Y e s t e r d a y
T O M O R R O W
T O D A Y
First Commonwealth Financial Corporation
1999 Annual Report
2 Message to Shareholders
10
Board of Directors
12
Affiliate Management
13
Corporate Information/Market Area
15
Independent Auditors’ Report
16
Consolidated Financial Statements
20 Notes to Consolidated Financial Statements
36 Quarterly Summary of Financial Data
37
Selected Financial Data
38 Management’s Discussion and Analysis of
Financial Condition and Results of Operations
52
Shareholders’ Information
“
Y e s t e r d a y
is experience.
T o m o r r o w
is hope.
T o d a y
is getting from one point to the other
the best you can.
”
—Robert Frost
were increased twice resulting in a yield of 4.67% at year-
creased dividends for the industry as a whole. As I am
end. The current indicated dividend for 2000 is 14.3%
sure you are aware, the stock market has not rewarded
above the dividend paid in 1999. The fourteen consecu-
the small and mid cap stocks or the traditional value
tive years of double-digit dividend increases make First
stocks overall. In fact our total return to shareholders
Commonwealth one of the highest ranked in the coun-
last year of just over 2% outperformed the vast majority
try among all publicly traded companies. We also contin-
of those stocks.
ued to aggressively buy back our shares in the open mar-
The good news is that this low P/E level relative to
ket including over 3.8 million shares (post split) acquired
the S&P 500 has historically signaled a bottom in indus-
through a Modified Dutch Auction completed last Sep-
try valuations. In fact many stock analysts are forecasting
tember. In November we distributed shares subsequent
a possible rally in financial stocks later in 2000 as the
to a two-for-one stock split. This action was taken to stimu-
Federal Reserve moves to a neutral position on future
late more activity among individual investors by reduc-
interest rate increases. Other positive factors include the
ing the initial cost of becoming a First Commonwealth
opportunities opened up by the recent passage of the
shareholder. The split also encouraged new institutional
Financial Services Modernization Act, an anticipated
shareholders to invest by increasing the average number
increase in merger and acquisition activity, and increased
of shares actively traded.
share repurchases due to the low current valuations.
Because over half of the registered First Commonwealth
While we do not control all the factors that affect the
shareholders participate in the dividend reinvestment plan,
share value of our stock, we do control the primary driver
we have made significant additional improvements to make
of long-term value. That primary driver is the consistent
a great plan even better. The increase of the discount ap-
improvement of the financial performance of the Cor-
plied to shares purchased with reinvested dividends was
poration. We are committed to build on the progress
doubled to a full 10%. Other improvements were made to
that was made in 1999 in order to maximize the long-
attract more individual investors who believe these types of
term return to our shareholders.
plans provide the best opportunity for long-term wealth build-
I am especially proud of, and grateful to, all the em-
ing. First Commonwealth’s dividend reinvestment plan is
ployees throughout First Commonwealth for their accom-
among the best, if not the best, in the country.
plishments this past year. Their efforts to make the Y2K
The financial services sector has experienced signifi-
rollover a non-event were exceptional. The enthusiasm
cant turmoil over the past several years. At the end of
with which they embraced intensive training in improv-
1997 bank stocks were trading at a P/E (price divided by
ing their customer service skills was most gratifying. The
earnings per share) multiple of 83% relative to the S&P
old axiom that you can best judge a company by its people
500 average. At the end of 1999 the industry had de-
is even more true during this period of continuous change.
clined to a multiple of only 48% of the S&P 500 average.
By that measurement we certainly have an exceptional
This decline occurred despite record earnings and in-
company in which we all can take great pride.
1999 Annual Report
3
Ye s t e r d a y
THE AMERICAN HERITAGE DICTIONARY defines “tradition” as “the passing down of a culture from
generation to generation.” Traditions are founded on yesterday’s experiences, experiences that
have proven valuable and worthwhile to the community. In Pamplona, Spain, it’s the running
of the bulls. In Punxsutawney, Pennsylvania, it’s Phil checking his shadow. At First Common-
wealth, our tradition is high quality service and local values, consistently delivered. Our affiliate
companies have roots in western and central Pennsylvania leading back to 1880. Consequently,
our customer service skills have been carefully crafted for 120 years.
Many traditions improve with time. With First Commonwealth, these improvements
include more choices in financial services and new technologies. We can now provide all of
the benefits of a large financial organization. The constant through all of these changes is our
core belief in providing local service and local value. This is our area of expertise; it’s the source
of our success. It’s what our customers, shareholders and communities have come to expect.
AS A BUSINESS OWNER, MY FINANCIAL NEEDS ARE
COMPLEX: LOANS, DEPOSIT ACCOUNTS, INVESTMENT
ADVICE, AND INSURANCE PROTECTION. I GET IT ALL
FROM FIRST COMMONWEALTH – MY TRUSTED
FINANCIAL ADVISOR.
ED BRATTON, Owner of Giant Eagle stores and long-time
First Commonwealth customer and shareholder
These important constituencies expect First Com-
monwealth to keep a local focus in servicing and re-
investing money in local communities. They expect
a board of directors and local management who are
in touch with the needs of the community.
That’s why a critical component of our busi-
ness strategy continues to include locally managed
delivery of financial services. Our affiliates have a
management team who know exactly how to best
serve their communities. These are people who live
there, work there, and participate in the local traditions. By keeping our business in the area,
we support other local businesses, create jobs and stimulate the economy. This makes our
communities a better place for everyone. As we look to the past, we are pleased with yesterday’s
successes. Over the years, our customer focus hasn’t changed, nor will it change in the future.
It’s our tradition. And it’s our foundation for the future.
1999 Annual Report
5
To m o r r o w
HAVE YOU EVER SEEN OLD SCIENCE FICTION FILMS? That view of the future, complete with
robots and techno-gadgets, all seemed so far-fetched at the time. The truth is, today’s
technological advances are only a little less fantastic than that old science fiction. Who
would have imagined Automated Teller Machines (ATMs) or Internet banking? However,
many of today’s technologies make banking easier and more convenient for our customers,
as do new ways of looking at services and delivery. These changes will not alter the tradi-
tions of yesterday; rather, they’ll enhance those traditions. With our combination of tradi-
tional values and new services, we eagerly anticipate the future for both our customers and
our shareholders.
In that spirit, customers will have access to what we call “total solution banking” -
banking that is grounded in our belief that customers should have access to services that
meet all financial needs, wherever and whenever they need them. Insurance and invest-
ment services will feature prominently in our future, providing true “one stop shopping”
for financial services. In these busy times, many customers might not have time to stop by
AS AN EMPLOYEE SHAREHOLDER, I WANT TO BE
AFFILIATED WITH A COMPANY WITH A CLEAR
VISION OF FUTURE SUCCESS. THAT’S WHY I AM
WITH FIRST COMMONWEALTH.
ORLANDO FULGENZIO III, Vice President in charge
of Internet design – fcfcovf@telerama.com
a bank, preferring instead to do banking at home
through a variety of methods. One such avenue
will be Internet banking, a service that will allow
customers to do everything from pay bills and print
instant statements to purchase insurance and trade
stock shares via home computer.
If you worry about navigating your way
through these new services, you shouldn’t. First
Commonwealth recognizes how challenging find-
ing your path to financial goals can be, so we are increasing our advisory capacity. Financial
advisors will work to ensure you have a clear plan to reach your financial goals. These advi-
sors can aid in difficult decisions, and can help develop a plan to get you where you want to
go, providing you with a true “road map” for the challenges – and hopes – of the 21st century.
1999 Annual Report
7
To d a y
BETWEEN REFLECTING ON THE PAST AND PLANNING FOR THE FUTURE COMES THE REALITY OF TODAY.
What is happening in the present remains the most concrete means of measuring success and
achievement. At First Commonwealth, we believe what is happening right now is every bit as
promising as our proud past and our exciting future. Although our company and our industry
are in a transition phase, customers and shareholders can enjoy greatly expanded value today.
Recent legislation, for instance, has allowed us to capitalize on our foresight to provide
expanded financial services. Already customers can purchase a full line of insurance products and
services through First Commonwealth Insurance Agency, and obtain investment services through
First Commonwealth Trust Company. With the legislation, we will be able to proceed at an even
faster pace. As customers look forward to Internet banking in the future, they can today utilize a
financial calculator and peruse information on insurance, trust and investment services at our web
site at www.fcfbank.com. If they prefer, they can bank via First Commonwealth Bank’s ex-
panded call center known as the Convenience Banking Center at 1-800-711-BANK (2265),
SUCCESSFUL BUSINESSES, LIKE FIRST
COMMONWEALTH, ARE THE ONES THAT CAN
MAKE AN EFFECTIVE TRANSITION FROM PAST
SUCCESSES TO FUTURE OPPORTUNITIES.
LAURIE STERN SINGER, President, Allegheny Valley Chamber
of Commerce and Allegheny Valley Development Corporation;
Director for the Corporation and shareholder
which allows them to do most transactions from their phones.
For customers eager for increased financial advice, we offer
two products through our newest affiliate, Southwest Bank.
FOCUS, a financial planning tool designed to help custom-
ers assess and prioritize financial needs, and Total Solutions
Banking, a comprehensive financial approach for businesses,
are both receiving wide acclaim.
Good decision-making today stands as strong testa-
ment to the fact that we’ve learned from our past and have the
necessary vision for the future. Our decisions have proved
highly successful, as our record-breaking year demonstrates. Not only are we investing in the
future, we’re also obtaining excellent financial results now. Our customers and shareholders
can trust our decision-making knowing that we delivered on promises this year, as we have in
the past, and as we will in the future.
1999 Annual Report
9
E. H. Brubaker
Sumner E. Brumbaugh
Ray T. Charley
Edward T. Côté
Clayton C. Dovey, Jr.
Ronald C. Geiser
Johnston A. Glass
A. B. Hallstrom
David F. Irvin
David L. Johnson
Robert F. Koslow
Dale P. Latimer
Joseph W. Proske
John A. Robertshaw, Jr.
Laurie Stern Singer
David R. Tomb, Jr., Esq.
First Commonwealth Financial Corporation
Board of Directors
E. H. Brubaker Rockton
David L. Johnson Havertown
Retired, Chairman of the
Board, Deposit Bank, DuBois
Sumner E. Brumbaugh
Duncansville
Chairman of the Board,
Central Bank, Hollidaysburg
Ray T. Charley Greensburg
President, Thomi Co.
Edward T. Côté Rector
Associate, The Wakefield
Group, Murrysville
David S. Dahlmann
Greensburg
Vice Chairman, First
Commonwealth Financial
Corporation and President
and Chief Executive Officer,
Southwest Bank
Thomas L. Delaney
Jupiter, FL
Private Investor
Clayton C. Dovey, Jr.
Johnstown
Retired, Chairman of the
Board, Cenwest Bank,
Johnstown
Ronald C. Geiser Johnstown
Retired, Former President
and Chief Executive Officer,
Cenwest Bank, Johnstown
Johnston A. Glass Indiana
President and Chief
Executive Officer,
First Commonwealth Bank,
Indiana
A. B. Hallstrom DuBois
Chairman, Hallstrom
Construction, Inc., DuBois
Thomas J. Hanford
Boca Raton, FL
Private Investor
H. H. Heilman, Jr., Esq.
Manorville
Attorney at Law, Heilman
and McClister, Kittanning
David F. Irvin Indiana
Owner, The Irvin-McKelvy
Co., Indiana
Retired, Former Vice
President and Corporate
Secretary, Pennsylvania
Manufacturer’s Corporation,
Philadelphia
Robert F. Koslow New Castle
Chairman of the Board,
Peoples Bank of Western
Pennsylvania, New Castle
Dale P. Latimer
New Alexandria
President, R & L
Development Co.,
New Alexandria
James W. Newill
Boca Raton, FL
Certified Public Accountant,
Former President,
J.W. Newill Company
Joseph E. O'Dell Indiana
President and Chief
Executive Officer, First
Commonwealth Financial
Corporation, Indiana
Joseph W. Proske Ridgway
Retired, Former Vice
President-Engineering,
Kane Magnetics
International, Kane
John A. Robertshaw, Jr.
Greensburg
Former Chairman,
Laurel Vending, Inc.
Laurie Stern Singer
Allison Park
President, Allegheny Valley
Chamber of Commerce
and Allegheny Valley
Development Corporation
David R. Tomb, Jr., Esq.
Indiana
Attorney at Law, Indiana
E. James Trimarchi Indiana
Chairman of the Board, First
Commonwealth Financial
Corporation, Indiana
Robert C. Williams
Fayetteville
President, Unitas Bank,
Chambersburg
1999 Annual Report
11
David S. Dahlmann
Thomas L. Delaney
Thomas J. Hanford
H. H. Heilman, Jr., Esq.
James W. Newill
Joseph E. O'Dell
E. James Trimarchi
Robert C. Williams
First Commonwealth Affiliate Presidents
John O. Campbell, President, First Commonwealth Insurance
Agency, First Commonwealth Place, 654 Philadelphia Street,
Indiana, PA 15701 • (724) 349-6056
David S. Dahlmann, President & Chief Executive Officer,
Southwest Bank, 111 Main Street,
Greensburg, PA 15601 • (724) 834-2310
John O. Campbell
David S. Dahlmann
Johnston A. Glass, President & Chief Executive Officer, First
Commonwealth Bank, Central Offices, Philadelphia and
Sixth Streets, Indiana, PA 15701 • (724) 349-3400
Rosemary Krolick, President & Chief Executive Officer,
Commonwealth Systems Corporation, 22 North Sixth Street,
Indiana, PA 15701 • (724) 349-4310
Johnston A. Glass
Rosemary Krolick
Domenic P. Rocco, Jr., President & Chief Executive Officer,
First Commonwealth Trust Company, 614 Philadelphia
Street, Indiana, PA 15701 • (724) 465-3282
Gerard M. Thomchick, President, First Commonwealth
Professional Resources Incorporated, 22 North Sixth Street,
Indiana, PA 15701 • (724) 349-7220. President, Common-
wealth Trust Credit Life Insurance Company, 2700 North
Third Street, Suite 2000, Phoenix, AZ 85004
Domenic P. Rocco, Jr.
Gerard M. Thomchick
First Commonwealth Financial Corporation
Corporate Information
Corporate Description
First Commonwealth Financial
Corporation is a Pennsylvania
business corporation established in
1983, registered as a bank holding
company by the Board of Governors
of the Federal Reserve System.
