive income are displayed net of
income taxes. The following tables set forth the related tax effects allocated
to each element of comprehensive income for the years ended December 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ---------------------------------
TAX TAX
PRE-TAX (EXPENSE) NET-OF-TAX PRE-TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT
------ ---------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses) on
securities:
Unrealized holding gains (losses)
arising during period.......... $(993) $ 348 $(645) $7,291 $(2,553) $4,738
Transfer of securities from held
to maturity to available for
sale........................... 952 (333) 619 -- -- --
Less: reclassification adjustment
for (gains) losses realized in
net income..................... 27 (9) 18 (276) 97 (179)
----- ----- ----- ------ ------- ------
Net unrealized gains (losses)..... (14) 6 (8) 7,015 (2,456) 4,559
----- ----- ----- ------ ------- ------
Other comprehensive income.......... $ (14) $ 6 $ (8) $7,015 $(2,456) $4,559
===== ===== ===== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------
TAX
PRE-TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ----------
<S> <C> <C> <C>
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period... $(1,491) $523 $ (968)
Less: reclassification adjustment for (gains) losses
realized in net income................................. (984) 344 (640)
------- ---- -------
Net unrealized gains (losses)............................. (2,475) 867 (1,608)
------- ---- -------
Other comprehensive income.................................. $(2,475) $867 $(1,608)
======= ==== =======
</TABLE>
F-12
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which was effective for
financial statements for periods beginning after December 15, 1997. Statement
No. 131 redefines how operating segments are determined and requires disclosure
of certain financial and descriptive information about a company's operating
segments. First Western has determined that it only has one operating segment
which is the operation of a bank which operates in one geographic region,
therefore, First Western will not be presenting any further segment information.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosure
About Pension and Other Post-Retirement Benefits". This statement requires
certain footnote disclosures related to pension and other retiree benefits and
has no impact on First Western's financial position or results of operations.
Implementation of this standard is reflected in Note 13.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management is in the
process of evaluating the impact of this statement on First Western's financial
statements. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for the years ended December 31, 1997 and 1996 to conform with the
1998 presentation.
NOTE 2. SECURITIES AVAILABLE FOR SALE
At December 31, 1998 and 1997, the cost and market values of securities
classified as available for sale were as follows (in thousands):
<TABLE>
<CAPTION>
1998
-------------------------------------------------
GROSS
------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities....................... $ 7,399 $ 22 $ -- $ 7,421
U.S. government agencies and corporations...... 205,300 650 (39) 205,911
Mortgage-backed securities..................... 496,734 2,039 (390) 498,383
States and political subdivisions.............. 82,899 1,526 (29) 84,396
Other securities............................... 68,006 4,707 (125) 72,588
-------- ------ ----- --------
$860,338 $8,944 $(583) $868,699
======== ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------
GROSS
------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities....................... $ 7,745 $ 41 $ -- $ 7,786
U.S. government agencies and corporations...... 92,100 555 (65) 92,590
Mortgage-backed securities..................... 161,509 1,879 (62) 163,326
Other securities............................... 54,792 6,048 (21) 60,819
-------- ------ ----- --------
$316,146 $8,523 $(148) $324,521
======== ====== ===== ========
</TABLE>
Securities available for sale with market values of $393,108,000 and
$147,216,000 at December 31, 1998 and 1997, respectively, were pledged to secure
public and trust deposits, securities sold under agreements to repurchase and
other short-term borrowings and for other purposes.
F-13
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The cost and market value of securities available for sale at December 31,
1998, by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties (in thousands):
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
---- -----
<S> <C> <C>
Due in one year or less............................... $194,289 $194,719
Due after one year through five years................. 91,545 92,958
Due after five years through ten years................ 13,118 13,426
Due after ten years................................... 64,652 69,213
-------- --------
363,604 370,316
Mortgage-backed securities............................ 496,734 498,383
-------- --------
$860,338 $868,699
======== ========
</TABLE>
Sales of securities available for sale during 1998, 1997 and 1996 were
$68,464,000, $18,522,000 and $116,040,000, respectively. Gross gains of
$1,050,000, $284,000 and $1,744,000 and gross losses of $1,077,000, $8,000 and
$760,000 were realized on those sales during 1998, 1997 and 1996, respectively.
NOTE 3. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY
On December 1, 1998, First Western transferred all of its securities that
were classified as held to maturity to available for sale. At the time of the
transfer, these securities had an amortized cost of $192,953,000 and a market
value of $193,905,000. This transfer was made in order to give First Western's
management more flexibility in managing the total investment securities
portfolio. First Western's management did not believe that it was strategically
important to maintain the held to maturity portfolio.
At December 31, 1997, the carrying and market values of investment
securities and mortgage-backed securities held to maturity were as follows (in
thousands):
<TABLE>
<CAPTION>
1997
-------------------------------------------------
GROSS
------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government agencies and corporations...... $ 14,154 $ -- $ (60) $ 14,094
States and political subdivisions.............. 85,247 1,208 (10) 86,445
Other securities............................... 750 -- -- 750
-------- ------ ------- --------
$100,151 $1,208 $ (70) $101,289
======== ====== ======= ========
Mortgage-backed securities..................... $132,673 $ 569 $(1,300) $131,942
======== ====== ======= ========
Total..................................... $232,824 $1,777 $(1,370) $233,231
======== ====== ======= ========
</TABLE>
Investment securities and mortgage-backed securities with an amortized cost
of $92,277,000 at December 31, 1997 were pledged to secure public and trust
deposits, securities sold under agreements to repurchase and other short-term
borrowings and for other purposes.
There were no sales of investment securities or mortgage-backed securities
held to maturity during 1998, 1997 or 1996.
F-14
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 4. LOANS
Loans at December 31, 1998 and 1997 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial, financial and agricultural............. $ 186,664 $ 141,989
Real estate:
Construction..................................... 11,239 14,450
Mortgage......................................... 650,616 606,042
Installment loans to individuals................... 320,508 322,828
---------- ----------
1,169,027 1,085,309
Less unearned income............................... 37,821 38,946
---------- ----------
$1,131,206 $1,046,363
========== ==========
</TABLE>
First Western's bank subsidiary grants commercial, residential and
installment loans to its customers, primarily within the western Pennsylvania
and northeastern Ohio regions, with no significant concentrations of credit risk
within any specific industry. The bank subsidiary's loan portfolio is
diversified; however, a substantial portion of its debtors' ability to honor
their obligations is dependent upon the economy within the western Pennsylvania
and northeastern Ohio regions. The total loans serviced for others was $3.3
million and $176.1 million at December 31, 1998 and 1997, respectively. During
the fourth quarter of 1998, First Western sold most its mortgage loan servicing
rights.