Corporate Executive Offices
Market Area and Affiliate Headquarters by County
Elk
Jefferson
Lawrence
Beaver
Armstrong
Indiana
Clearfield
Centre
Allegheny
Cambria
Blair
Westmoreland
Huntingdon
Washington
Somerset
Bedford
Franklin
Executive Offices
Old Courthouse Square,
22 North Sixth Street
Indiana, Pennsylvania
Mail Address
Post Office Box 400
Indiana, Pennsylvania 15701-0400
Telephone (724)349-7220
Executive Officers
E. James Trimarchi
Chairman of the Board
Joseph E. O’Dell
President and Chief Executive Officer
David S. Dahlmann
Vice Chairman
Gerard M. Thomchick
Senior Executive Vice President and
Chief Operating Officer
John J. Dolan
Executive Vice President and Chief Financial Officer
Rosemary Krolick
Executive Vice President and Chief Information
Officer
David R. Tomb, Jr.
Senior Vice President, Secretary and Treasurer
William R. Jarrett
Senior Vice President, Risk Management
R. John Previte
Senior Vice President, Investments
For shareholder information see
page 52 of this report.
ALLEGHENY
BLAIR
CLEARFIELD
FRANKLIN
INDIANA
LAWRENCE
Reliable Bank
Central Bank
Deposit Bank
Unitas Bank
Bridgeville, PA
Hollidaysburg, PA
DuBois, PA
Chambersburg, PA
First Commonwealth
Financial Corporation
Peoples Bank of
Western Pennsylvania
ARMSTRONG
CAMBRIA
First Bank of
Leechburg
Leechburg, PA
Cenwest Bank
Johnstown, PA
New Castle, PA
SOMERSET
Peoples Bank
Jennerstown, PA
WESTMORELAND
Southwest Bank
Greensburg, PA
First Commonwealth
Bank
NBOC Bank
Commonwealth
Systems Corporation
First Commonwealth
Insurance Agency
First Commonwealth
Professional
Resources Inc.
First Commonwealth
Trust Company
Indiana, PA
For other information call our Conve-
nience Banking Center at 1-800-711-
BANK (2265) or visit our website:
www.fcfbank.com
1999 Annual Report
13
Shareholder value
First Commonwealth is committed to building shareholder value. It is our mission, our highest priority. Value is delivered
through the total return (dividend yields plus market price appreciation) from investing in FCF stock. This page is an
illustration of how our dividend policy and exceptional Dividend Reinvestment Plan deliver on our commitment.
FCFC Has Consistently Increased
Annual Dividends Paid*
$0.56
$0.49
$0.44
$0.40
$0.36
$0.32
$0.28
$0.25
$0.21
$0.60
$0.50
$0.40
$0.30
$0.20
1992 1993
1994
1995
1996
1997
1998
1999
2000
*Chart shows consistent dividend increases since the year First Commonwealth was first listed
on NYSE. First Commonwealth has actually increased dividends every year since 1983, when
the Corporation was established. Dividends paid reflect 2-for-1 stock splits in 1994 and 1999.
Dividend for 2000 is indicated rate.
Our Dividend
Reinvestment Plan
is one of the best
in the country!
First Commonwealth is proud to offer an outstanding
FCFC Dividend Reinvestment Plan
Plan Benefits
· Receive a 10% discount on shares purchased with
reinvested dividends for faster growth
· Detailed statements for simplified record keeping
· All the rights of voluntary direct share ownership for
flexibility
opportunity to create long-term wealth through its Divi-
· Automatic reinvestment of dividends for convenience
dend Reinvestment Plan. The Plan boasts a number of
· Safekeeping of shares for security
benefits for participants as well as accolades and endorse-
· Full or partial reinvestment or cash dividends for options
ments by analysts and shareholders alike.
The combination of the Plan structure and dividend
growth make it one of the premier Dividend Reinvest-
ment Plans not only within our industry - in the coun-
try. For information, contact our Plan Administrator,
The Bank of New York, at 1-800-524-4458 or visit our
web site at www.fcfbank.com.
Highlights
· Recognition by Moody’s Handbook of Dividend
Achievers for our eleven years of increased dividends
and our 12.13% dividend growth rate over the past
ten years
· FCF ranks 114th out of 10,000 actively traded
companies in dividend growth
· Over 50% of First Commonwealth’s registered
shareholders participate in the plan
· Attractive dividend yield of 5.40% (as of 3/6/00)
First Commonwealth Financial Corporation
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Shareholders
of First Commonwealth Financial Corporation:
We have audited the accompanying consolidated balance sheets of First Commonwealth Financial
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Corporation’s management. Our responsibility
is to express an opinion on these financial statements based on our audits. The 1998 and 1997 consolidated
financial statements give retroactive effect to the merger of First Commonwealth Financial Corporation and
Southwest National Corporation on December 31, 1998, which has been accounted for as a pooling of
interests as described in Note 3 to the consolidated financial statements. We did not audit the balance sheet
of Southwest National Corporation as of December 31, 1998, or the related statements of income,
shareholders’ equity, and cash flows of Southwest National Corporation for the years ended December 31,
1998 and 1997, which statements reflect total assets of 23% as of December 31, 1998, and net interest
income of 25% and 26% of the related consolidated totals for the years ended December 31, 1998 and 1997,
respectively. Those statements were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Southwest National Corporation for 1998 and 1997,
is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such consolidated financial
statements present fairly, in all material respects, the financial position of First Commonwealth Financial
Corporation and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE, LLP
Pittsburgh, Pennsylvania
January 28, 2000
15
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
Assets
Cash and due from banks
Interest-bearing bank deposits
Federal funds sold
Securities available for sale, at market
Securities held to maturity, at cost, (market
value $435,000 in 1999 and $486,185 in 1998)
Loans
Unearned income
Allowance for credit losses
Net loans
Property and equipment
Other real estate owned
Other assets
Total assets
Liabilities
Deposits (All Domestic):
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Other liabilities
Company obligated mandatorily redeemable
capital securities of subsidiary trust
Other long-term debt
Total long-term debt
Total liabilities
Shareholders’ Equity
Preferred stock, $1 par value per
share, 3,000,000 shares authorized, none issued
Common stock, $1 par value per share,
100,000,000 shares authorized, 62,525,412
shares issued and 58,142,848 shares outstanding
in 1999; 62,525,412 shares issued and 61,875,946
shares outstanding in 1998
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock (4,382,564 and 649,466 shares at
December 31, 1999 and 1998, respectively at cost)
Unearned ESOP shares
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
16
December 31,
1999
1998
$
$
$
92,673
1,218
8,700
1,144,042
448,347
2,503,687
(3,628)
(33,539)
2,466,520
40,917
1,707
136,722
4,340,846
251,404
2,697,425
2,948,829
424,827
42,152
35,000
603,355
638,355
4,054,163
$
$
$
96,615
1,914
1,000
1,042,636
482,696
2,382,229
(7,379)
(32,304)
2,342,546
41,929
2,370
85,083
4,096,789
264,082
2,667,049
2,931,131
140,547
38,856
-0-
630,850
630,850
3,741,384
-0-
-0-
62,525
68,330
257,773
(40,304)
(55,448)
(6,193)
286,683
4,340,846
$
62,525
68,978
235,623
2,199
(5,913)
(8,007)
355,405
4,096,789
$
Interest Income
Interest and fees on loans
Interest and dividends on investments:
Taxable interest
Interest exempt from Federal income taxes
Dividends
Interest on Federal funds sold
Interest on bank deposits
Total interest income
Interest Expense
Interest on deposits
Interest on short-term borrowings
Interest on mandatorily redeemable capital
securities of subsidiary trust
Interest on other long-term debt
Total interest on long-term debt
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Other Income
Securities gains
Trust income
Service charges on deposits
Gain on sale of loans
Other income
Total other income
Other Expenses
Salaries and employee benefits
Net occupancy expense
Furniture and equipment expense
Data processing expense
Pennsylvania shares tax expense
Merger and related charges
Other operating expenses
Total other expenses
Income before income taxes and extraordinary items
Applicable income taxes
Net income before extraordinary items
Extraordinary items (less applicable income taxes of $336)
Net Income
Average Shares Outstanding (a)
Average Shares Outstanding Assuming Dilution (a)
Earnings per common share: (a)
Net income before extraordinary items
Extraordinary items
Net income
Earnings per common share assuming dilution: (a)
Net income before extraordinary items
Extraordinary items
Net income
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, except per share data)
Years Ended December 31,
1998
1999
1997
$
196,428
$
203,093
$
198,357
88,266
9,479
3,108
105
121
297,507
103,331
13,832
1,007
34,483
35,490
152,653
144,854
9,450
135,404
565
5,525
9,255
4,996
10,512
30,853
49,806
6,537
5,991
3,213
3,477
-0-
24,591
93,615
72,642
19,612
53,030
-0-
53,030
60,333,092
60,569,322
0.88
0.00
0.88
0.88
0.00
0.88
$
$
$
$
$
$
$
$
$
$
$
$
$
$
69,467
6,600
2,138
1,893
230
283,421
113,960
10,214
-0-
24,108
24,108
148,282
135,139
15,049
120,090
1,457
5,251
8,274
1,630
9,726
26,338
48,710
6,750
6,105
3,101
3,152
7,915
24,468
100,201
46,227
12,229
33,998
(624)
33,374
61,333,572
61,666,026
0.55
(0.01)
0.54
0.55
(0.01)
0.54
$
$
$
$
$
$
$
49,246
4,869
1,375
689
236
254,772
112,600
8,108
-0-
3,719
3,719
124,427
130,345
10,152
120,193
6,825
4,421
8,432
207
5,656
25,541
47,074
7,063
6,165
3,049
2,951
-0-
22,555
88,857
56,877
17,338
39,539
-0-
39,539
61,671,898
61,845,674
0.64
0.00
0.64
0.64
0.00
0.64
17
(a) Share amounts have been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on
October 19, 1999.
The accompanying notes are an integral part of these consolidated financial statements.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollar Amounts in Thousands)
Balance at December 31, 1996
Comprehensive income
Net income
Other comprehensive income, net of tax:
Unrealized holding gains on securities
arising during the period
Less: reclassification adjustment
for gains on securities included
in net income
Total other comprehensive income
Total comprehensive income
Cash dividends declared
Decrease in unearned ESOP shares
Discount on dividend reinvestment plan
purchases
Treasury stock acquired
Treasury stock reissued
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury
Stock
Unearned
ESOP
Shares
Total
Shareholders’
Equity
$
63,322
$
75,491
$ 210,843
$
1,429
$
(6,089)
$
(3,474)
$ 341,522
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
171
(630)
-0-
(34)
39,539
-0-
-0-
-0-
-0-
39,539
(22,152)
-0-
-0-
-0-
-0-
5,159
(4,432)
727
727
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(5,908)
50
-0-
-0-
-0-
-0-
-0-
-0-
1,038
-0-
-0-
-0-
39,539
5,159
(4,432)
727
40,266
(22,152)
1,209
(630)
(5,908)
16
Balance at December 31, 1997
63,322
74,998
228,230
2,156
(11,947)
(2,436)
354,323
Comprehensive income
Net income
Other comprehensive income, net of tax:
Unrealized holding gains on securities
arising during the period
Less: reclassification adjustment
for gains on securities included
in net income
Total other comprehensive income
Total comprehensive income
Cash dividends declared
Net increase in unearned ESOP shares
Discount on dividend reinvestment plan
purchases
Treasury stock acquired
Treasury stock reissued
Treasury stock cancelled in merger
Cash issued for partial shares in merger
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(795)
(2)
-0-
33,374
-0-
-0-
-0-
33,374
-0-
-0-
-0-
-0-
-0-
158
(1,016)
-0-
(38)
(5,107)
(17)
-0-
971
-0-
-0-
971
-0-
(928)
-0-
-0-
(928)
-0-
33,374
(25,981)
-0-
-0-
-0-
-0-
-0-
-0-
43
43
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(2,123)
2,255
5,902
-0-
-0-
-0-
43
33,417
-0-
(5,571)
(25,981)
(5,413)
-0-
-0-
-0-
-0-
-0-
(1,016)
(2,123)
2,217
-0-
(19)
Balance at December 31, 1998
62,525
68,978
235,623
2,199
(5,913)
(8,007)
355,405
Comprehensive income
Net income
Other comprehensive income, net of tax:
Unrealized holding losses on
securities arising during the period
Less: reclassification adjustment
for gains on securities included
in net income
Total other comprehensive income
Total comprehensive income
Cash dividends declared
Decrease in unearned ESOP shares
Discount on dividend reinvestment plan
purchases
Treasury stock acquired
Treasury stock reissued
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
53,030
-0-
-0-
-0-
53,030
-0-
-0-
(42,137)
-0-
-0-
(42,137)
-0-
-0-
-0-
-0-
(366)
-0-
-0-
53,030
(42,503)
(42,503)
-0-
53
(30,880)
-0-
(358)
-0-
(343)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(51,331)
1,796
-0-
-0-
-0-
-0-
1,814
-0-
-0-
-0-
(366)
(42,503)
10,527
(30,880)
1,867
(358)
(51,331)
1,453
Balance at December 31, 1999
$
62,525
$
68,330
$ 257,773
$ (40,304)
$ (55,448)
$
(6,193)
$ 286,683
The accompanying notes are an integral part of these consolidated financial statements.
18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
Years Ended December 31,
1998
1997
1999
$
53,030
$
33,374
$
39,539
Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses
Depreciation and amortization
Net gains on sales of assets
Income from increase in cash surrender value of
bank owned life insurance
Increase in interest receivable
Increase in interest payable
Increase (decrease) in income taxes payable
Change in deferred taxes
Other - net
Net cash provided by operating activities
Investing Activities
Transactions with securities held to maturity:
Sales
Maturities and redemptions
Purchases of investment securities
Transactions with securities available for sale:
Sales
Maturities and redemptions
Purchases of investment securities
Proceeds from sales of loans and other assets
Sale of subsidiary
Investment in bank owned life insurance
Net decrease (increase) in time deposits with banks
Net increase in loans
Purchases of premises and equipment
Net cash used by investing activities
Financing Activities
Proceeds from issuance of other long-term debt
Repayments of other long-term debt
Proceeds from issuance of company obligated
mandatorily redeemable capital securities of
subsidiary trust
Discount on dividend reinvestment plan purchases
Dividends paid
Net increase (decrease) in Federal funds purchased
Net increase (decrease) in other short-term borrowings
Sale of branch and deposits, net of cash received
Acquisition of treasury stock
Reissuance of treasury stock
Net increase in deposits
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
9,450
7,735
(5,192)
(2,126)
(773)
1,815
445
287
(11,922)
52,749
-0-
127,566
(93,151)
39,282
193,605
(398,933)
99,692
(2,431)
(20,000)
689
(227,347)
(5,197)
(286,225)
15,049
7,914
(3,829)
(1,365)
(4,011)
1,159
(584)
(1,404)
6,567
52,870
-0-
211,948
(184,668)
171,891
184,508
(891,718)
104,609
-0-
-0-
3,127
(50,580)
(7,702)
(458,585)
10,152
7,033
(7,148)
(204)
(8,241)
2,842
(451)
1,327
3,621
48,470
-0-
137,124
(125,078)
50,049
87,936
(256,444)
22,772
-0-
(25,000)
(759)
(232,881)
(6,141)
(348,422)
25,000
(50,319)
469,800
(37,576)
204,842
(63,487)
35,000
(358)
(27,825)
(45,025)
329,306
-0-
(51,331)
1,453
21,333
237,234
3,758
97,615
$
101,373 $
-0-
(1,016)
(25,746)
(60,675)
(2,228)
(8,612)
(2,123)
2,217
56,909
390,950
(14,765)
112,380
97,615
-0-
(630)
(21,739)
53,675
(7,417)
-0-
(5,908)
16
128,253
287,605
(12,347)
124,727
$ 112,380
The accompanying notes are an integral part of these consolidated financial statements.