In the normal course of business, loans are extended to directors and
executive officers and their associates. All of these loans are on substantially
the same terms as loans to other individuals and businesses of comparable
creditworthiness. A summary of loan activity for those directors and executive
officers and their associates with loan balances in excess of $60,000 for the
year ended December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNTS
BALANCE AT COLLECTED AND BALANCE AT
JAN. 1 1998 ADDITIONS OTHER CHANGES DEC. 31, 1998
- ----------- --------- ------------- -------------
<S> <C> <C> <C>
1$4,721 $9,733 $11,235 $13,219
====== ======= =======
</TABLE>
NOTE 5. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year.................. $18,077 $16,054 $14,148
Provision for loan losses................... 4,000 4,836 8,288
Recoveries on loans previously
charged-off.............................. 828 1,108 674
------- ------- -------
22,905 21,998 23,110
Less loans charged-off...................... 4,608 3,921 7,056
------- ------- -------
Balance at end of year........................ $18,297 $18,077 $16,054
======= ======= =======
</TABLE>
Statement No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended, requires an allowance to be established as a component of the allowance
for loan losses for certain loans when it is probable that all amounts due
pursuant to contractual terms of the loan will not be collected and the recorded
investment in the loan exceeds the fair value. Management reviews the impairment
status of all loans designated as nonaccrual or which have been classified as
"substandard" or "doubtful" by First Western's loan review process. Management
does not individually evaluate certain smaller balance, homogeneous loans, such
as consumer installment loans and residential mortgage loans, for impairment.
These loans are evaluated on an
F-15
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
aggregate basis using a formula-based approach in accordance with First
Western's policy. All of the loans deemed to be impaired were evaluated using
the fair value of the collateral as the measurement standard.
The following table presents First Western's investment in loans considered
to be impaired and related information on those impaired loans (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
---- ----
<S> <C> <C>
Recorded investment in loans considered to be impaired...... $1,948 $3,276
Loans considered to be impaired that were on a nonaccrual
basis..................................................... 322 162
Allowance for loan losses related to loans considered to be
impaired.................................................. 490 757
Average recorded investment in impaired loans............... 2,051 3,328
Total interest income recognized on impaired loans.......... 185 298
Interest income on impaired loans recognized on a cash
basis..................................................... 13 9
</TABLE>
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Land.................................................... $ 2,179 $ 1,954
Buildings............................................... 21,724 20,573
Leasehold interests and improvements.................... 2,263 2,249
Furniture and fixtures.................................. 18,513 15,996
------- -------
44,679 40,772
Less accumulated depreciation and amortization.......... 21,516 19,776
------- -------
$23,163 $20,996
======= =======
</TABLE>
Provisions for depreciation and amortization charged to other expenses were
$2,631,000, $2,312,000 and $2,205,000 for 1998, 1997 and 1996, respectively.
NOTE 7. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Receivable from paying agent............................ $53,241 $ 15
Accrued interest receivable............................. 11,608 9,890
Net deferred tax benefit................................ 2,191 2,172
Other real estate owned................................. 617 382
Other................................................... 3,692 3,062
------- -------
$71,349 $15,521
======= =======
</TABLE>
NOTE 8. DEPOSITS
Time deposits include certificates of deposit issued in denominations of
$100,000 or more, which amounted to $99,823,000 and $92,108,000 at December 31,
1998 and 1997, respectively. Interest expense on these certificates was
$5,944,000, $5,375,000 and $3,898,000 for 1998, 1997 and 1996, respectively.
F-16
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
At December 31, 1998, the scheduled maturities of certificates of deposit
are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $643,742
2000........................................................ 107,386
2001........................................................ 24,433
2002........................................................ 10,470
2003 and thereafter......................................... 26,251
--------
$812,282
========
</TABLE>
NOTE 9. REPURCHASE AGREEMENTS AND SECURED LINES OF CREDIT
First Western's subsidiaries have repurchase agreements with various
wholesale funding sources and certain retail customers. First Western's
liability for repurchase agreements and secured lines of credit is as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- -------------------------
WEIGHTED WEIGHTED
REMAINING MATURITY AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------------------ ------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Next business day.......... $ 6,420 4.56% $ 7,356 5.88%
31 days to 90 days......... -- -- 32,050 5.21
91 days to one year........ 43,700 6.13 18,650 5.93
Over one year.............. 172,500 5.44 63,700 6.02
-------- ---- -------- ----
$222,620 5.55% $121,756 5.79%
======== ==== ======== ====
</TABLE>
At December 31, 1998, the weighted average life of repurchase agreements
with a remaining maturity in excess of one year was 8.9 years based on the
stated maturity of the repurchase agreements, however, many of these repurchase
agreements have call provisions. The weighted average life of First Western's
repurchase agreements with a remaining maturity in excess of one year based on
the call dates was 2.2 years at December 31, 1998.
First Western's repurchase agreements and secured lines of credit are
secured by U.S. Treasury securities, securities issued by U.S. government
agencies and corporations, mortgage-backed securities and securities issued by
states and political subdivisions.
NOTE 10. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the FHLB with original maturities greater than one year
mature as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- -------------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
1998....................... $ 74,000 5.96%
1999....................... $ 15,000 5.15% 15,000 5.15
2000....................... 31,400 5.39 30,000 5.78
2002....................... 37,000 5.56 37,000 5.56
2003....................... 50,000 4.55 -- --
2008....................... 45,000 4.59 -- --
-------- ---- -------- ----
$178,400 4.97% $156,000 5.75%
======== ==== ======== ====
</TABLE>
The weighted average life of First Western's advances from the FHLB is 4.8
years based on the stated maturity of the advances, however, many of these
advances have call provisions at which time the FHLB can convert the interest
rate to a variable rate. First Western would have the option to repay the
advance, with no
F-17
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
penalties, if the FHLB chose to convert the advance to an adjustable rate at the
call date. The weighted average life of First Western's advances based on the
call dates is 1.6 years.
Advances from the FHLB are secured by stock in the FHLB of Pittsburgh,
qualifying residential first mortgage loans, mortgage-backed securities, certain
investment securities and securities available for sale. Certain of these
advances are subject to restrictions or penalties in the event of prepayment.
NOTE 11. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
---- ----
<S> <C> <C>
Revolving credit note with a bank, due in 2003, bearing
interest at either the bank's variable prime rate adjusted
for a factor of minus 1% to minus 0.5% depending on First
Western's capital levels, a fixed interest rate determined
by the bank for periods up to one year or a variable rate
based on the federal funds rate adjusted by a margin of
plus 1% to plus 1.25% depending on First Western's capital
levels. The maximum available credit under this line is
$25 million. At December 31, 1998, the interest rate was
5.32%..................................................... $23,000 $ --
Term loan payable to bank, due in quarterly installments of
$390,000 bearing interest at either the bank's variable
prime rate or the bank's fully absorbed cost of funds rate
plus 1.25% or the bank's Eurodollar rate plus 1.25% as
selected by First Western at various intervals............ -- 3,508
Term loan payable to bank by First Western Employee Stock
Ownership Trust used to purchase 40,000 shares of First
Western stock (before stock dividends), guaranteed by
First Western, bearing interest at the bank's variable
prime interest rate, payable quarterly by the Employee
Stock Ownership Trust with principal due in annual
installments of $150,000. At December 31, 1998, the
interest rate was 8.25%................................... 600 750
------- ------
$23,600 $4,258
======= ======
</TABLE>
Principal repayments are scheduled as follows: $150,000 for 1999,
$1,483,000 for 2000, $3,483,000 for 2001, $3,484,000 for 2002 and $15,000,000
for 2003. Certain long-term debt instruments contain financial covenants which,
among other things, include limitations on certain types of indebtedness,
dividends to First Western shareholders (limited to $5,373,000 at December 31,
1998), and maintenance of certain levels or ratios of net worth, investments in
subsidiaries, non-performing assets and interest expense coverage. First Western
was in compliance with all such covenants at December 31, 1998.
NOTE 12. INCOME TAXES
Income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income exclusive of securities gains (losses).... $6,781 $8,725 $5,960
Net securities gains (losses).................... (9) 97 344
------ ------ ------
$6,772 $8,822 $6,304
====== ====== ======
</TABLE>
F-18
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The income tax provision consists of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Taxes currently payable.......................... $6,502 $8,388 $8,397
Deferred tax liability (benefit)................. 270 434 (2,093)
------ ------ ------
$6,772 $8,822 $6,304
====== ====== ======
</TABLE>
The deferred tax liability (benefit) results from temporary differences in
the recognition of revenue and expense for tax and financial statement purposes.
The source of these differences and the tax effect of each are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized loss on sale of mortgage loans........ $ -- $1,017 ($1,017)
Provision for loan losses........................ (77) (708) (667)
Deferred loan origination fees................... 144 186 624
Settlement of tax audit.......................... -- -- (500)
Termination costs relating to credit card sale... -- 225 (276)
Other............................................ 203 (286) (257)
---- ------ -------
$270 $ 434 ($2,093)
==== ====== =======
</TABLE>
The reconciliation between the federal statutory tax rate and the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate............................ 35.0% 35.0% 35.0%
Increases (decreases) in tax resulting from:
Tax-exempt interest on investment securities
and loans................................... (5.7) (4.9) (6.3)
Income on bank-owned life insurance............ (2.0) -- --
State income taxes, net of federal benefit..... -- 0.6 0.2
Settlement of tax audit........................ -- -- (2.1)
Other, net..................................... 0.1 (0.4) 0.1
---- ------ -------
Effective tax rate............................... 27.4% 30.3% 26.9%
==== ====== =======
</TABLE>
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax
F-19
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
effects of significant items comprising First Western's net deferred tax asset
as of December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............................... $5,678 $5,601
Intangible assets....................................... 958 919
Employee benefit plans.................................. 724 578
Deferred directors' fees................................ 399 406
Other................................................... 233 507
------ ------
Total deferred tax assets............................ 7,992 8,011
------ ------
Deferred tax liabilities:
Purchase accounting adjustments......................... 789 1,108
Unrealized appreciation in securities available for
sale................................................. 2,926 2,931
Difference between book and tax basis of property....... 607 464
Loan origination fees................................... 1,479 1,336
------ ------
Total deferred tax liabilities....................... 5,801 5,839
------ ------
Net deferred tax assets.............................. $2,191 $2,172
====== ======
</TABLE>
NOTE 13. EMPLOYEE BENEFIT PLANS
Pension benefits
First Western has a noncontributory qualified defined benefit pension plan
(the "Plan") that covers substantially all full-time employees. Pension benefits
are based on a formula taking into consideration an employee's vesting status,
compensation and years of service. First Western's funding policy is to make
annual contributions to the Plan based upon the funding formula developed by the
Plan's actuary. The formula used by the Plan is the Frozen Initial Liability
Method. The minimum funding commitments for 1998, 1997 and 1996 were $0,
$326,000 and $0, respectively.
As part of a restructuring program, First Western amended the pension plan
in 1992 to provide special retirement benefits under an early retirement window
program and a supplemental plan (the "Unfunded Plan"). The Unfunded Plan also
includes a special defined benefit plan arrangement that was made for an
executive officer during 1997. First Western makes contributions to the Unfunded
Plan to the extent necessary to make the benefit payments to the participants.
The following tables summarize benefit obligation and plan asset activity
for the pension plans (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year............... $16,349 $14,011
Service cost.......................................... 679 545
Interest cost......................................... 1,094 1,040
Plan amendments....................................... 8 12
Benefits paid......................................... (719) (720)
Actuarial gain........................................ 347 1,461
------- -------
Benefit obligation at end of year..................... $17,758 $16,349
======= =======
</TABLE>
F-20
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in plan assets
Fair value at beginning of year....................... $15,944 $13,779
Actual return on plan assets.......................... 2,319 2,463
Employer contributions................................ 89 422
Benefits paid......................................... (719) (720)
------- -------
Fair value at end of year............................. $17,633 $15,944
======= =======
Reconciliation of funded status
Funded status......................................... $ (125) $ (404)
Unrecognized actuarial (gain) loss.................... (76) 571
Unrecognized transition asset......................... (420) (484)
Unrecognized prior service cost....................... (63) (81)
------- -------
Net amount recognized at year-end..................... $ (684) $ (398)
======= =======
Additional year-end information on the Unfunded Plan
Projected benefit obligation.......................... $ 752 $ 753
Accumulated benefit obligation........................ 748 750
Fair value of plan assets............................. -- --
Weighted average assumptions as of December 31
Discount rate......................................... 6.75% 7.00%
Expected return on plan assets........................ 8.50 8.50
Rate of compensation increase......................... 5.25 5.25
</TABLE>
A summary of the components of net periodic pension expense for the pension
plans for 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost..................................... $ 679 $ 545 $ 535
Interest cost.................................... 1,094 1,040 971
Expected return on plan assets................... (1,328) (1,142) (1,097)
Amortization of prior service cost............... (10) (11) (11)
Amortization of transition obligation............ (64) (64) (64)
Recognized actuarial (gain) or loss.............. 4 2 5
------- ------- -------
Net periodic pension expense..................... $ 375 $ 370 $ 339
======= ======= =======
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
First Western provides health care benefits for a certain group of retirees
and life insurance for substantially all of its retired employees. The following
tables summarize benefit obligation and plan asset activity for the
postretirement benefit plans (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year............... $ 1,011 $ 971
Service cost.......................................... 26 21
Interest cost......................................... 62 70
Plan amendments....................................... 30 --
Benefits paid......................................... (120) (133)
Actuarial (gain) or loss.............................. (62) 82
------- -------
Benefit obligation at end of year..................... $ 947 $ 1,011
======= =======
</TABLE>
F-21
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Change in plan assets
Fair value at beginning of year....................... $ -- $ --
Employer contributions................................ 120 133
Benefits paid......................................... (120) (133)
------- -------
Fair value at end of year............................. $ -- $ --
======= =======
Reconciliation of funded status
Funded status......................................... $ (947) $(1,011)
Unrecognized actuarial (gain) loss.................... (317) (280)
Unrecognized transition asset......................... 309 387
Unrecognized prior service cost....................... (181) (225)
------- -------
Net amount recognized at year-end..................... $(1,136) $(1,129)
======= =======
Additional year-end information on the postretirement
benefit plans
Benefit obligation.................................... $ 947 $ 1,011
Fair value of plan assets............................. -- --
Weighted average assumptions as of December 31
Discount rate......................................... 6.75% 7.00%
Rate of compensation increase......................... 5.25 5.25
</TABLE>
A summary of the components of net postretirement benefit cost for 1998,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost............................................ $ 26 $ 21 $ 20
Interest cost........................................... 62 70 74
Amortization of prior service cost...................... (14) (17) (17)
Amortization of transition obligation................... 77 77 77
Recognized actuarial gain............................... (25) (22) (5)
---- ---- ----
Net postretirement benefit cost......................... $126 $129 $149
==== ==== ====
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 6.2% for 1999 and is expected to decrease
linearly each successive year until it reaches 5% in 2002. As of December 31,
1998, a one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
by approximately $22,000 and the net periodic postretirement health care cost
for the year ended December 31, 1998 by approximately $1,000 and a one
percentage point decrease in the assumed health care cost trend rate for each
year would decrease the accumulated postretirement benefit obligation by
approximately $21,000 and the net periodic postretirement health care cost for
the year ended December 31, 1998 by approximately $1,000.