19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
NOTE 1—Statement of Accounting Policies
General
The following summary of accounting and reporting policies
is presented to aid the reader in obtaining a better
understanding of the financial statements and related financial
data of First Commonwealth Financial Corporation and its
subsidiaries (the “Corporation”) contained in this report.
The financial information is presented in accordance with
generally accepted accounting principles and general
practice for financial institutions. In preparing financial
statements, management is required to make estimates and
assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. In addition, these
estimates and assumptions affect revenues and expenses in
the financial statements and as such, actual results could
differ from those estimates.
Through its subsidiaries which include two commercial
banks, a nondepository trust company, and insurance agency,
the Corporation provides a full range of loan, deposit, trust
and insurance services primarily to individuals and small to
middle-market businesses in seventeen counties in central
and western Pennsylvania. Under current conditions, the
Corporation is reporting one business segment.
The Corporation and subsidiaries are subject to regulations
of certain state and federal agencies. These regulatory
agencies periodically examine the Corporation and its
subsidiaries for adherence to laws and regulations. As a
consequence, the cost of doing business may be affected.
Basis of Presentation
The accompanying consolidated financial statements include
the accounts of the Corporation and its wholly-owned
subsidiaries. All material intercompany transactions have
been eliminated in consolidation.
Investments of 20 to 50 percent of the outstanding common
stock of investees are accounted for using the equity method
of accounting.
Securities
Debt securities that the Corporation has the positive intent
and ability to hold to maturity are classified as securities
held-to-maturity and are reported at amortized cost. Debt
and equity securities that are bought and held principally for
the purpose of selling them in the near term are to be
classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings. Debt
and equity securities not classified as either held-to-maturity
securities or trading securities are classified as securities
available-for-sale and are reported at fair value, with
20
unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders’ equity, net
of deferred taxes.
The Corporation has securities classified as either held-to-
maturity or available-for-sale. The Corporation does not
engage in trading activities. Net gain or loss on the sale of
securities is determined by using the specific identification
method.
In June 1998, the Financial Accounting Standards Board
(“FASB”) issued statement No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“FAS No.
133”) which is effective for the first quarter of years
beginning after June 15, 2000. FAS No. 133 establishes
accounting and reporting standards for derivative instruments
and for hedging activities which require that an entity
recognize all derivatives as either assets or liabilities in a
balance sheet and measure those instruments at fair value.
Management’s preliminary analysis is that adoption of FAS
No. 133 should not have a material impact on the
Corporation’s financial condition or results of operations.
Effective January 1, 1999, the Corporation adopted the FASB
Statement No. 134, “Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise” (“FAS No.
134”). FAS No. 134 amends FAS No. 65 “Accounting for
Certain Mortgage Banking Activities”. FAS No. 65 required
that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities as trading securities
while FAS No. 134 requires the resulting mortgage-backed
securities or other retained interests be classified based on the
entity’s ability and intent to sell or hold those investments.
On the date FAS No. 134 is initially applied, an enterprise
may reclassify mortgage backed securities and other
beneficial interests retained after the securitization of
mortgage loans held for sale from the trading category, except
for those with sales commitments in place. The Corporation
currently holds no mortgage backed securities or other
beneficial interests retained after the securitization of
mortgage loans held for sale. The adoption of FAS No. 134
did not have a material impact on the Corporation’s financial
condition or results of operations.
Loans
Loans are carried at the principal amount outstanding.
Unearned income on installment loans and leases is taken into
income on a declining basis which results in an approximately
level rate of return over the life of the loan or lease. Interest is
accrued as earned on nondiscounted loans.
The Corporation considers a loan to be impaired when, based
on current information and events, it is probable that a creditor
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
will be unable to collect principal or interest due according to
the contractual terms of the loan. Loan impairment is
measured based on the present value of expected cash flows
discounted at the loan’s effective interest rate or, as a practical
expedient, at the loan’s observable market price or the fair
value of the collateral if the loan is collateral dependent.
Payments received on impaired loans are applied against the
recorded investment in the loan. For loans other than those
that the Corporation expects repayment through liquidation
of the collateral, when the remaining recorded investment in
the impaired loan is less than or equal to the present value of
the expected cash flows, income is recorded on a cash basis.
Mortgage Servicing Rights
When the Corporation purchases or originates mortgage
loans with a definitive plan to sell or securitize those loans
and retain the mortgage servicing rights, the Corporation
measures the mortgage servicing rights at cost by allocating
the cost of the mortgage loans between the mortgage
servicing rights and the mortgage loans (without the
mortgage servicing rights) based on their relative fair values
at the date of purchase or origination. When the Corporation
does not have a definitive plan at the purchase or origination
date and later sells or securitizes the mortgage loans and
retains the mortgage servicing rights, the Corporation
allocates the amortized cost of the mortgage loans between
the mortgage servicing rights and the mortgage loans
(without mortgage servicing rights) based on their relative
fair values at the date of sale. The amount capitalized as the
right to service mortgage loans is recognized as a separate
asset and amortized in proportion to, and over the period of,
estimated net servicing income (servicing revenue in excess
of servicing cost). Mortgage servicing rights are periodically
evaluated for impairment based on fair values.
Loan Fees
Loan origination and commitment fees, net of associated
direct costs, are deferred and the net amount is amortized as
an adjustment to the related loan yield on the interest
method, generally over the contractual life of the related
loans or commitments.
Other Real Estate Owned
Real estate, other than bank premises, is recorded at the
lower of cost or fair value less selling costs at the time of
acquisition. Expenses related to holding the property, net of
rental income, are generally charged against earnings in the
current period.
Allowance for Credit Losses
The allowance for credit losses represents management’s
estimate of an amount adequate to provide for losses which
may be incurred on loans currently held. Management
determines the adequacy of the allowance based on historical
patterns of loan charge-offs and recoveries, the relationship
of the allowance to outstanding loans, industry experience,
current economic trends and other factors relevant to the
collectibility of loans currently in the portfolio.
Bank-Owned Life Insurance
In January 1999 and November 1997, the Corporation
purchased insurance on the lives of a certain group of
employees. The policies accumulate asset values to meet
future liabilities including the payment of employee benefits
such as health care. Premiums of $20,000 and $25,000 are
shown in the Consolidated Statements of Cash Flows for
1999 and 1997, respectively. Increases in the cash surrender
value are recorded as other income in the Consolidated
Statements of Income. The cash surrender value of bank-
owned life insurance is reflected in “other assets” on the
Consolidated Balance Sheets.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is computed on
the straight-line and accelerated methods over the estimated
useful life of the asset. Charges for maintenance and repairs
are expensed as incurred. Where a lease is involved,
amortization is charged over the term of the lease or the
estimated useful life of the improvement, whichever is shorter.
Accounting for the Impairment of Long-Lived Assets
The Corporation reviews long-lived assets, such as premises
and equipment and intangibles for impairment whenever
events or changes in circumstances, such as a significant
decrease in the market value of an asset or the extent or
manner in which an asset is used indicate that the carrying
amount of an asset may not be recoverable. If there is an
indication that the carrying amount of an asset may not be
recoverable, future discounted cash flows expected to result
from the use of the asset are estimated. If the sum of the
expected cash flows is less than the carrying value of the
asset a loss is recognized for the difference between the
carrying value and fair market value of the asset.
Income Taxes
The Corporation records taxes in accordance with the asset
and liability method utilized by Statement of Financial
Accounting Standards No. 109 (“FAS No. 109”), whereby
deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amount of existing assets
and liabilities and their respective tax bases given the
provisions of the enacted tax laws. Deferred tax assets are
reduced, if necessary, by the amount of such benefits that are
not expected to be realized based upon available evidence.
21
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 1—Statement of Accounting Policies (continued)
Comprehensive Income Disclosures
For all periods presented, “other comprehensive income” (comprehensive income excluding net income) includes only one
component, which is the change in unrealized holding gains and losses on available for sale securities. The following table
identifies the related tax effects allocated to each component of other comprehensive income in the Statements of Changes in
Shareholders’ Equity:
December 31, 1999
Tax
Pre-tax (Expense)
Amount Benefit Amount
Net of
Tax
December 31, 1998
Tax
Net of
Tax
Pre-tax (Expense)
Amount Benefit Amount
December 31, 1997
Tax
(Expense)
Net of
Tax
Benefit Amount
Pre-tax
Amount
$(64,826) $ 22,689
$ (42,137)
$ 1,495
$ (524)
$ 971
$ 7,936
$ (2,777) $ 5,159
(563)
(65,389)
197
22,886
$(65,389) $ 22,886
(366)
(42,503)
$ (42,503)
(1,428)
67
67
$
500
(24)
(24)
$
(928)
43
43
$
(6,819)
1,117
$ 1,117
2,387
(390)
$
(390) $
(4,432)
727
727
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period
Less: reclassification adjustment for
gains realized in net income
Net unrealized gains (losses)
Other comprehensive income
Cash Flow Statement
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks,
and Federal funds sold. Generally, Federal funds are sold for
one-day periods.
Supplemental Disclosures
Cash paid during the year for:
Interest
Income taxes
1999
1998
1997
$ 150,839
$ 18,832
$ 147,123
$ 14,200
$ 121,600
16,685
$
Noncash investing and financing activities:
ESOP borrowings
ESOP loan reductions
$
$
-0-
1,814
$
$
6,000
429
$
$
-0-
1,038
Loans transferred to
other real estate owned
and repossessed assets
Gross increase (decrease) in
market value adjustment to
securities available for sale
$
4,936
$
6,624
$
7,314
$ (65,390)
$
67
$
1,117
22
Stock Split
On October 19, 1999, the Corporation’s Board of Directors
approved a 2-for-1 stock split effected in the form of a 100%
stock dividend. Shareholders of record at the close of
business November 4, 1999 received one additional share for
each share held. The additional shares were distributed on
November 18, 1999. Pursuant to the foregoing stock split an
additional 31,262,706 common shares were issued, and the
sum of $31,263 ($1 per share) was transferred to the
Corporation’s common stock account, and such amount was
charged against the Corporation’s additional paid-in capital
account. Common stock, additional paid-in capital, and
share data for all periods presented have been restated to
reflect the stock split as if it had occurred at the beginning of
the earliest period presented.
Earnings Per Common Share
Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders less
unallocated ESOP shares by the weighted-average number of
common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of
the entity. For all periods presented the dilutive effect on
average shares outstanding is the result of compensatory
stock options outstanding.
Employee Stock Ownership Plan
NOTE 2—Sale of Subsidiary
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
Effective April 1, 1999, the Corporation sold all of the
outstanding common stock of BSI Financial Services Inc.
(“BSI”), a wholly-owned subsidiary of the Corporation, to a
bank headquartered in Richmond, Indiana. Cash proceeds in
the amount of $1,709 were received, resulting in a loss on sale
of $202 which has been reflected in the financial statements.
BSI provided mortgage banking, loan servicing and collection
services to the Corporation’s subsidiary banks and unaffiliated
organizations. Services performed by BSI for the subsidiary
banks have been transferred to the subsidiary banks or other
nonbank subsidiaries of the Corporation.
NOTE 3—Business Combination
Effective December 31, 1998, the Corporation acquired all of
the outstanding shares of Southwest National Corporation
(“Southwest”), a Pennsylvania-chartered bank holding
company headquartered in Greensburg, Pennsylvania. Each
of the 3,043,738 outstanding shares of Southwest National
Corporation were exchanged for 5.8 shares of the
Corporation’s common stock. The aggregate number of
shares issued by the Corporation, excluding partial shares
was 17,652,156. Related share amounts have been restated
for the stock split described in NOTE 1. The merger was
accounted for as a pooling of interests, and accordingly, all
financial statements were restated as though the merger had
occurred at the beginning of the earliest period presented.
NOTE 4—Cash and Due From Banks on Demand
Regulations of the Board of Governors of the Federal
Reserve System impose uniform reserve requirements on all
depository institutions with transaction accounts (checking
accounts, NOW accounts, etc.). Reserves are maintained in
the form of vault cash or a noninterest-bearing balance held
with the Federal Reserve Bank. The subsidiary banks
maintained with the Federal Reserve Bank average balances
of $3,807 during 1999 and $18,561 during 1998.
Accounting treatment for the Corporation’s Employee Stock
Ownership Plan (“ESOP”) described in NOTE 18 follows
Statement of Position 93-6 (“SOP 93-6”) “Employers
Accounting for Employee Stock Ownership Plans” for ESOP
shares acquired after December 31, 1992 (new shares). The
Corporation has elected, as permitted under SOP 93-6, not to
adopt this statement for ESOP shares acquired on or before
December 31, 1992 (old shares).
ESOP shares purchased subject to debt guaranteed by the
Corporation are recorded as a reduction of common
shareholders’ equity by charging unearned ESOP shares. As
shares are committed to be released to the ESOP trust for
allocation to plan participants, unearned ESOP shares is
credited for the average cost of the shares to the ESOP.
Compensation cost recognized for new shares in accordance
with the provisions of SOP 93-6 is based upon the fair market
value of the shares committed to be released. Additional paid-
in capital is charged or credited for the difference between the
fair value of the shares committed to be released and the cost
of those shares to the ESOP. Compensation cost recognized
for old shares committed to be released is recorded at the cost
of those shares to the ESOP.
Dividends on both old and new unallocated ESOP shares are
used for debt service and are reported as a reduction of debt
and accrued interest payable. Dividends on allocated ESOP
shares are charged to retained earnings and allocated to the
plan participants’ accounts. The average number of common
shares outstanding used in calculating earnings per share
excludes all unallocated ESOP shares.