OTHER BENEFIT PLANS
First Western also has a 401(k) Profit-Sharing and Stock Bonus Plan.
Contributions to the plan are made annually at the discretion of First Western's
Board of Directors and amounted to $1,098,000, $1,164,000 and $937,000 for 1998,
1997 and 1996, respectively.
During 1996, the Employee Stock Ownership Plan (the "ESOP") acquired 60,000
shares (adjusted for stock dividends) of First Western common stock with a loan
of $1,050,000 from an unrelated bank. This loan is to be repaid in seven annual
installments of $150,000 beginning in December 1996. A total of 8,571 shares
were allocated to plan participants in both 1998 and 1997 in accordance with the
terms of the plan. Distributions are made upon an employee's retirement, death
or termination, subject to a plan-provided
F-22
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
vesting schedule. For financial reporting purposes, the ESOP loans and the
related shares have been reflected on First Western's consolidated balance
sheets to the extent of the unpaid loan balance.
NOTE 14. STOCK OPTION PLAN
First Western has an Incentive Stock Option Plan for Key Officers (the "ISO
Plan") which was adopted on January 21, 1991. Under the ISO Plan, as amended,
802,994 shares of common stock have been reserved for issuance. The Board's
Compensation Committee grants options to certain key employees, at an option
price equal to the fair market value of First Western's common stock on the date
of grant. The options granted generally become exercisable between two and seven
years from the date of grant, and are intended to qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended. The
total shares reserved for issuance, options granted and the option price per
share have been adjusted for subsequent stock dividends in accordance with terms
of the ISO Plan. The ISO Plan has a life of ten years during which time the
options must be granted. Options previously granted must be exercised within ten
years of date of grant.
On April 21, 1998, First Western's shareholders approved the Equity
Compensation Plan for Non-Employee Directors of First Western Bancorp, Inc. and
First Western Bank, N.A. (the "Directors' Plan") which provides for the payment
of directors fees in stock options and restricted stock. Under the terms of the
Directors' Plan, 200,000 share of common stock have been reserved for issuance.
During 1998, 22,977 options were issued to directors at an option price equal to
the fair market value of First Western stock on the date of the grant. Beginning
in 1998, First Western issued restricted stock to directors as payment for their
regular meeting fees. The restricted shares cannot be traded for a two year
period. First Western issued 3,701 shares of restricted stock to directors
during 1998.
The changes in options outstanding under both plans during 1998, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ --------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1.............. 391,451 $11.74 373,237 $10.14 378,490 $ 9.75
Granted............................. 90,127 29.16 46,950 21.33 22,500 17.75
Exercised........................... (13,000) 4.50 (28,736) 6.58 (27,303) 11.03
Cancelled........................... (500) 30.19 -- -- (450) 13.33
------- ------ ------- ------ ------- ------
Outstanding, December 31............ 468,078 $15.28 391,451 $11.74 373,237 $10.14
======= ====== ======= ====== ======= ======
Exercisable, December 31............ 348,226 $11.84 320,551 $ 9.99 297,506 $ 9.54
======= ====== ======= ====== ======= ======
Available for Grant, December 31.... 423,642 313,269 360,219
======= ======= =======
Weighted average fair value of
options granted during the year... $ 7.62 $ 5.05 $ 3.87
====== ====== ======
</TABLE>
F-23
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 4.50 111,376 2.1 years $ 4.50 111,376 $ 4.50
13.33 197,625 6.0 13.33 197,625 13.33
17.75 22,500 7.8 17.75 10,800 17.75
21.33 46,950 8.3 21.33 5,448 21.33
22.06 1,598 9.8 22.06 1,598 22.06
23.56 12,000 9.7 23.56 -- 23.56
30.19 76,029 9.3 30.19 21,379 30.19
- --------------- ------- --------- ------ ------- ------
$4.50 to $30.19 468,078 6.0 $15.28 348,226 $11.84
=============== ======= ========= ====== ======= ======
</TABLE>
First Western has adopted the disclosure-only provisions of Statement No.
123, "Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
the ISO and Directors' Plans. If First Western had elected to recognize
compensation cost for the ISO and Directors' Plans based on the fair value at
the grant dates for awards under the ISO and Directors' Plans, consistent with
the method prescribed by Statement No. 123, net income and earnings per share
would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (in thousands):
As reported................................. $17,923 $20,282 $17,127
Pro forma................................... 17,542 20,135 17,019
Basic earnings per share:
As reported................................. $ 1.61 $ 1.80 $ 1.49
Pro forma................................... 1.57 1.79 1.48
Diluted earnings per share:
As reported................................. $ 1.58 $ 1.77 $ 1.47
Pro forma................................... 1.54 1.76 1.46
</TABLE>
The fair value of First Western's stock options used to compute pro forma
net income and earnings per share disclosures is the estimated present value at
the grant date using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield......................................... 2.0% 2.5% 3.0%
Expected volatility.................................... 20.2 19.6 21.0
Discount rate.......................................... 5.7 6.8 6.2
Expected holding period in years....................... 8 5 5
</TABLE>
The fair value of stock options, calculated using the Black-Scholes option
pricing model, granted during 1998, 1997 and 1996 were $687,000, $237,000 and
$87,000, respectively.