Employee Stock Option Plan
FASB Statement No. 123 “Accounting for Stock Based
Compensation” (“FAS No. 123”) defines a method of
measuring stock based compensation, such as stock options
granted, at an estimated fair value. FAS No. 123 also
permits the continued measurement of stock based
compensation under provisions of the Accounting Principles
Board Opinion No. 25 “Accounting for Stock Issued to
Employees” (“APB 25”).
As permitted under FAS No. 123, the Corporation has
elected to use the intrinsic value method to measure stock
based compensation under APB 25 and to disclose in a
footnote to the financial statements, net income and earnings
per share determined as if the fair value methodology of FAS
No. 123 was implemented (see NOTE 19).
23
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 5—Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of securities available for sale at
December 31, 1999 and 1998:
1999
1998
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Approximate
Fair
Value
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Approximate
Fair
Value
U.S. Treasury Securities
$
4,970
$
-0-
$
(27)
$
4,943
$
29,961
$
400
$
-0- $
30,361
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities
Other
Obligations of States and
Political Subdivisions
Debt Securities Issued
by Foreign Governments
Corporate Securities
Other Mortgage Backed
Securities
Total Debt Securities
Equities
Total Securities
Available for Sale
781,690
123,436
104
-0-
(38,777)
(4,068)
743,017
119,368
715,882
176,571
2,342
1,149
(1,167)
717,057
(152)
177,568
75,348
210
(5,940)
69,618
36,225
744
(185)
36,784
430
70,252
-0-
11
-0-
(5,812)
430
64,451
85,521
1,141,647
-0-
325
(4,413)
(59,037)
81,108
1,082,935
64,330
3
(3,226)
61,107
460
1,099
34,169
994,367
44,749
-0-
-0-
-0-
(7)
460
1,092
61
4,696
887
(552)
(2,063)
33,678
997,000
-0-
45,636
$ 1,205,977
$ 328
$ (62,263)
$ 1,144,042
$ 1,039,116
$ 5,583
$ (2,063) $ 1,042,636
Mortgage backed securities include mortgage backed
obligations of U.S. Government agencies and corporations,
mortgage backed securities issued by other organizations
and other asset backed securities. These obligations have
contractual maturities ranging from less than one year to 30
years and have an anticipated average life to maturity
ranging from less than one year to 21 years. All mortgage
backed securities contain a certain amount of risk related to
the uncertainty of prepayments of the underlying
mortgages. Interest rate changes have a direct impact upon
prepayment speeds, therefore the Corporation uses
computer simulation models to test the average life and
yield volatility of all mortgage backed securities under
various interest rate scenarios to insure that volatility falls
within acceptable limits. At December 31, 1999 and 1998,
the Corporation owned no high risk mortgage backed
securities as defined by the Federal Financial Institutions
Examination Council’s Supervisory Policy Statement on
Securities Activities.
The amortized cost and estimated market value of debt
securities at December 31, 1999, by contractual maturity, are
shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right
to call or repay obligations with or without call or
prepayment penalties.
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Due after 10 years
Mortgage Backed Securities
Total Debt Securities
Amortized
Cost
$
4,962
152,005
15,585
101,884
274,436
867,211
$ 1,141,647
Approximate
Fair
Value
$
4,969
147,816
15,106
90,919
258,810
824,125
$ 1,082,935
Proceeds from the sales of securities available for sale were
$39,282, $171,891 and $50,049 during 1999, 1998 and 1997
respectively. Gross gains of $541, $2,817 and $6,833 and
gross losses of $0, $1,284 and $14 were realized on those
sales during 1999, 1998 and 1997 respectively.
Securities available for sale with an approximate fair value
of $463,004 and $179,943 were pledged at December 31,
1999 and 1998, respectively to secure public deposits and for
other purposes required or permitted by law.
24
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 6—Securities Held to Maturity
Below is an analysis of the amortized cost and approximate fair values of debt securities held to maturity at
December 31, 1999 and 1998:
1999
1998
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Approximate
Fair
Value
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Approximate
Fair
Value
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities
$ 183,926
$
60
$
(4,231)
$ 179,755
$ 224,312
$
655
$
(429)
$ 224,538
Other
Obligations of States and
Political Subdivisions
Debt Securities Issued by
Foreign Governments
Corporate Securities
Other Mortgage Backed
Securities
Total Securities Held to
Maturity
104,790
-0-
(2,436)
102,354
105,785
1,296
(92)
106,989
134,770
176
(6,204)
128,742
140,513
2,556
(512)
142,557
358
22,212
-0-
-0-
-0-
(711)
358
21,501
358
-0-
5,249
10
-0-
-0-
358
5,259
2,291
-0-
(1)
2,290
6,479
5
-0-
6,484
$ 448,347
$ 236
$ (13,583)
$ 435,000
$ 482,696
$ 4,522
$ (1,033)
$ 486,185
The amortized cost and estimated market value of debt
securities at December 31, 1999, by contractual maturity, are
shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right
to call or repay obligations with or without call or
prepayment penalties.
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Due after 10 years
Mortgage Backed Securities
Total Debt Securities
Amortized
Cost
Approximate
Fair Value
$
$
3,941
133,853
46,643
77,693
262,130
186,217
448,347
$
$
3,941
131,225
45,849
71,940
252,955
182,045
435,000
There were no sales of securities held to maturity in 1999,
1998 or 1997.
Securities held to maturity with an amortized cost of
$282,388 and $277,345 were pledged at December 31, 1999
and 1998, respectively, to secure public deposits and for
other purposes required or permitted by law.
NOTE 7—Loans (all domestic)
Loans at year end were divided among these general
categories:
Commercial, financial,
agricultural and other
Real estate loans:
Construction and land
development
1-4 Family dwellings
Other real estate loans
Loans to individuals for household,
family and other personal
expenditures
Leases, net of unearned income
Subtotal
Unearned income
Total loans and leases
December 31,
1999
1998
$
417,300
$
377,733
41,734
980,506
495,789
33,097
1,009,903
387,166
502,465
65,893
2,503,687
(3,628)
$ 2,500,059
517,907
56,423
2,382,229
(7,379)
$ 2,374,850
Most of the Corporation’s business activity was with
customers located within Pennsylvania. The portfolio is well
diversified, and as of December 31, 1999 and 1998, there
were no significant concentrations of credit.
25
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 8—Allowance for Credit Losses
Description of changes:
Allowance at January 1
Additions:
Recoveries of previously
charged off loans
Provision charged to operating
expense
Deductions:
Loans charged off
Allowance at December 31
Relationship to impaired loans:
Recorded investment in impaired loans
at end of period
Average balance of impaired loans for
the year
Allowance for credit losses related
to impaired loans
Impaired loans with an allocation
of the allowance for credit losses
Impaired loans with no allocation
of the allowance for credit losses
Income recorded on impaired loans
on a cash basis
1999
1998
1997
$ 32,304
$ 25,932
$ 25,234
1,381
1,950
1,524
9,450
15,049
10,152
9,596
$ 33,539
10,627
$ 32,304
10,978
$ 25,932
1999
1998
$
$
$
$
$
$
12,827
10,808
3,082
7,471
5,356
458
$
$
$
$
$
$
9,741
10,756
1,593
4,530
5,211
286
NOTE 9—Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-
balance-sheet risk in the normal course of business to meet
the financial needs of its customers. These financial
instruments include commitments to extend credit, standby
letters of credit and commercial letters of credit. Those
instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in
the balance sheet. The contract or notional amount of those
instruments reflects the extent of involvement the
Corporation has in particular classes of financial instruments.
As of December 31, 1999 and 1998, the Corporation did not
own or trade any other financial instruments with significant
off-balance-sheet risk including derivatives such as futures,
forwards, interest rate swaps, option contracts and the like,
although such instruments may be appropriate to use in the
future to manage interest rate risk.
The Corporation’s exposure to credit loss in the event of
nonperformance by the other party of the financial
instrument for commitments to extend credit, standby letters
of credit and commercial letters of credit written is
represented by the contract or notional amount of those
instruments. The Corporation uses the same credit policies
in making commitments and conditional obligations as it
does for on-balance-sheet instruments. The following table
26
identifies the notional amount of those instruments at
December 31, 1999 and 1998.
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
Standby letters of credit
Commercial letters of credit
1999
1998
$
$
$
421,871
39,847
514
$
$
$
481,354
38,456
-0-
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future
cash requirements. The Corporation evaluates each
customer’s creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the
Corporation upon extension of credit, is based on
management’s credit evaluation of the counter-party.
Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, residential and
income-producing commercial properties.
Standby letters of credit and commercial letters of credit
written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
NOTE 10—Premises and Equipment
Premises and equipment are described as follows:
Land
Buildings and improvements
Leasehold improvements
Furniture and equipment
Subtotal
Less accumulated depreciation
and amortization
Total premises and
equipment
Estimated
Useful Life
Indefinite
5 - 50 Years
5 - 39 Years
3 - 25 Years
$
1999
5,425
44,582
9,930
46,177
106,114
1998
$
5,481
44,368
9,725
44,124
103,698
65,197
61,769
$
40,917
$
41,929
Depreciation and amortization related to premises and
equipment was $5,160 in 1999, $5,669 and $5,171 in 1998
and 1997, respectively.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 11—Interest-Bearing Deposits
Components of interest-bearing deposits at December 31
were as follows:
NOW and Super NOW accounts
Savings and MMDA accounts
Time deposits
Total interest-bearing deposits
1999
98,545
1,073,789
1,525,091
2,697,425
$
$
1998
$
107,947
1,078,534
1,480,568
$ 2,667,049
Interest-bearing deposits at December 31, 1999 and 1998,
include reallocations from demand deposits of $97,883 and
$94,588 and reallocations from NOW and Super NOW
accounts of $294,943 and $272,320 respectively into Savings
and MMDA accounts. These reallocations are based on a
formula approved by the regulatory authorities and have
been made to reduce the Corporation’s reserve requirement.
Included in time deposits at December 31, 1999 and 1998,
were certificates of deposit in denominations of $100 or
more of $358,261 and $299,412 respectively.
Interest expense related to $100 or greater certificates of
deposit amounted to $18,103 in 1999, $16,921 in 1998, and
$17,574 in 1997.
Included in time deposits at December 31, 1999, were
certificates of deposit with the following scheduled maturities:
2000
2001
2002
2003
2004 and thereafter
$
$
799,072
293,846
340,042
45,619
44,007
1,522,586
NOTE 12—Short-term Borrowings
Short-term borrowings at December 31 were as follows:
1999
1998
Ending Average Average Ending Average Average
Balance Balance Rate
Balance Balance Rate
$
2,950 $ 94,161 5.22% $ 47,975 $ 72,511 5.68%
100,000
49,037 5.21%
-0-
18,336 5.73%
262,301 124,904 4.66% 84,228
90,383 4.76%
59,576 11,167 4.81% 8,344
14,104 5.24%
Federal funds
purchased
Borrowings
from FHLB
Securities
sold under
agreements
to repurchase
Treasury, tax
and loan
note option
Total
$ 424,827 $279,269 4.95% $ 140,547 $ 195,334 5.23%
Maximum
total at any
month-end
$ 424,960
$ 278,247
Interest expense on short-term borrowings for the years
ended December 31 is detailed below:
Federal funds purchased
Borrowings from FHLB
Securities sold under agreements
to repurchase
Treasury, tax and loan note option
Total interest on
short-term borrowings
$
1999
4,913
2,557
5,825
537
1998
1997
$
4,119
1,051
4,305
739
$
3,466
274
3,772
596
$
13,832
$ 10,214
$
8,108
NOTE 13—Company Obligated Mandatorily Redeemable
Capital Securities of Subsidiary Trust
The Corporation established First Commonwealth Capital
Trust I (“the Trust”), a Delaware business trust and the Trust
issued 35,000 capital securities (liquidation amount of $35
million) during September 1999, through a private offering
to qualified investors. Additionally, the Trust issued
common securities to the Corporation. The Trust used the
proceeds from the sale to buy a series of 9.50% junior
subordinated deferrable interest debentures due 2029 from
the Corporation with the same economic terms as the capital
securities. The Trust will distribute the cash payments it
receives from the Corporation on the debentures to the
holders of the capital securities and the common securities.
The original series A capital securities and series A junior
subordinated deferrable interest debentures have since been
exchanged for registered series B capital securities and
registered series B junior subordinated deferrable interest
debentures having the same economic terms as the original
series A securities.
The Trust will redeem all of the outstanding capital securities
when the debentures are paid at maturity on September 1,
2029. Subject to receiving prior approval of the Board of
Governors of the Federal Reserve System the Corporation
may redeem the debentures, in whole or in part, at any time
on or after September 1, 2009, at a redemption price equal to
104.750% of the principal amount of the debentures on
September 1, 2009, declining ratably on each September 1
thereafter to 100% on or after September 1, 2019, plus
accrued and unpaid interest to the date of redemption. The
Corporation may also redeem the debentures prior to
September 1, 2009, upon the occurrence of certain tax and
bank regulatory events, subject to receiving prior approval of
the Board of Governors of the Federal Reserve System. If
the Corporation redeems any debentures before their
maturity, the Trust will use the cash it receives on the
redemption of the debentures to redeem, on a pro rata basis,
capital securities and common securities having an aggregate
liquidation amount equal to the aggregate principal amount
of the debentures redeemed.
27
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 13—Company Obligated Mandatorily Redeemable
Capital Securities of Subsidiary Trust (continued)
The net proceeds (after deduction of offering expenses and the
initial purchaser’s commission) from the sale of the
debentures to the Trust were approximately $34.2 million.
The Corporation used the net proceeds from the issuance of
the debentures to partially finance the purchase of 3,819,420
shares of its outstanding common stock (approximately 6.5%
of its outstanding shares of common stock) pursuant to a
“modified Dutch Auction” tender offer. Unamortized deferred
issuance costs associated with the capital securities amounted
to $909 as of December 31, 1999 and are being amortized on a
straight-line basis over the term of the capital securities. The
outstanding balance of the capital securities are included as a
separate component of long-term debt on the Consolidated
Balance Sheets while interest on the capital securities is
included as a separate component of interest expense on the
Consolidated Statements of Income. The amortization of the
deferred issuance costs is included in interest expense from the
capital securities on the Consolidated Statements of Income.
NOTE 14—Other Long-term Debt
Long-term debt at December 31, follows:
Capital securities included in total long-term debt on the
Consolidated Balance Sheets are excluded from NOTE 14,
but are described in NOTE 13.