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are various outstanding commitments
to extend credit and standby letters of credit which are not reflected in the
accompanying consolidated financial statements. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
F-24
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
condition established in the contract. Standby letters of credit are conditional
commitments issued by First Western to guarantee the performance of a customer
to a third party. First Western uses the same credit policies in making
commitments as it does for on-balance sheet instruments. Firm commitments to
extend credit at December 31, 1998 of $277,309,000 consist of commercial,
mortgage and other commitments of $205,241,000 and home equity lines of credit
of $72,068,000. Standby letters of credit at December 31, 1998 totaled
$13,101,000. Credit-related financial instruments have off-balance sheet credit
risk, because only origination fees (if any) are recognized in the consolidated
balance sheet for these instruments until the commitments are fulfilled or
expire. The credit risk involved in issuing guarantees and letters of credit is
essentially the same as that involved in extending loans to customers. The
credit risk amounts are equal to the notional amounts of the contracts,
assuming, in accordance with the requirements of FASB Statement No. 105,
"Disclosure of Information about Financial Instruments with Off-Balance Sheet
Risk and Financial Instruments with Concentrations of Credit Risk," that
counterparties fail completely to meet their obligations and the collateral or
other security is of no value. 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 contract
amounts do not necessarily represent future cash requirements. First Western's
credit loss risk in the event of a borrower's inability to repay loans funded
under commitments is represented by the contractual amount. These commitments
represent the possibility of additional credit risk; however, management
believes that no material losses, beyond its current evaluation of such in
determining the adequacy of the allowance for loan losses, will occur as a
result of these transactions.
First Western's obligation for future minimum lease payments on operating
leases at December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
FUTURE MINIMUM LEASE PAYMENTS
-----------------------------
<S> <C>
1999................................................. $609
2000................................................. 481
2001................................................. 393
2002................................................. 292
2003................................................. 240
</TABLE>
In the normal course of business, First Western is involved in several
legal proceedings. Management believes that the liability, if any, from such
proceedings will not have a material adverse effect on the consolidated
financial statements of First Western.
NOTE 16. REGULATORY RESTRICTIONS
First Western is a legal entity separate and distinct from its subsidiaries
and there are various legal and regulatory limitations concerning the extent to
which certain of these subsidiaries can finance or otherwise provide funds to
First Western.
Certain restrictions exist regarding the ability of certain of the
subsidiaries to pay dividends to First Western, which are the primary source of
First Western's revenues, in addition to management and service fees. Under
national banking regulations, as promulgated by the Office of the Comptroller of
the Currency ("OCC"), First Western Bank, N.A., an OCC-supervised bank, may make
payments of dividends without obtaining prior regulatory approval, if the total
of all dividends declared by the bank's Board of Directors in a calendar year
does not exceed the total of such bank's net profit for that year combined with
its retained net profits for the two preceding calendar years less any required
transfer to surplus. Under OCC regulations, the total capital available for
payment of dividends from First Western Bank, N.A. was approximately $17,940,000
at December 31, 1998.
The OCC has the power to prohibit any act, including the payment of
dividends, if, in their opinion, such act would constitute an unsafe or unsound
banking practice.
First Western and its banking subsidiary are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain
F-25
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on First Western's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, First Western and its banking subsidiary must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. First Western's capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require First Western and its banking subsidiary to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that First Western and its banking subsidiary meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998 and 1997, First Western and its subsidiaries were
considered to be well-capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes may have changed First Western's category.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
--------------- --------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total Capital to Risk-Weighted Assets:
Consolidated............................ 124,423 9.79% 101,711 8.00% N/A N/A
First Western Bank, N.A................. 135,129 10.75% 100,519 8.00% 125,649 10.00%
Tier I Capital to Risk-Weighted Assets:
Consolidated............................ 107,074 8.42% 50,856 4.00% N/A N/A
First Western Bank, N.A................. 119,391 9.50% 50,260 4.00% 75,389 6.00%
Tier I Capital to Average Assets:
Consolidated............................ 107,074 5.00% 64,291 3.00% N/A N/A
First Western Bank, N.A................. 119,391 5.65% 63,346 3.00% 105,577 5.00%
AS OF DECEMBER 31, 1997
Total Capital to Risk-Weighted Assets:
Consolidated............................ 161,632 14.85% 87,060 8.00% N/A N/A
First Western Bank, N.A................. 126,863 12.00% 84,593 8.00% 105,742 10.00%
Tier I Capital to Risk-Weighted Assets:
Consolidated............................ 147,974 13.60% 43,530 4.00% N/A N/A
First Western Bank, N.A................. 113,586 10.74% 42,297 4.00% 63,445 6.00%
Tier I Capital to Average Assets:
Consolidated............................ 147,974 8.73% 50,859 3.00% N/A N/A
First Western Bank, N.A................. 113,586 6.84% 49,806 3.00% 83,011 5.00%
</TABLE>
First Western's banking subsidiary is also subject to certain restrictions
imposed by federal law on extensions of credit and certain other transactions
with First Western, including borrowing from this subsidiary unless the loans
are both well-secured and limited in amount to no more than 10% of the lending
subsidiary's capital and surplus. The banking subsidiary is also required to
maintain average reserve balances with the district Federal Reserve Bank. The
average amount of these balances was approximately $4,924,000 and $3,500,000 for
the years ended December 31, 1998 and 1997, respectively.
F-26
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 17. SUPPLEMENTAL SCHEDULES OF NONCASH ACTIVITIES
Noncash activities for the years ended December 31, 1998, 1997 and 1996
were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental schedule of noncash investing activity:
Securities purchased settling after year end.............. $ 53,385 $ 1,299 $ 7
======== ======= ========
Securities sold settling after year end................... $ 53,241 $ 15 $ 4
======== ======= ========
Loans acquired in branch acquisition...................... $ 73,677 $ -- $ --
======== ======= ========
Transfer of investment securities to securities available
for sale............................................... $192,953 $ -- $ --
======== ======= ========
Transfer of loans to other real estate owned.............. $ 1,811 $ 1,130 $ 1,233
======== ======= ========
Transfer of loans to loans held for sale.................. $ -- $34,036 $154,935
======== ======= ========
Net change in accumulated other comprehensive income...... $ (14) $ 7,015 $ (2,474)
======== ======= ========
Supplemental schedule of noncash financing activity:
Deposits assumed in branch acquisitions................... $383,842 $37,296 $ --
======== ======= ========
Deposits sold in branch dispositions...................... $ 46,702 $15,363 $ --
======== ======= ========
Issuance of common stock, at par, for a 50% stock
dividend............................................... $ -- $19,635 $ --
======== ======= ========
</TABLE>
F-27
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 18. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of First Western's financial instruments as of December 31,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks................... $ 45,997 $ 45,997 $ 40,973 $ 40,973
Interest-bearing deposits in other
banks.................................. 2,960 2,960 6,836 6,836
Securities available for sale............. 868,699 868,699 324,521 324,521
Investment securities, held to maturity... -- -- 100,151 101,289
Mortgage-backed securities, held to
maturity............................... -- -- 132,673 131,942
Loans held for sale....................... 15,475 15,672 39,840 40,332
Loans..................................... 1,131,206 1,121,061 1,041,263 1,033,991
Bank-owned life insurance................. 26,410 26,410 25,000 25,000
Liabilities:
Demand and savings deposits............... 676,474 676,474 524,555 524,555
Time deposits............................. 812,282 820,431 667,784 670,562
Federal funds purchased and other
short-term borrowings.................. 61,078 61,078 81,773 81,773
Repurchase agreements and secured lines of
credit................................. 222,620 218,345 121,756 122,330
Advances from the Federal Home Loan
Bank................................... 178,400 173,651 156,000 154,702
Long-term debt............................ 23,600 23,600 4,258 4,258
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust holding solely junior
subordinated debentures of the
Corporation............................ 23,877 27,656 23,837 27,375
Off-balance sheet instruments:
Interest rate swaps....................... -- -- -- (33)
</TABLE>
The estimated fair value amounts have been determined by First Western
using available market information and appropriate valuation methodologies.
However, judgment is required to interpret market data to develop the estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts First Western could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
CASH AND DUE FROM BANKS
For cash and due from banks, the carrying amount is the estimated fair
value.
INTEREST-BEARING DEPOSITS IN OTHER BANKS AND FEDERAL FUNDS SOLD
For interest-bearing deposits in other banks and federal funds sold, the
carrying amount is the estimated fair value.
SECURITIES AVAILABLE FOR SALE, INVESTMENT SECURITIES AND MORTGAGE-BACKED
SECURITIES, HELD TO MATURITY
Fair values for investment securities, mortgage-backed securities and
securities available for sale are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
F-28
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
LOANS HELD FOR SALE
Fair values for loans held for sale are based on quoted market prices.
LOANS
For certain homogeneous categories of loans, such as some residential
mortgages and other consumer loans, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted for differences
in loan characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. It was not practicable to estimate fair value of
nonperforming loans of approximately $4.8 million and $5.1 million in First
Western's portfolio at December 31, 1998 and 1997, respectively, because it is
not practicable to reasonably assess the credit adjustment that would be applied
in the marketplace for such loans. Interest rates on such loans approximate
current lending rates.
BANK-OWNED LIFE INSURANCE
For bank-owned life insurance, the carrying amount is the cash surrender
value of the policies and the carrying value is also the estimated fair value.
DEMAND AND SAVINGS DEPOSITS
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at the reporting date. No disclosure of
the relationship value of First Western's deposits is required. Management
believes the relationship value of these deposits is significant based upon the
historical stable core deposit base and limited secondary market transactions,
but has made no attempt to estimate this value.
TIME DEPOSITS
The fair value of fixed-maturity certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining maturities.
FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM BORROWINGS
The fair value of federal funds purchased and other short-term borrowings
is the amount payable at the reporting date.
REPURCHASE AGREEMENTS, SECURED LINES OF CREDIT, ADVANCES FROM THE FEDERAL HOME
LOAN BANK, LONG-TERM DEBT AND CORPORATION-OBLIGATED MANDATORILY REDEEMABLE
CAPITAL SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES OF THE CORPORATION
Rates currently available to First Western for borrowings with similar
terms and remaining maturities are used to estimate the fair values of existing
borrowings.
OFF-BALANCE SHEET COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of off-balance sheet commitments to extend credit and
standby letters of credit is estimated to equal the outstanding commitment
amount. Management does not believe it is meaningful to provide an estimate of
fair value that differs from the outstanding commitment amount as a result of
the uncertainties involved in attempting to assess the likelihood and timing of
the commitment being drawn upon, coupled with the lack of an established market
and a wide diversity of fee structures.
OFF-BALANCE SHEET INSTRUMENTS
The fair values of interest rate swaps are based on pricing models using
current interest rate and maturity assumptions.
F-29
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 19. OFF-BALANCE SHEET INSTRUMENTS
First Western has used interest rate swaps to help manage its exposure to
changes in interest rates. At December 31, 1997, First Western used interest
rate swaps to synthetically convert certain adjustable rate borrowings to fixed
rates. These swaps matured during 1998. At December 31, 1998, First Western did
not have any interest rate swaps or other off-balance sheet instruments. The
summary information with respect to First Western's interest rate swaps at
December 31, 1997 is as follows (dollars in thousands):
<TABLE>
<S> <C>
Notional amount............................................. $30,000
Unrealized gains............................................ 9
Unrealized losses........................................... (42)
Weighted average receive variable rate...................... 5.86%
Weighted average pay fixed rate............................. 6.14%
Life (years)................................................ 0.7
</TABLE>
NOTE 20. BRANCH OFFICE PURCHASES AND SALES
On September 19, 1997, First Western completed its purchase of the Chicora,
Pennsylvania branch office of Mellon Bank. This branch had approximately $37
million of deposits as of the date of acquisition, and First Western paid a
premium of approximately $3.5 million to acquire this branch. During the third
quarter of 1997, First Western completed the sale of its Slippery Rock,
Pennsylvania branch office. This branch had approximately $4 million of
deposits, and First Western realized a gain of $325,000 from the sale. During
October 1997, First Western completed the sale of its Oil City, Pennsylvania
branch office. This branch had approximately $12 million of deposits, and First
Western realized a gain of $283,000 from this sale.
In January 1998, First Western completed the sale of its three Lake County,
Ohio branches to FirstMerit Bank. These branches had approximately $47 million
in deposits. First Western realized a net gain of $1.1 million on this
transaction.
On June 19, 1998, First Western Bank, N.A. completed the purchase of 16
branches in western Pennsylvania from PNC Bank. The purchase included branches,
related deposits, consumer loans, small business banking relationships and
certain brokerage relationships of the following branches: Farrell, Grove City,
Hermitage, Sharon, Transfer and West Middlesex (Mercer County); Beaver,
Chippewa, Midland and New Brighton (Beaver County); Ebensburg and Barnesboro
(Cambria County); Evans City (Butler County); McDonald (Washington County);
Punxsutawney (Jefferson County); and Kiski Valley (Westmoreland County). First
Western acquired approximately $384 million in deposits, $74 million in consumer
and small business loans, and $11 million in brokerage assets, along with
related fixed assets, leases, safe deposit business and other agreements. First
Western paid consideration of approximately $59 million for the deposit and
brokerage relationships and the right to acquire, at book value, the loan
portfolio and the real estate and related assets of the 16 branches. This
premium was recorded as an intangible asset and is being amortized over twelve
years.