In October 1999, the parent company entered into an
agreement with an unrelated financial institution which
enabled the parent company to borrow up to $20,000 through
October 2000. As of December 31, 1999, $16,000 was
outstanding and $4,000 remained available on this line of
credit. At the option of the lender this commitment could be
extended for an additional year. Loan terms require
payments of eleven quarterly installments equal to one-
sixteenth of the outstanding principal amount as of the
commitment expiration date plus a balloon payment for the
remaining outstanding balance to be paid at maturity. The
maturity date of the loan is the third anniversary of the
commitment expiration date. Interest on advances taken is
accrued at either the daily Federal funds rate plus 1.25%,
Euro-rate plus 1.25%, the lender’s as-offered rate or prime
rate. The parent company may elect the interest rate method
to be applied for each advance.
Scheduled loan payments for other long-term debt are
summarized below:
2000
2001
2002
2003
2004 Thereafter
1999
1998
Loan payments
$52,051 $5,670 $105,611 $8,634 $1,465
$429,924
ESOP loan due
December, 2005
Bank loan due
July, 2003
Borrowings from
FHLB due:
February, 2000
July, 2000
August, 2002
November, 2002
November, 2002
December, 2002
February, 2008
February, 2008
May, 2008
May, 2008
November, 2008
December, 2008
December, 2017
June, 2019
Mortgage loan due
July, 2012
Mortgage loan due
January, 2013
Amount
Rate
Amount
Rate
$
6,193
Libor +1% $
8,007 Libor +1%
16,000
FF +1.25%
0
25,000
25,000
-0-
50,000
-0-
50,000
100,000
100,000
55,000
45,000
50,000
65,000
7,264
8,898
-0-
-0-
$ 603,355
4.72%
4.72%
5.82%
4.72%
25,000
4.72%
25,000
5.36%
25,000
5.82%
50,000
25,000
5.33%
50,000 5.71%
5.45%
5.48%
5.67%
5.67%
5.03%
4.96%
6.17%
5.71%
5.45% 100,000
5.48% 100,000
55,000
45,000
50,000
65,000
7,476
-0-
5.67%
5.67%
5.03%
4.96%
6.17%
5.72%
177
2.00%
190
$ 630,850
4.50%
All Federal Home Loan Bank stock, along with an interest in
unspecified mortgage loans and mortgage-backed securities,
with an aggregate statutory value equal to the amount of the
preceding advances, have been pledged as collateral with the
Federal Home Loan Bank of Pittsburgh.
28
During 1998, the Corporation incurred a cost of $960 for the
prepayment of FHLB term borrowings with original
maturities scheduled for 2007. This amount was recorded on
the Consolidated Statements of Income as an extraordinary
item, net of $336 of applicable income taxes.
NOTE 15—Common Share Commitments
At December 31, 1999, the Corporation had 100,000,000
common shares authorized and 62,525,412 shares
outstanding. Outstanding shares were reduced by 4,382,564
shares of treasury stock at December 31, 1999 and 649,466
shares at December 31, 1998. The Corporation may be
required to issue additional shares to satisfy common share
purchases related to the employee stock ownership plan
described in NOTE 18. The dilutive effect of stock options
outstanding on average shares outstanding in the diluted
earnings per share reported on the income statement were
236,230, 332,454 and 173,776 shares at December 31, 1999,
1998 and 1997 respectively.
During 1999, 3,921,668 shares of treasury stock were
acquired at an average price of $13.09. During 1998, 86,800
shares of treasury stock were acquired at an average price of
$12.22 and reissued to the leveraged ESOP. Treasury shares
consisting of 188,570 and 131,138 were reissued during
1999 and 1998 upon exercise of stock options.
NOTE 16—Income Taxes
NOTE 17—Retirement Plans
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
The income tax provision consists of:
1999
1998
1997
Current tax provision for income
exclusive of securities transactions:
Federal
State
Securities transactions
Total current tax
provision
Deferred tax provision (benefit)
Total tax provision
$ 19,111
16
198
$ 13,097 $
(11)
547
19,325
287
$ 19,612
13,633
(1,404)
$ 12,229 $
13,384
238
2,389
16,011
1,327
17,338
Temporary differences between financial statement carrying
amounts and tax bases of assets and liabilities that represent
significant portions of the deferred tax assets (liabilities) at
December 31, 1999 and 1998, were as follows:
Deferred tax assets:
Allowance for credit losses
Postretirement benefits other
than pensions
Accumulated depreciation
Unrealized loss on securities
available for sale
Other
Total deferred tax assets
Deferred tax liabilities:
Accumulated accretion of bond discount
Unrealized gain on securities
available for sale
Lease financing deduction
Loan origination fees and costs
Basis difference in assets acquired
Pension expense
Other
Total deferred tax liabilities
1999
1998
$
11,641
$
11,132
985
242
21,702
827
35,397
973
278
-0-
631
13,014
(250)
(325)
-0-
(9,372)
(628)
(892)
(200)
(262)
(11,604)
(1,184)
(7,829)
(849)
(1,143)
(233)
(257)
(11,820)
Net deferred tax asset
$
23,793
$
1,194
The total tax provision for financial reporting purposes
differs from the amount computed by applying the statutory
income tax rate to income before income taxes. The
differences are as follows:
1999
1998
1997
% of
Pretax
Amount Income Amount Income Amount Income
% of
Pretax
% of
Pretax
35.0
$ 16,179
35.0 $ 19,907
35.0
Tax at statutory rate $ 25,425
Increase (decrease)
resulting from:
Effect of
nontaxable
income
Merger expenses
State income taxes
Other
Total tax
provision
(5,247)
-0-
16
(582)
$ 19,612
All employees with at least one year of service are eligible to
participate in the employee stock ownership plan (“ESOP”).
Contributions to the plan are determined by the board of
directors, and are based upon a prescribed percentage of the
annual compensation of all participants. The ESOP acquired
484,178 shares of the Corporation’s common stock in 1998
at a corresponding cost of $6,000, which the Corporation
borrowed and concurrently loaned this amount to the ESOP.
This amount represents leveraged and unallocated shares,
and accordingly has been recorded as long-term debt and the
offset as a reduction of the common shareholders’ equity.
Compensation costs related to the plan were $1,555 in 1999,
$1,068 in 1998 and $1,032 in 1997. (See NOTE 18).
The Corporation also has a savings plan pursuant to the
provisions of section 401(k) of the Internal Revenue Code.
Under the terms of the plan, each participant will receive an
automatic employer contribution to the plan in an amount
equal to 3% of compensation. Each participating employee
may contribute up to 10% of compensation to the plan which
up to 4% is matched 100% by the employer’s contribution.
Prior to 1999, each participant could contribute up to 5% of
compensation to the plan, which was matched by the
employer’s contribution equal to 80% of the employee’s
contribution. Employees of Southwest are covered by a
401(k) plan whereby each participant may contribute up to
10% of compensation to the plan of which up to 4% is
matched 100% by the employer’s contribution. The
Southwest Board of Directors may also authorize an annual
discretionary contribution to the plan. The Southwest plan
was not yet mergered into the Corporation’s plan as of
December 31, 1999. The 401(k) plan expense was $2,328 in
1999, $2,261 in 1998 and $2,415 in 1997.
Upon shareholder approval at the regular 1998 meeting the
Corporation established a “Supplemental Executive
Retirement Plan” (“SERP”) to provide deferred
compensation for a select group of management. The
purpose of this plan is to restore some of the benefits lost to
the highly compensated employees compared to other
employees due to limits and restrictions incorporated into the
Corporation’s 401(k) and ESOP plans. The Corporation’s
401(k) and ESOP plans include restrictions on maximum
compensation, actual deferral percentage, actual
contribution, maximum contribution and maximum salary
reduction which are required in order to meet specific legal
requirements.
(7.2)
0.0
0.0
(0.8)
(3,894)
542
(11)
(587)
(8.4)
1.2
(0.0)
(1.3)
(2,660)
-0-
238
(147)
(4.7)
0.0
0.4
(0.2)
27.0
$ 12,229
26.5 $ 17,338
30.5
Participants in the SERP may elect to contribute up to 10%
of plan compensation (compensation in excess of limits of
the Corporation’s 401(k) and ESOP plans) into the SERP,
through salary reduction. The Corporation will make an
elective contribution to the SERP equal to the elective
29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 17—Retirement Plans (continued)
The following table sets forth the change in plan assets:
contribution of the participant. Each participant of the SERP
will also receive a matching contribution equal to 100% of
the employee’s elective contribution up to 4%, and an
additional non-elective contribution from the employer equal
to 8% of plan compensation. For 1998, each participant
could make an elective contribution for up to 5% of plan
compensation which was matched by an employers’
contribution equal to 80% of the employee’s contribution.
The SERP will continue to supplement the Corporation’s
401(k) and ESOP plans and will therefore be modified at the
same time and in the same respect as the basic plans are
modified in future periods. The SERP plan expense was
$153 in 1999 and $62 in 1998.
Pension Plan of Acquired Subsidiary
Southwest’s noncontributory defined benefit pension plan
covers all eligible employees and provides benefits that are
based on each employee’s years of service and compensation.
Net periodic pension cost of this plan for each of the last
three years was as follows:
1999
1998
1997
Service cost
Interest cost on projected benefit obligation
Actual return on plan assets
Net amortization and deferral
Net periodic pension cost
$
-0- $ 365 $ 327
411
469
(1,042)
(425)
507
(179)
$ (20) $ 230 $ 203
394
(261)
(153)
The following table sets forth the plan’s funded status and
the amounts recognized on the Corporation’s Consolidated
Balance Sheet as of December 31:
Market value of plan assets, primarily registered
investment companies, U.S. government and agency
obligations and money markets
Projected benefit obligation
Plan assets (less) greater than projected
benefit obligation
Unrecognized net transition asset
Unrecognized net loss (gain)
Prepaid pension expense recognized on the
balance sheet
Actuarial present value of accumulated benefits,
including vested benefits of $5,588 and $7,615
1999
1998
$ 6,485
5,765
$ 7,132
7,926
720
(92)
(56)
(794)
(123)
1,470
$
572
$ 553
$ 5,765
$ 7,926
The following table sets forth the change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefit payment
Actuarial loss (gain)
Curtailment
Benefit obligation at end of year
30
1999
1998
$ 7,926 $ 6,794
365
469
(973)
5,343
(4,072)
$ 5,765 $ 7,926
-0-
394
(908)
(1,647)
-0-
Fair value of plan assets at beginning of year
Return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
1999
1998
$ 7,132 $ 7,679
425
-0-
(972)
$ 6,485 $ 7,132
261
-0-
(908)
Assumptions used in determining the actuarial present value
of the projected benefit obligation were as follows at
December 31:
Discount rates
Rates of increase in compensation levels
Expected long-term rate of return on assets
1999
1998
6.0% 5.0%
N/A
6.5
3.5
6.0
Effective December 31, 1998, participants’ accrued benefit
in the Southwest Bank Pension Plan was frozen. Participants
became participants in the First Commonwealth Financial
Corporation ESOP Plan with no lapse in credited service,
and no loss of accrued benefits. The Southwest Bank Plan is
expected to be terminated at some future date, with
distribution made in accordance with Plan provisions and
applicable regulations.
Postretirement Benefits other than Pensions for
Acquired Subsidiary
Employees of Southwest were covered by a postretirement
benefit plan.
Net periodic benefit cost of this plan was as follows:
1999
1998
Service cost
Interest cost on projected benefit obligation
Amortization of transition obligation
Loss amortization
Net periodic benefit cost
$
$
13 $
61
259
55
82
260 $ 457
197
2
48
The following table sets forth the plan’s funded status and
the amounts recognized on the Corporation’s Consolidated
Balance Sheet as of December 31:
Accumulated postretirement benefit obligation:
Retirees
Fully eligible active plan participants
Other plan participants
Total accumulated postretirement benefit obligation
Plan assets at fair value
Accumulated postretirement benefit obligation in
excess of plan assets
Unrecognized transition obligation
Unrecognized net loss
Accrued benefit liability recognized on the
balance sheet
1999
1998
$ 2,762 $ 2,941
155
14
318
183
2,959
3,414
— —
2,959
(21)
(56)
3,414
(610)
(23)
$ 2,882 $ 2,781
The following table sets forth the change in benefit obligation:
NOTE 18—Unearned ESOP Shares
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
Benefit obligation at beginning of year
Service cost
Interest cost
Benefit payments
Actuarial loss (gain)
Curtailment
Benefit obligation at end of year
1999
1998
$ 3,414 $ 3,805
61
259
(193)
642
(1,160)
13
197
(225)
(440)
-0-
$ 2,959 $ 3,414
The discount rates used in determining the actuarial present
value of the accumulated postretirement benefit obligation
were 6.75% and 6.0% for 1999 and 1998 respectively. The
health care cost trend rates used for 1999 were projected at
an initial rate of 5.75% decreasing over time to an annual
rate of 4.50% for grandfathered participants and an initial
rate of 5.00% decreasing over time to an annual rate of
4.50% for non-grandfathered participants. The health care
cost trend rates used for 1998 were projected at level rates of
5.75% for grandfathered participants and 5% for non-
grandfathered participants. This grandfathering is related to
cost sharing requirements for different groups of participants
for these benefits.
The health care cost trend rate assumption can have a
significant impact on the amounts reported for this plan. A
one-percentage-point change in assumed health care cost
trend rates would have the following effects:
Effect on total of service and interest
cost components
Effect on postretirement benefit
obligation
1-Percentage-
1-Percentage-
Point Increase Point Decrease
$
14
$ 200
$
(12)
$ (179)
Southwest amended this plan to discontinue participation for
active employees December 31, 1998 and to limit
participation to employees retiring before January 1, 2002.
As the result of this plan curtailment, an additional expense
of $1,129 was recorded for 1998.
In February 1998, the FASB issued Statement No. 132,
“Employers’ Disclosures about Pensions and Other
Postretirement Benefits” (“FAS No. 132”) which is effective
for years beginning after December 15, 1997. FAS No. 132
revises employers’ disclosures about pension and other
postretirement benefit plans but does not change the
measurement or recognition of those plans.
The adoption of FAS No. 132 did not have a material impact on
the Corporation’s financial condition or results of operations.
The Corporation had borrowed amounts which were
concurrently loaned to the First Commonwealth Financial
Corporation Employee Stock Ownership Plan Trust
(“ESOP”) on the same terms. The combined balances of the
ESOP related loans were $6,193 at December 31, 1999 and
$8,007 at December 31, 1998.
The loans have been recorded as long-term debt on the
Corporation’s Consolidated Balance Sheets. A like amount
of unearned ESOP shares was recorded as a reduction of
common shareholders’ equity. Unearned ESOP shares,
included as a component of shareholders’ equity, represents
the Corporation’s prepayment of future compensation
expense. The shares acquired by the ESOP are held in a
suspense account and will be released to the ESOP for
allocation to the plan participants as the loan is reduced.
Repayment of the loans are scheduled to occur over a six
year period from contributions to the ESOP by the
Corporation and dividends on unallocated ESOP shares.
The following is an analysis of ESOP shares held in
suspense:
(See NOTE 1 for the definition of “old” and “new shares”).
Shares in suspense
December 31, 1997
Shares acquired during 1998
Shares allocated during 1998
Shares in suspense
December 31, 1998
Shares allocated during 1999
Shares in suspense
December 31, 1999
Total
Old
Shares
New
Shares
342,502
484,178
(96,066)
202,398
-0-
(23,520)
140,104
484,178
(72,546)
730,614
(131,927)
178,878
(32,300)
551,736
(99,627)
598,687
146,578
452,109
The fair market value of the new shares remaining in
suspense was approximately $5,425 and $6,759 at December
31, 1999 and 1998 respectively.
Interest on ESOP loans was $460 in 1999, $255 in 1998 and
$211 in 1997. During 1999, 1998 and 1997, dividends on
unallocated shares in the amount of $369, $196 and $213
respectively were used for debt service while all dividends
on allocated shares were allocated to the participants.
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 19—Stock Option Plan
At December 31, 1999, the Corporation had a stock-based
compensation plan, which is described below. All of the
exercise prices and related number of shares have been
restated to reflect the previously described stock split. The
plan permits the executive compensation committee to grant
options for up to one million shares of the Corporation’s
common stock through October 15, 2005. Although the
vesting requirements and term of future options granted are
at the discretion of the executive compensation committee,
all options granted during 1997 became vested at December
31, 1997 and expire ten years from the grant date, all options
granted during 1998 became vested at December 31, 1998
and expire ten years from the grant date and all options
granted during 1999 became vested on December 31, 1999
and expire ten years from the grant date. The Corporation
has elected, as permitted by FAS No. 123, to apply APB
Opinion 25 and related Interpretations in accounting for its
plan. Accordingly, no compensation cost has been
recognized for its stock options outstanding. Had
compensation cost for the Corporation’s stock option plan
been determined based upon the fair value at the grant dates
for awards under the plan consistent with the method of
FASB Statement 123, the Corporation’s net income and
earnings per share would have been reduced to the pro forma
amounts shown below:
1999
1998
1997
As
Reported
Pro
Pro
Forma Reported Forma Reported Forma
Pro
As
As
$ 53,030 $ 52,197 $ 33,374 $ 33,374 $ 39,539 $ 33,597
Net Income
Basic earnings
per share
Diluted earnings
per share
$
$
0.88 $
0.86 $
0.54 $
0.54 $
0.64 $
0.54
The fair value of each option granted is estimated on the date
of the grant using the Black-Scholes options pricing model
with the following weighted average assumptions used:
Dividend yield
Expected volatility
Risk-free interest rate
Expected option life
1999
1998
1997
4.29% per annum 3.75% per annum 2.5% per annum
31.4%
6.3%
9.1 years
90.0%
5.1%
9.1 years
28.0%
5.6%
5.7 years
Under the Corporation’s 1995 Stock Option Plan, the
Corporation may grant options to its executives and, as
amended during 1999, non-employee directors, for up to one
million shares of common stock. The Corporation also
assumed the Stock Options of United National Bank
Corporation (“Unitas”) and Reliable Financial Corporation
(“RFC”) upon the merger of these financial institutions into
the Corporation in 1994.
32
A summary of the status of the Corporation’s outstanding stock
options as of December 31, 1999, 1998 and 1997 and changes
for the years ending on those dates is presented below:
1999
Weighted
Average
Exercise
Price
1998
1997
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
Shares
Shares
Outstanding at
beginning
of year
Granted
Exercised
Forfeited
Outstanding at
end of year
Exercisable at
end of year
1,306,346 $ 10.53 1,052,548 $ 8.75
610,416 $ 11.56
404,016 $14.69
(188,570) $ 8.66 (131,138) $ 8.72
(19,080) $ 9.81
(48,014) $ 12.08
466,616 $ 8.05
624,560 $ 9.25
(5,600) $ 3.22
(33,028) $ 9.22
1,680,178 $ 11.07 1,306,346 $10.53 1,052,548 $ 8.75
1,680,178 $ 11.07
956,058 $11.06
690,038 $ 8.47
The following table summarizes information about the stock
options outstanding at December 31, 1999.
Options Outstanding
Options Exercisable
Weighted-
Average Weighted-
Weighted-
Number Remaining Average Number Average
Outstanding Contract Exercise Exercisable Exercise
at 12/31/99
at 12/31/99
Price
Price
Life
Range of
Exercise
Prices
$ 2.50-2.99
$ 4.00-4.99
$ 9.1875-9.25
$ 11.1825-11.5625
$ 14.6875
Total
20,328
8,800
697,067
596,083
357,900
1,680,178
2.3
3.2
7.0
9.1
8.2
20,328
2.71
$
8,800
4.04
$
697,067
$
9.22
596,083
$ 11.56
357,900
$ 14.69
$ 11.07 1,680,178
$ 2.71
$ 4.04
$ 9.22
$11.56
$14.69
$11.07
There are no material legal proceedings to which the
Corporation or its subsidiaries are a party, or of which any of
their property is the subject, except proceedings which arise
in the normal course of business and, in the opinion of
management, will not have any material adverse effect on the
consolidated operations or financial position of the
Corporation and its subsidiaries.
NOTE 21—Related Party Transactions
Some of the Corporation’s or its subsidiaries’ directors,
executive officers, principal shareholders and their related
interests, had transactions with the subsidiary banks in the
ordinary course of business. All loans and commitments to
loans in such transactions were made on substantially the
same terms, including collateral and interest rates, as those
prevailing at the time for comparable transactions. In the
opinion of management, these transactions do not involve
more than the normal risk of collectibility nor do they
present other unfavorable features. It is anticipated that
further such extensions of credit will be made in the future.
0.88 $
0.87 $
0.54 $
0.54 $
0.64 $
0.54
NOTE 20—Commitments and Contingent Liabilities
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
The following is an analysis of loans to those parties whose
aggregate loan balances exceeded $60 during 1999.
Balances December 31, 1998
Advances
Repayments
Other
Balances December 31, 1999
$ 10,308
7,889
(8,889)
(904)
$ 8,404
“Other” primarily reflects the change in those classified as a
“related party” as a result of mergers, resignations and
retirements.
NOTE 22—Regulatory Restrictions and Capital Adequacy
The amount of funds available to the parent from its
subsidiary banks is limited by restrictions imposed on all
financial institutions by banking regulators. At December
31, 1999, dividends from subsidiary banks were restricted
not to exceed $79,092. These restrictions have not had, and
are not expected to have, a significant impact on the
Corporation’s ability to meet its cash obligations.
The Corporation is subject to various regulatory capital
requirements administered by the Federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material
effect on the Corporation’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and its banking subsidiaries
must meet specific capital guidelines that involve quantitative
measures of the Corporation’s assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting
practices. The Corporation’s capital amounts and classification
are also subject to qualitative judgements by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation to maintain minimum
amounts and ratios of total and Tier I capital (common and
certain other “core” equity capital) to risk weighted assets, and
of Tier I capital to average assets. As of December 31, 1999,
the Corporation and its banking subsidiaries meet all capital
adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notifications from
the Federal Reserve Board and Federal Deposit Insurance
Corporation categorized First Commonwealth Bank and
Southwest Bank as well capitalized under the regulatory
framework for prompt corrective action. To be considered as
well capitalized, the banks must maintain minimum total
risk-based capital, Tier I risk-based capital and Tier I
leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management
believes have changed the institution’s category.
As of December 31, 1999
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation (a)
First Commonwealth Bank
Southwest Bank
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation (a)
First Commonwealth Bank
Southwest Bank
Tier I Capital to Average Assets
First Commonwealth Financial Corporation (a)
First Commonwealth Bank
Southwest Bank
As of December 31, 1998
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation
First Commonwealth Bank
Southwest Bank
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation
First Commonwealth Bank
Southwest Bank
Tier I Capital to Average Assets
First Commonwealth Financial Corporation
First Commonwealth Bank
Southwest Bank
Actual
Amount
Ratio
Regulatory Minimum
Ratio
Amount
To Be Well Capitalized Under
Prompt Corrective Action Provisions
Amount
Ratio
$ 384,368
$ 287,968
92,933
$
$ 351,085
$ 261,744
86,322
$
$ 351,085
$ 261,744
86,322
$
$ 372,538
$ 269,259
86,040
$
$ 342,999
$ 245,823
80,184
$
$ 342,999
$ 245,823
80,184
$
14.4%
13.7%
17.6%
13.2%
12.4%
16.3%
7.4%
7.2%
8.2%
15.8%
14.4%
18.4%
14.5%
13.1%
17.2%
8.6%
8.0%
9.2%
$ 213,009
$ 168,687
42,308
$
$ 106,504
84,344
$
21,154
$
$ 141,488
$ 108,724
31,790
$
8.0%
8.0%
8.0%
4.0%
4.0%
4.0%
3.0%
3.0%
3.0%
Not Applicable
$ 210,859
52,886
$
Not Applicable
10.0%
10.0%
Not Applicable
$ 126,515
31,731
$
Not Applicable
6.0%
6.0%
Not Applicable
$ 181,207
52,983
$
Not Applicable
5.0%
5.0%
$ 188,929
$ 149,993
37,364
$
8.0%
8.0%
8.0%
Not Applicable
$ 187,492
46,705
$
Not Applicable
10.0%
10.0%
$
$
$
94,464
74,997
18,682
$ 119,491
92,383
$
26,274
$
4.0%
4.0%
4.0%
3.0%
3.0%
3.0%
Not Applicable
$ 112,495
28,023
$
Not Applicable
6.0%
6.0%
Not Applicable
$ 153,972
43,790
$
Not Applicable
5.0%
5.0%
(a) Includes $35,000 of Company obligated mandatorily redeemable capital securities of subsidiary trust described in NOTE 13 which qualify as Tier I Capital.
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 23—Condensed Financial Information of First
Commonwealth Financial Corporation (parent company only)
Statements of Cash Flows
Balance Sheets
Assets
Cash
Securities available for sale
Loans to affiliated parties
Investment in subsidiaries
Investment in jointly-owned company
Premises and equipment
Dividends receivable from subsidiaries
Receivable from subsidiaries
Other assets
Total assets
Liabilities and Shareholders’ Equity
Accrued expenses and other liabilities
Dividends payable
Loans payable
Subordinated debentures payable
Shareholders’ equity
Total liabilities and
shareholders’ equity
Statements of Income
Interest and dividends
Dividends from subsidiaries
Interest expense
Net securities gains
Other revenue
Operating expenses
Income before taxes and equity
in undistributed earnings of
subsidiaries
Applicable income tax benefits
Income before equity in
undistributed earnings of
subsidiaries
Equity in undistributed
earnings of subsidiaries
Net income
December 31,
1999
1998
$
5,122
103
480
330,400
3,477
6,992
2,786
3,574
2,711
$ 355,645
$
2,544
8,141
22,193
36,083
286,684
$
4,501
145
498
348,597
3,059
6,022
2,914
3,588
526
$ 369,850
$
1,352
5,086
8,007
-0-
355,405
$ 355,645
$ 369,850
Years Ended December 31,
$
1999
149
36,506
(1,758)
57
15
(11,476)
$
1998
251
28,559
(255)
203
1,008
(8,111)
$
1997
94
37,023
(214)
382
16
(8,262)
23,493
4,421
21,655
2,348
29,039
2,610
27,914
24,003
31,649
25,116
$ 53,030
9,371
$ 33,374
7,890
$ 39,539
Operating Activities
Net income
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization
Net (gains) losses on sale of
assets
Decrease (increase) in prepaid
income taxes
Undistributed equity in
subsidiaries
Other - net
Net cash provided by
operating activities
Investing Activities
Transactions with securities
available for sale:
Purchases of investment
securities
Sales of investment
securities
Net change in loans to
affiliated parties
Purchases of premises and
equipment
Additional net investment
in subsidiary
Sale of subsidiary
Net cash used by
investing activities
Financing Activities
Net decrease in short-term
borrowings
Issuance of subordinated
debentures
Issuance of other long-term debt
Discount on dividend reinvestment
plan purchases
Treasury stock acquired
Treasury stock reissued
Cash dividends paid
Net cash used by
financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Years Ended December 31,
1999
1998
1997
$ 53,030
$33,374
$39,539
1,655
1,470
1,522
144
(203)
(381)
(242)
13
229
(25,116)
(818)
(9,371)
(1,642)
(7,890)
(403)
28,653
23,641
32,616
-0-
(10,091)
(6,734)
102
13,709
5,419
17
(28)
48
(1,476)
(2,036)
(1,005)
(2,406)
1,709
(1,770)
-0-
-0-
-0-
(2,054)
(216)
(2,272)
-0-
-0-
(103)
36,083
16,000
-0-
-0-
-0-
-0-
(358)
(51,331)
1,453
(27,825)
(25,978)
621
4,501
$ 5,122
(1,016)
(2,123)
2,217
(25,746)
(630)
(5,908)
16
(21,739)
(26,668)
(3,243)
7,744
$ 4,501
(28,364)
1,980
5,764
$ 7,744
Supplemental disclosures
Proceeds from the issuance of subordinated debentures and
other long-term debt during 1999 were used primarily to fund
the purchase of 3,819,420 shares of the Corporation’s common
stock pursuant to a “modified Dutch Auction” tender offer.
Noncash investing and financing activities:
ESOP borrowings
ESOP loan reductions
34
1999
-0-
1,814
1998
$ 6,000
429
$
1997
$
-0-
$ 1,038
$
$
The Corporation borrowed $6,000 in 1998 and concurrently
loaned this amount to the ESOP on identical terms. The loan
was recorded as long-term debt and the offset was recorded
as a reduction of the common shareholders’ equity. Loan
payments in the amount of $1,814 in 1999, $429 in 1998 and
$1,038 in 1997 were made by the ESOP thereby reducing the
outstanding amount related to unearned ESOP shares to
$6,193 at December 31, 1999.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 24—Fair Values of Financial Instruments
Below are various estimated fair values at December 31, 1999
and 1998, as required by Statement of Financial Accounting
Standards No. 107 (“FAS No. 107”). Such information, which
pertains to the Corporation’s financial instruments, is based on
the requirements set forth in FAS No. 107 and does not
purport to represent the aggregate net fair value of the
Corporation. It is the Corporation’s general practice and intent
to hold its financial instruments to maturity, except for certain
securities designated as securities available for sale, and not to
engage in trading activities. Many of the financial instruments
lack an available trading market, as characterized by a willing
buyer and seller engaging in an exchange transaction.