On October 14, 1998, First Western announced the sale of the recently
acquired Punxsutawney, Ebensburg, Barnesboro and Kiski Valley branches to three
banks that are unrelated to First Western. As part of this transaction, First
Western will acquire the deposits and consumer loans of a branch in Moon
Township, Allegheny County, Pennsylvania from one of these banks. First Western
sold these branches because they were not located near First Western's core
banking markets. These branches were acquired in June 1998 from PNC Bank as part
of a 16 branch purchase. The remaining twelve branches from the PNC branch
purchase are located within First Western's strategic market. The four branches
that are being sold have approximately $139 million of deposits and $25 million
of consumer loans. The Moon Township branch to be acquired by First Western has
approximately $10 million of deposits and $2.7 million of consumer loans. The
sales and purchase are expected to be completed in February 1999. Management
expects that no gain or loss will be recognized on the sales of these offices.
F-30
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 21. TRUST PREFERRED CAPITAL SECURITIES
On February 11, 1997, First Western completed the private placement of $25
million of 9.875% capital securities due February 1, 2027 issued by Capital
Trust. Securities of this type received approval in October 1996 from the
Federal Reserve Board to qualify as Tier I capital, and the interest payable
thereon is currently considered to be tax-deductible. Proceeds of the issue were
invested by Capital Trust in junior subordinated debentures issued by First
Western. Net proceeds from the sale of the debentures have been used for general
corporate purposes, including, but not limited to, repurchase of shares of First
Western's common stock and investments in and advances to First Western's
subsidiaries. Interest payments to the holders of the trust preferred securities
are recorded as minority interest expense.
NOTE 22. EARNINGS PER SHARE
Income and shares in thousands:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------- ---------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share:
Income available to
shareholders...... $17,923 11,150 $1.61 $20,282 11,242 $1.80
Effect of dilutive
securities:
Stock options........ -- 219 -- 204
------- ------ ----- ------- ------ -----
Diluted earnings
per share:
Income available to
shareholders...... $17,923 11,369 $1.58 $20,282 11,446 $1.77
======= ====== ===== ======= ====== =====
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic earnings
per share:
Income available to
shareholders...... $17,127 11,510 $1.49
Effect of dilutive
securities:
Stock options........ -- 159
------- ------ -----
Diluted earnings
per share:
Income available to
shareholders...... $17,127 11,669 $1.47
======= ====== =====
</TABLE>
NOTE 23. PENDING ACQUISITION
On December 13, 1998, First Western's Board of Directors approved a
definitive agreement to be acquired by Sky Financial Group, Inc. ("Sky
Financial"). Under the terms of the agreement, First Western's shareholders will
receive 1.211 shares of Sky Financial common stock for each share of First
Western common stock in a tax-free exchange. The merger is intended to be
accounted for as a pooling-of-interests. In connection with this agreement,
First Western has issued an option to Sky Financial to purchase up to 19.9% of
outstanding shares of First Western, at an exercise price of $28.50 per share,
which is exercisable only upon the occurrence of certain events. The merger
transaction is subject to shareholder and regulatory approval and is expected to
be completed during the third quarter of 1999.
NOTE 24. RESTRUCTURING CHARGE
During the fourth quarter of 1998, First Western completed its "Profit
Improvement Initiative" which had the goal of reducing First Western's operating
expenses. This program resulted in the elimination of approximately 70 positions
at First Western. Of the approximately 70 positions eliminated, 49 of the
positions were full-time positions including five executive level positions.
First Western eliminated positions throughout the organization affecting all
departments. The largest number of positions were eliminated from the bank
branches which also had the largest number of employees.
The severance benefits to be paid to the terminated employees varied
depending on their length of service and position held. The cost of the
severance benefits for the terminated employees of $1.5 million was recorded
during the fourth quarter of 1998 as a restructuring charge. Some of the
terminated employees have deferred their severance payments for a period of up
to two years. All of the employees identified by First
F-31
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Western for severance in the Profit Improvement Initiative have been terminated.
First Western has not made any adjustments or changes to the restructuring
charge or the remaining accrual for severance benefits.
At December 31, 1998, the remaining accrual for severance benefits was $1.3
million.
NOTE 25 PARENT COMPANY
Following are condensed financial statements for First Western (in
thousands).
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS:
Cash and short-term investments........................... $ -- $ 1,299
Investment in:
Bank subsidiary........................................ 182,696 124,514
Nonbank subsidiaries................................... 18,958 39,914
Premises and equipment.................................... 5,493 5,079
Other assets.............................................. 1,531 882
-------- --------
TOTAL ASSETS...................................... $208,678 $171,688
======== ========
LIABILITIES:
Interest payable.......................................... $ 1,221 $ 1,103
Other liabilities......................................... 2,267 2,608
Long-term debt............................................ 56,169 29,135
-------- --------
TOTAL LIABILITIES................................. 59,657 32,846
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, no stated value, 4,000,000 shares
authorized, none issued................................ -- --
Common stock, $5 par value, 20,000,000 shares authorized,
11,866,002 and 11,786,811 shares issued and 11,146,443
and 11,132,253 shares outstanding...................... 59,330 58,934
Additional paid-in capital................................ 4,239 2,611
Retained earnings......................................... 100,202 90,090
Treasury stock, 685,273 and 611,700 shares at cost........ (14,150) (12,043)
Unallocated common stock held by ESOP (at cost)........... (600) (750)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 149,021 138,842
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $208,678 $171,688
======== ========
</TABLE>
F-32
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash dividends from:
Bank subsidiary........................................... $ 2,000 $22,500 $ 8,000
Nonbank subsidiaries...................................... 19,110 16,310 250
Interest income from:
Bank subsidiary........................................... 39 59 66
Interest income on investment securities.................... -- -- 145
Interest income on securities available for sale............ -- -- 211
Interest expense............................................ (3,916) (2,883) (555)
Management and service fees from:
Bank subsidiary........................................... 13,208 11,860 11,145
Nonbank subsidiaries...................................... -- 166 163
Net securities gains (losses)............................... -- -- 465
Other operating income...................................... 4 3 3
Other operating expenses.................................... (14,528) (15,566) (13,302)
-------- ------- --------
Income before tax benefit and equity in undistributed
earnings of subsidiaries.................................. 15,917 32,449 6,591
Income tax benefit.......................................... (1,781) (2,250) (576)
-------- ------- --------
Income before equity in undistributed earnings of
subsidiaries.............................................. 17,698 34,699 7,167
Equity in undistributed earnings of:
Bank subsidiary........................................... 17,641 102 9,777
Nonbank subsidiaries...................................... (17,416) (14,519) 183
-------- ------- --------
NET INCOME............................................. $ 17,923 $20,282 $ 17,127
======== ======= ========
</TABLE>
F-33