Therefore, the Corporation had to use significant estimations
and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to
estimate fair values may materially affect the estimated
amounts. Also, management is concerned that there may not
be reasonable comparability between institutions due to the
wide range of permitted assumptions and the methodologies
in absence of active markets. This lack of uniformity gives
rise to a high degree of subjectivity in estimating financial
instrument fair values.
The following methods and assumptions were used by the
Corporation in estimating financial instrument fair values:
Cash and short-term instruments: The balance sheet carrying
amounts for cash and short-term instruments approximate the
estimated fair values of such assets.
Securities: Fair values for securities held to maturity and
securities available for sale are based on quoted market
prices, if available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
instruments. The carrying value of nonmarketable equity
securities, such as Federal Home Loan Bank stock, is
considered a reasonable estimate of fair value.
Loans receivable: Fair values of variable rate loans subject to
frequent repricing and which entail no significant credit risk are
based on the carrying values. The estimated fair values of other
loans are estimated by discounting the future cash flows using
interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount of
accrued interest is considered a reasonable estimate of fair value.
Off-balance-sheet instruments: Many of the Corporation’s
off-balance-sheet instruments, primarily loan commitments
and standby letters of credit, are expected to expire without
being drawn upon, therefore the commitment amounts do not
necessarily represent future cash requirements. Management
has determined that due to the uncertainties of cash flows
and difficulty in predicting the timing of such cash flows,
fair values were not estimated for these instruments.
Deposit liabilities: For deposits which are payable on demand
at the reporting date, representing all deposits other than time
deposits, management estimates that the carrying value of such
deposits is a reasonable estimate of fair value. The carrying
amounts of variable rate time deposit accounts and certificates
of deposit approximate their fair values at the report date. Fair
values of fixed rate time deposits are estimated by discounting
the future cash flows using interest rates currently being offered
and a schedule of aggregated expected maturities. The carrying
amount of accrued interest approximates its fair value.
Short-term borrowings: The carrying amounts of short-term
borrowings such as Federal funds purchased, securities sold
under agreements to repurchase, borrowings from the
Federal Home Loan Bank and treasury, tax and loan notes
approximate their fair values.
Long-term debt: The carrying amounts of variable rate debt
approximate their fair values at the report date. Fair values
of fixed rate debt are estimated by discounting the future
cash flows using the Corporation’s estimated incremental
borrowing rate for similar types of borrowing arrangements.
The following table presents carrying amounts and estimated fair values of the Corporation’s financial instruments at
December 31, 1999 and 1998.
1999
1998
Financial assets
Cash and due from banks
Interest-bearing deposits with banks
Federal funds sold
Securities available for sale
Investments held to maturity
Loans, net of allowance
Financial liabilities
Deposits
Short-term borrowings
Long-term debt
Carrying
Amount
$
92,673
1,218
8,700
1,144,042
448,347
2,466,520
2,948,829
424,827
638,355
Estimated
Fair
Value
$
92,673
1,218
8,700
1,144,042
435,000
2,547,096
2,913,140
424,827
581,254
Carrying
Amount
$
96,615
1,914
1,000
1,042,636
482,696
2,342,546
2,931,131
140,547
630,850
Estimated
Fair
Value
$
96,615
1,914
1,000
1,042,636
486,185
2,389,039
2,946,535
140,547
635,252
35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY SUMMARY OF FINANCIAL DATA - UNAUDITED
(Dollar Amounts in Thousands, except per share data)
The unaudited quarterly results of operations, restated to reflect pooling of interests for the years ended December 31, 1999
and 1998 are as follows:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for
credit losses
Securities gains
Other operating income
Other operating expenses
Income before income taxes
Applicable income taxes
Net income
Basic earnings per share (a)
Diluted earnings per share (a)
Average shares outstanding (a)
Average shares outstanding assuming dilution (a)
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for
credit losses
Securities gains (losses)
Other operating income
Merger and other related charges
Other operating expenses
Income before taxes and extraordinary items
Applicable income taxes
Net income before extraordinary items
Extraordinary items, net of income taxes
Net income
Basic earnings per share, before extraordinary items (a)
Diluted earnings per share, before extraordinary items (a)
Average shares outstanding (a)
Average shares outstanding assuming dilution (a)
First
Quarter
$ 71,801
36,740
35,061
2,213
1999
Second
Quarter
$ 73,636
36,989
36,647
2,337
Third
Quarter
$ 75,360
38,154
37,206
2,363
Fourth
Quarter
$76,710
40,770
35,940
2,537
32,848
34,310
34,843
33,403
563
7,319
24,191
16,539
4,534
$ 12,005
0.20
$
0.20
$
61,152,708
61,432,570
First
Quarter
$ 68,450
35,201
33,249
2,475
-0-
9,944
23,490
20,764
5,938
$ 14,826
0.24
$
0.24
$
61,203,388
61,376,932
Second
Quarter
$ 72,016
38,023
33,993
2,625
2
6,581
22,870
18,556
4,804
$ 13,752
0.22
$
0.22
$
61,290,374
61,491,946
1998
Third
Quarter
$ 72,408
38,394
34,014
2,857
-0-
6,444
23,064
16,783
4,336
$12,447
0.22
$
0.21
$
57,713,182
58,003,391
Fourth
Quarter
$70,547
36,664
33,883
7,092
30,774
31,368
31,157
26,791
982
5,056
-0-
22,930
13,882
3,900
9,982
-0-
$ 9,982
0.16
$
0.16
$
61,607,954
62,023,294
-0-
5,833
-0-
22,843
14,358
3,864
10,494
-0-
$ 10,494
0.17
$
0.17
$
61,545,594
61,901,396
1,657
5,798
-0-
23,005
15,607
4,063
11,544
-0-
$ 11,544
0.19
$
0.19
$
61,503,208
61,796,158
(1,182)
8,194
7,915
23,508
2,380
402
1,978
(624)
$ 1,354
0.03
$
0.03
$
60,685,824
60,953,602
(a) Per share amounts have been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend
declared on October 19, 1999.
36
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollar Amounts in Thousands, except per share data)
The following selected financial data is not covered by the auditor’s report and should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the
consolidated financial statements and related notes. All amounts have been restated to reflect the poolings of interests.
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for
credit losses
Securities gains (losses)
Other operating income
Merger and related charges
Other operating expenses
Income before taxes and extra-
ordinary items
Applicable income taxes
Net income before extraordinary items
Extraordinary items (less applicable taxes
of $336)
Net income
Per Share Data (a)
Net income before extraordinary items
Extraordinary items
Net income
Dividends declared
Average shares outstanding
Per Share Data Assuming Dilution (a)
Net income before extraordinary items
Extraordinary items
Net income
Dividends declared
Average shares outstanding
At End of Period
Total assets
Investment securities
Loans and leases, net of unearned income
Allowance for credit losses
Deposits
Company obligated mandatorily redeemable
capital securities of subsidiary trust
Other long-term debt
Shareholders’ equity
Key Ratios
Return on average assets
Return on average equity
Net loans to deposit ratio
Dividends per share as a percent of net
income per share
Average equity to average assets ratio
$
$
$
$
$
$
$
$
$
1999
1998
1997
1996
1995
Years Ended December 31,
297,507
152,653
144,854
9,450
$
283,421
148,282
135,139
15,049
$
254,772
124,427
130,345
10,152
$
235,188
109,189
125,999
6,301
$
227,182
103,019
124,163
5,575
135,404
120,090
120,193
119,698
118,588
565
30,288
-0-
93,615
72,642
19,612
53,030
-0-
53,030
0.88
0.00
0.88
0.515
60,333,092
0.88
0.00
0.88
0.515
60,569,322
4,340,846
1,592,389
2,500,059
33,539
2,948,829
35,000
603,355
286,683
1,457
24,881
7,915
92,286
46,227
12,229
33,998
(624)
33,374
0.55
(0.01)
0.54
0.445
61,333,572
0.55
(0.01)
0.54
0.445
61,666,026
4,096,789
1,525,332
2,374,850
32,304
2,931,131
-0-
630,850
355,405
$
$
$
$
$
$
$
$
6,825
18,716
-0-
88,857
56,877
17,338
39,539
-0-
39,539
0.64
0.00
0.64
0.41
61,671,898
0.64
0.00
0.64
0.41
61,845,674
3,668,557
1,015,798
2,436,337
25,932
2,884,343
-0-
193,054
354,323
$
$
$
$
$
$
$
$
1,599
17,359
-0-
85,299
53,357
16,164
37,193
-0-
37,193
0.60
0.00
0.60
0.37
62,310,086
0.60
0.00
0.60
0.37
62,381,790
3,339,996
901,411
2,236,523
25,234
2,756,111
-0-
52,737
341,522
$
$
$
$
$
$
$
$
(603)
15,996
-0-
83,689
50,292
15,728
34,564
-0-
34,564
0.55
0.00
0.55
0.33
62,472,404
0.55
0.00
0.55
0.33
62,563,920
3,075,123
960,588
1,935,938
23,803
2,586,545
-0-
7,168
329,486
$
$
$
$
$
$
$
$
1.25%
15.44%
83.64%
58.52%
8.10%
0.85%
9.13%
79.92%
1.15%
11.31%
83.57%
82.41%
9.28%
64.06%
10.16%
1.17%
11.07%
80.23%
61.67%
10.53%
1.14%
11.02%
73.93%
60.00%
10.38%
(a) Per share amounts have been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on October 19, 1999.
37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
decrease of $0.13 per share on a pre-tax basis for 1998.
These charges include merger expenses for the acquisition of
Southwest National Corporation, early retirement and
postretirement benefit accruals and premises and equipment
expenses to standardize depreciation methods. Excluding
merger and related charges, gains on sale of loans and
branches, securities transactions and extraordinary items,
basic earnings per share increased $0.22 or 36.67% for 1999
compared to 1998. Extraordinary items for 1998 resulted
from a single transaction whereby the Corporation incurred a
cost of $960 thousand for the prepayment of FHLB term
borrowings. Increases in net interest income increased basic
earnings per share by $0.20 per share in 1999 and $0.09 per
share in 1998. Increases in employee costs decreased
earnings per share by $0.03 in both the 1999 and 1998
periods. Return on average assets was 1.25% and return on
average equity was 15.44% during 1999 compared to 0.85%
and 9.13%, respectively for 1998. Return on average assets
was 1.15% during 1997 while return on average equity was
11.31%.
The following is an analysis of the impact of changes in net
income on earnings per share:
Net income per share, prior year
$
0.54
$ 0.64
1999
vs.
1998
1998
vs.
1997
Increase (decrease) from changes in:
Net interest income
Provision for credit losses
Security transactions
Other income
Salaries and employee benefits
Occupancy and equipment costs
Merger and other related charges
Other expenses
Provision for income taxes
Extraordinary items, net of tax
0.20
0.09
(0.01)
0.11
(0.03)
0.00
0.13
(0.03)
(0.13)
0.01
0.09
(0.08)
(0.09)
0.10
(0.03)
0.00
(0.13)
(0.03)
0.08
(0.01)
Net income per share
$
0.88
$ 0.54
Net interest income, the most significant component of
earnings, is the amount by which interest generated from
earning assets exceeds interest expense on liabilities. Net
interest income was $144.9 million in 1999 compared to
$135.1 million in 1998 and $130.3 million in 1997. The
following is an analysis of the average balance sheets and net
interest income for each of the three years in the period
ended December 31, 1999.
Introduction
This discussion and the related financial data are presented to
assist in the understanding and evaluation of the consolidated
financial condition and the results of operations of First
Commonwealth Financial Corporation including its
subsidiaries (the “Corporation”) for the years ended
December 31, 1999, 1998 and 1997 and are intended to
supplement, and should be read in conjunction with, the
consolidated financial statements and related footnotes.
In addition to historical information, this discussion and
analysis contains forward-looking statements. The forward-
looking statements contained herein are subject to certain
risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking
statements. Important factors that might cause such a
difference include, but are not limited to, those discussed in
this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” Readers are cautioned
not to place undue reliance on these forward-looking
statements, which reflect management’s analysis only as of
the date hereof. The Corporation undertakes no obligation to
publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date
hereof.
The Corporation acquired Southwest National Corporation
and its subsidiary (“Southwest”) effective December 31,
1998. The merger was accounted for as a pooling of
interests and accordingly, all financial statements have been
restated as though the merger had occurred at the beginning
of the earliest period presented. During the fourth quarter of
1997 the Corporation formed First Commonwealth Insurance
Agency (“FCIA”) as a subsidiary of First Commonwealth
Bank (“FCB”), a commercial banking subsidiary of the
Corporation. FCIA began marketing a wide range of
insurance and annuity products to the Corporation’s retail
and commercial customers beginning January 1, 1998.
On October 19, 1999, the Corporation’s Board of Directors
approved a 2-for-1 stock split effected in the form of a 100%
stock dividend. Shareholders of record at the close of
business November 4, 1999 received one additional share for
each share held. The additional shares were distributed on
November 18, 1999. Share data for all periods presented has
been restated to reflect the stock split as if it had occurred at
the beginning of the earliest period presented.
Results of Operations
Net income in 1999 was $53.0 million, an increase of $19.7
million from the 1998 level of $33.4 million and compared to
$39.5 million reported in 1997. Basic earnings per share
increased $0.34 per share in 1999 to $0.88. The 1998 period
was impacted negatively by a number of merger and other
related charges totaling $7.9 million which resulted in a
38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
1999
1998
1997
Average
Balance
Income/ Yield or
Rate(a)
Expense
Average
Balance
Income/ Yield or
Rate(a)
Expense
Average
Balance
Income/ Yield or
Rate(a)
Expense
$
1,844
1,608,467
2,097
$
121
100,853
105
6.56% $
6.59
5.01
3,692
1,271,319
35,521
$
230
78,205
1,893
6.23%
6.43
5.33
$
4,663
931,017
12,653
$
236
55,490
689
5.06%
6.24
5.45
2,408,450
196,428
8.27
2,439,436
203,093
8.43
2,330,657
198,357 8.60
4,020,858
297,507
7.59
3,749,968
283,421
7.72
3,278,990
254,772
7.91
Assets
Interest-earning assets:
Time deposits with banks
Investment securities
Federal funds sold
Loans (b) (c), net of
unearned income
Total interest-
earning assets
Noninterest-earning assets:
Cash
Allowance for credit losses
Other assets
Total noninterest-
earning assets
Total Assets
80,716
(33,757)
174,063
221,022
$ 4,241,880
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
78,999
(27,388)
138,114
189,725
$ 3,939,693
77,259
(25,510)
110,112
161,861
$ 3,440,851
$
386,124
712,637
1,499,857
279,269
643,746
$
8,375
17,769
77,187
13,832
35,490
2.17% $
2.49
5.15
4.95
5.51
341,835
715,814
1,530,491
195,334
430,677
$
7,579
21,379
2.22%
2.99
85,002 5.55
5.23
10,214
5.60
24,108
$
271,321
737,725
1,517,972
156,470
65,820
$
5,042
22,752
84,806
8,108
3,719
1.86%
3.08
5.59
5.18
5.65
3,521,633
152,653
4.33
3,214,151
148,282
4.61
2,749,308
124,427
4.53
328,720
31,177
365,645
725,542
311,304
30,541
349,698
691,543
Shareholders’ Equity
$ 4,241,880
$ 3,939,693
$ 3,440,851
Net Interest Income and
Net Yield On Interest-
earning Assets
$ 144,854
3.80%
$135,139
3.77%
$ 130,345
4.12%
(a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate.