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $17,923 $20,282 $17,127
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation......................................... 967 878 765
Gain on sale of securities available for sale........ -- -- (465)
Other -- net......................................... (745) 1,645 884
Equity in undistributed earnings of subsidiaries..... (225) 14,417 (9,960)
------- ------- -------
TOTAL ADJUSTMENTS................................. (3) 16,940 (8,776)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 17,920 37,222 8,351
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in bank subsidiary............................. (37,010) -- --
Investment in nonbank subsidiaries........................ -- (42,534) (10)
Proceeds from maturities and paydown of investment
securities............................................. -- -- 981
Proceeds from sales of securities available for sale...... -- -- 1,474
Purchase of securities available for sale................. -- -- (1,298)
Purchase of premises and equipment -- net of
retirements............................................ (1,378) (1,703) (2,248)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES............. (38,388) (44,237) (1,101)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. 34,711 27,643 2,625
Payments on long-term debt................................ (7,717) (6,245) (3,443)
Common stock purchased for ESOP........................... -- -- (1,050)
Stock allocated to ESOP participants...................... 150 150 150
Proceeds from exercise of stock options................... 41 148 290
Proceeds from common stock issued for dividend
reinvestment........................................... 1,774 154 35
Restricted stock issued................................... 105 -- --
Treasury stock purchased.................................. (2,135) (7,801) (3,471)
Treasury stock issued..................................... 42 -- 264
Dividends paid on common stock............................ (7,802) (6,371) (5,704)
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES...................................... 19,169 7,678 (10,304)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS............................................... (1,299) 663 (3,054)
CASH AND SHORT-TERM INVESTMENTS --
BEGINNING OF YEAR......................................... 1,299 636 3,690
------- ------- -------
CASH AND SHORT-TERM INVESTMENTS -- END OF YEAR.............. $ -- $ 1,299 $ 636
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... $ 3,798 $ 1,810 $ 635
======= ======= =======
Income taxes........................................... $ 7,670 $ 8,426 $ 6,055
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITY:
Transfer of investment securities held to maturity and
securities available for sale to nonbank subsidiary.... $ -- $ -- $ 7,740
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY:
Issuance of common stock, at par, for 50% stock
dividend............................................... $ -- $19,635 $ --
======= ======= =======
</TABLE>
F-34
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 26. QUARTERLY EARNINGS SUMMARY (UNAUDITED)
Quarterly earnings for the years ended December 31, 1998 and 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998
------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest income.................................... $31,394 $32,566 $38,016 $37,757
Interest expense................................... 16,756 17,902 21,811 21,164
------- ------- ------- -------
Net interest income................................ 14,638 14,664 16,205 16,593
Provision for loan losses.......................... 1,000 1,000 1,000 1,000
------- ------- ------- -------
Net interest income after provision for loan
losses........................................... 13,638 13,664 15,205 15,593
Other income....................................... 5,628 3,560 4,722 3,331
Other expenses..................................... 11,428 11,627 13,338 14,253
------- ------- ------- -------
Income before income taxes......................... 7,838 5,597 6,589 4,671
Income taxes....................................... 2,219 1,569 1,833 1,151
------- ------- ------- -------
Net income......................................... $ 5,619 $ 4,028 $ 4,756 $ 3,520
======= ======= ======= =======
Dividends per share................................ $ 0.15 $ 0.15 $ 0.15 $ 0.25
======= ======= ======= =======
Basic earnings per share........................... $ 0.50 $ 0.36 $ 0.43 $ 0.32
======= ======= ======= =======
Basic weighted average shares outstanding.......... 11,149 11,176 11,143 11,131
======= ======= ======= =======
Diluted earnings per share......................... $ 0.49 $ 0.35 $ 0.42 $ 0.31
======= ======= ======= =======
Diluted average shares outstanding................. 11,376 11,406 11,351 11,341
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest income.................................... $31,319 $31,666 $32,091 $32,247
Interest expense................................... 17,096 16,804 16,836 16,883
------- ------- ------- -------
Net interest income................................ 14,223 14,862 15,255 15,364
Provision for loan losses.......................... 1,974 954 954 954
------- ------- ------- -------
Net interest income after provision for loan
losses........................................... 12,249 13,908 14,301 14,410
Other income....................................... 7,556(1) 3,581 2,766 3,328
Other expenses..................................... 10,974 10,355 10,550 11,116
------- ------- ------- -------
Income before income taxes......................... 8,831 7,134 6,517 6,622
Income taxes....................................... 2,959 2,254 1,846 1,763
------- ------- ------- -------
Net income......................................... $ 5,872 $ 4,880 $ 4,671 $ 4,859
======= ======= ======= =======
Dividends per share................................ $ 0.13 $ 0.13 $ 0.15 $ 0.15
======= ======= ======= =======
Basic earnings per share........................... $ 0.51 $ 0.43 $ 0.42 $ 0.44
======= ======= ======= =======
Basic weighted average shares outstanding.......... 11,427 11,230 11,165 11,150
======= ======= ======= =======
Diluted earnings per share......................... $ 0.51 $ 0.43 $ 0.41 $ 0.43
======= ======= ======= =======
Diluted average shares outstanding................. 11,596 11,425 11,383 11,377
======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes net gains on sales of loans of $4.8 million.
F-35
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
First Western Bank, National Association
First Western Investment Services Company
First Western Capital Trust I
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
First Western Bancorp, Inc. on Form S-8 (No. 33-46923) for the First Western
Bancorp, Inc. 401(k) Profit-Sharing and Stock Bonus Plan, on Form S-8 (Nos.
33-00528 and 33-50372) for the First Western Bancorp, Inc. Incentive Stock
Option Plan for Key Employees and on Form S-3 (No. 33-40596), as amended, for
the First Western Bancorp, Inc. Dividend Reinvestment and Additional Stock
Purchase Plan of our report dated January 25, 1999, appearing in this Annual
Report on Form 10-K of First Western Bancorp, Inc. for the year ended December
31, 1998.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 8, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000740876
<NAME> FIRST WESTERN
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 45,997
<INT-BEARING-DEPOSITS> 2,960
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 868,699
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,146,681
<ALLOWANCE> 18,297
<TOTAL-ASSETS> 2,227,351
<DEPOSITS> 1,488,756
<SHORT-TERM> 462,098
<LIABILITIES-OTHER> 79,999
<LONG-TERM> 23,600
0
0
<COMMON> 59,330
<OTHER-SE> 89,691
<TOTAL-LIABILITIES-AND-EQUITY> 2,227,351
<INTEREST-LOAN> 90,546
<INTEREST-INVEST> 49,074
<INTEREST-OTHER> 113
<INTEREST-TOTAL> 139,733
<INTEREST-DEPOSIT> 52,745
<INTEREST-EXPENSE> 77,633
<INTEREST-INCOME-NET> 62,100
<LOAN-LOSSES> 4,000
<SECURITIES-GAINS> (27)
<EXPENSE-OTHER> 50,646
<INCOME-PRETAX> 24,695
<INCOME-PRE-EXTRAORDINARY> 17,923
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,923
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.58
<YIELD-ACTUAL> 7.65
<LOANS-NON> 1,928
<LOANS-PAST> 2,879
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 18,077
<CHARGE-OFFS> 4,608
<RECOVERIES> 828
<ALLOWANCE-CLOSE> 18,297
<ALLOWANCE-DOMESTIC> 8,698
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,599
</TABLE>