(b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets.
(c) Loan income includes net loan fees.
(d) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits
into savings deposits which were made for regulatory purposes.
Both interest income and interest expense increased over
1998 levels as volume increases for 1999 were only partially
offset by rate decreases. Average interest-earning assets
increased $270.9 million while average interest-bearing
liabilities increased $307.5 million in 1999. Asset yields, on
a tax-equivalent basis, decreased 13 basis points (0.13%)
during 1999 to 7.59%, from 7.72% reported in 1998 and
compared to 7.91% reported in 1997. The cost of funds for
1999 decreased 28 basis points (0.28%) from 1998 costs of
4.61% and compared to costs of 4.53% for 1997.
Interest and fees on loans decreased $6.7 million for 1999
over 1998 levels and included decreases in interest on
mortgage loans of $6.4 million and decreases in interest on
39
Interest-bearing
demand deposits (d)
Savings deposits (d)
Time deposits
Short-term borrowings
Long-term debt
Total interest-
bearing liabilities
Noninterest-bearing
liabilities and capital:
Noninterest-bearing
demand deposits (d)
Other liabilities
Shareholders’ equity
Total noninterest-
345,311
31,439
343,497
bearing funding sources
720,247
Total Liabilities and
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
credit card loans of $1.4 million which were primarily the
result of loan sales. Average mortgage loans for the 1999
period decreased $88.7 million compared to 1998 averages,
as a result of the sale of $52.5 million and $42.2 million of
1-4 family residential mortgage loans in the fourth quarter
of 1998 and the first quarter of 1999, respectively. Average
credit card loans for the 1999 period decreased $9.8 million
as $20.4 million of consumer credit card loans were sold in
the second quarter of 1999. The decreased income from
mortgage and credit card loans in 1999 was partially offset
by increased income from commercial loans as enhanced
marketing strategies enabled the Corporation to capitalize
on lending opportunities with small to mid-sized
commercial customers.
The loan portfolio also reflected decreases due to rate of
$4.9 million during 1999 as the decline in loan yields
which began in the fourth quarter of 1995 has continued
throughout 1998 and 1999. Loan yields declined 16 basis
points (0.16%) during 1999 to 8.27% from 8.43% reported
for 1998 and compared to 8.60% during 1997. The loan
portfolio continued to be impacted by loan refinancings
and loans maturing at higher interest rates than current
market rates. Loan refinancings and prepayments slowed
throughout 1999 as market interest rates rose. Mortgage
portfolio yields rose 4 basis points (0.04%) for 1999
compared to 1998 as yields on innovative loan products
introduced in previous years began to approach the
average yield of the mortgage portfolio as these products
aged and introductory interest rates were no longer
offered on aged loans.
Interest income on investments increased $22.6 million for
1999 compared to 1998 as average balances of U.S.
government agency securities and asset backed securities for
1999 increased $183.6 million and $66.9 million,
respectively over 1998 averages. These securities purchases
were part of a capital management leveraging strategy
whereby borrowings from the Federal Home Loan Bank
classified as long-term debt were invested in U.S.
government agency securities and mortgage backed
securities. Interest income for 1999 was also impacted by
volume increases from corporate securities, primarily
investments in trust preferred securities.
Yields on investments for 1999 were 6.59% compared to
6.43% for 1998 and 6.24% for 1997. Yields on
investments for the 1999 period reflected an increase in
yields on U.S. government agency securities of 11 basis
points (0.11%) and an increase in yields on corporate
securities of 119 basis points (1.19%) for the 1999 period
compared to 1998. Prepayment speeds of mortgage backed
securities (“MBS”) which had accelerated during 1998
began to slow during the 1999 period as interest rates rose.
The primary risk of owning MBS relates to the uncertainty
40
of prepayments of the underlying mortgages. Interest rate
changes have a direct impact on prepayment speeds. As
interest rates increase, prepayment speeds generally
decline, resulting in a longer average life of a MBS.
Conversely as interest rates decline, prepayment speeds
increase, resulting in a shorter average life of a MBS.
Using computer simulation models, the Corporation tests
the average life and yield volatility of all MBSs under
various interest rate scenarios on a continuing basis to
insure that volatility falls within acceptable limits. The
Corporation holds no “high risk” securities nor does the
Corporation own any securities of a single issuer exceeding
10% of shareholders’ equity other than U.S. government
and agency securities.
Interest on deposits decreased $10.6 million for 1999
compared to 1998 as rate decreases were only partially
offset by volume increases. Interest on total savings
deposits decreased $4.2 million and interest on time
deposits decreased $7.9 million for 1999 due to rate
decreases and a decline in the interest rate environment,
particularly early in the year. Deposit costs for total
savings deposits reflected a decrease of 36 basis points
(0.36%) for 1999 while the cost of time deposits reflected a
decrease of 41 basis points (0.41%) over 1998 costs,
primarily as a result of active interest rate management.
Volume increases for deposits in 1999 occurred primarily
in products offering higher interest rates than traditional
products such as the Corporation’s “American Dream”
savings product utilized by consumers and the secured cash
manager product utilized by municipalities. The secured
cash manager product allows the municipality to sweep
excess balances from noninterest-bearing accounts into an
interest-bearing account which offers higher interest rates
than traditional N.O.W. accounts. Average balances of
noninterest-bearing demand deposits for 1999 reflected an
increase of $16.6 million compared to 1998 averages.
Interest expense on short-term borrowings increased $3.6
million during 1999 primarily as a result of increases in
average borrowings of $83.9 million over 1998 averages.
Increases in interest expense on short-term borrowings as a
result of volume increases during 1999 were partially offset
by rate decreases as the cost of short-term borrowings
decreased 28 basis points (0.28%) over 1998 costs.
Interest expense on long-term debt increased $11.4 million
for the 1999 period compared to 1998 primarily as a result
of increases in average borrowings of $213.1 million over
1998 averages. The long-term debt increase for 1999
included borrowings from the Federal Home Loan Bank
with maturities of up to 10 years to be utilized as part of the
above mentioned capital management leveraging strategy.
The average spread of this leverage strategy was
approximately 1.17% during the 1999 period and 1.05%
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
during the 1998 period. During 1999 and 1998 interest
income before taxes on these investments exceeded the
funding costs by $8.0 million and $4.6 million,
respectively. Total long-term debt for 1999 also included
increases resulting from the funding of the repurchase of
3.8 million shares of the Corporation’s common stock
through a “modified Dutch Auction” tender offer. The
aggregate amount of $49.7 million paid by the Corporation
in connection with the repurchase of common shares was
funded through the issuance of capital securities and the
issuance of a bank loan from an unrelated financial
institution. Capital securities in the amount of $35 million
were issued during 1999 bearing an interest rate of 9.50%
and maturing in thirty years. Interest expense on capital
securities for 1999 was $1.0 million. The parent company
incurred a $16 million bank loan during 1999 primarily to
fund the remaining cost of the stock repurchase. (SEE
NOTE 13 to the financial statements for a description of the
Company obligated mandatorily redeemable capital
securities of subsidiary trust and NOTE 14 to the financial
statements for a description of the bank loan outstanding).
Net interest margin (net interest income, on a tax-equivalent
basis as a percentage of average earning assets), was 3.80%
during 1999 compared to 3.77% in 1998 and 4.12% in 1997.
The Corporation’s use of computer modeling to manage
interest rate risk is described in the “Interest Sensitivity”
section of this discussion herein.
The following table shows the effect of changes in volumes
and rates on interest income and interest expense.
Interest-earning assets:
Time deposits with banks
Securities
Federal funds sold
Loans
Total interest income
Interest-bearing liabilities:
Deposits
Short-term borrowings
Long-term debt
Total interest expense
Net interest income
Analysis of Year-to-Year Changes in Net Interest Income
(Dollar Amounts in Thousands)
1999 Change from 1998
Change Due
to Volume
Change Due
to Rate
Total
Change
$
(109)
22,648
(1,788)
(6,665)
14,086
(10,629)
3,618
11,382
4,371
$ 9,715
$
(115)
21,682
(1,781)
(2,613)
17,173
(815)
4,389
11,927
15,501
$ 1,672
$
6
966
(7)
(4,052)
(3,087)
(9,814)
(771)
(545)
(11,130)
$ 8,043
Total
Change
$
(6)
22,715
1,204
4,736
28,649
1,360
2,106
20,389
23,855
$ 4,794
1998 Change from 1997
Change Due
to Volume
Change Due
to Rate
$
(49)
21,241
1,246
9,351
31,789
1,334
2,014
20,613
23,961
$ 7,828
$
43
1,474
(42)
(4,615)
(3,140)
26
92
(224)
(106)
$ (3,034)
mortgages and commercial loans not secured by real estate.
Net charge-offs against the allowance for credit losses were
$8.2 million, or 0.34% of average total loans in 1999. This
compared to net charge-offs of $8.7 million in 1998 and
$9.5 million in 1997. Net charge-offs were 0.36% and
0.41% of average total loans during 1998 and 1997,
respectively. For an analysis of credit quality, see the
“Credit Review” section of this discussion.
The provision for credit losses is an amount added to the
allowance against which credit losses are charged. The
amount of the provision is determined by management
based upon its assessment of the size and quality of the
loan portfolio and the adequacy of the allowance in relation
to the risks inherent within the loan portfolio. The
provision for credit losses was $9.5 million in 1999
compared to $15.0 million in 1998 and $10.2 million in
1997. The 1998 period contains an additional provision of
$4.2 million recorded in the fourth quarter of 1998 to
reflect changing economic conditions. The allowance for
credit losses was $33.5 million at December 31, 1999, for a
ratio of 1.34% of actual loans outstanding. The ratio of the
allowance for credit losses to total loans outstanding as of
December 31, 1999 has decreased slightly from the 1.36%
reported as of December 31, 1998, but this ratio remains
above historic levels. Net charge-offs for 1999 reflected
decreases in consumer installment and revolving credit
loans of $896 thousand and commercial loans secured by
real estate of $315 thousand which were partially offset by
increases in net charge-offs of 1-4 family residential
41
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents an analysis of the consolidated allowance for credit losses for the five years ended December 31,
1999 (dollars in thousands):
Summary of Loan Loss Experience
1999
1998
1997
1996
1995
Loans outstanding at end of year
$ 2,500,059
$ 2,374,850
$ 2,436,337
$ 2,236,523
$ 1,935,938
Average loans outstanding
$ 2,408,450
$ 2,439,436
$ 2,330,657
$ 2,060,196
$ 1,846,507
Allowance for credit losses:
Balance, beginning of year
Loans charged off:
Commercial, financial and agricultural
Loans to individuals
Real estate-construction
Real estate-commercial
Real estate-residential
Lease financing receivables
Total loans charged off
Recoveries of loans previously charged off:
Commercial, financial and agricultural
Loans to individuals
Real estate-construction
Real estate-commercial
Real estate-residential
Lease financing receivables
Total recoveries
Net loans charged off
Provision charged to expense
$
32,304
$
25,932
$
25,234
$
23,803
$
22,375
1,821
6,126
-0-
427
1,035
187
9,596
290
1,057
-0-
-0-
33
1
1,381
8,215
9,450
1,513
7,293
-0-
812
690
319
10,627
462
1,328
-0-
70
87
3
1,950
8,677
15,049
1,473
8,022
-0-
664
819
-0-
10,978
223
1,218
-0-
13
57
13
1,524
9,454
10,152
633
5,069
-0-
440
195
26
6,363
263
1,033
-0-
83
109
5
1,493
4,870
6,301
1,188
3,717
-0-
218
481
52
5,656
159
1,067
-0-
56
128
99
1,509
4,147
5,575
Balance, end of year
$
33,539
$
32,304
$
25,932
$
25,234
$
23,803
Ratios:
Net charge-offs as a percentage of
average loans outstanding
Allowance for credit losses as
a percentage of average loans
outstanding
0.34%
0.36%
0.41%
0.24%
0.22%
1.39%
1.32%
1.11%
1.22%
1.29%
Net securities gains decreased $892 thousand during 1999
from $1.5 million reported in 1998 and compared to $6.8
million in 1997. The securities gains during 1999 resulted in
part from the sales of fixed rate U.S. government agency
securities and U.S. treasury securities classified as securities
“available for sale” having book values of $15.0 million and
$21.9 million, respectively, which resulted in securities gains
of $167 thousand and $317 thousand, respectively. Proceeds
from the sale of U.S. treasury securities in 1999 were the
primary funding source for the acquisition of $20 million of
bank owned life insurance during the first quarter. The
security gains during 1998 resulted in part from the third and
fourth quarter sales of floating collateralized mortgage
obligations classified as securities “available for sale” having
book values of $87.9 million and $16.1 million respectively,
which resulted in security gains of $1.7 million during the
third quarter and security losses of $803 thousand during the
fourth quarter. These securities were sold to reduce the
exposure to accelerated prepayments in a declining interest
rate environment. The $89.6 million proceeds from the sale
of securities in the third quarter of 1998 were used to reduce
outstanding Federal funds purchased while the $15.3 million
proceeds in the fourth quarter of 1998 were reinvested in
higher yielding municipal securities. The 1998 securities
gains also included the first quarter sale of U.S. Treasury
securities classified as securities “available for sale” having a
book value of $45.8 million with the proceeds being
reinvested in mortgage backed and other U.S. government
agency securities with similar average expected maturities.
Securities losses of $586 thousand were incurred during the
fourth quarter of 1998 primarily as a result of the sale of
mutual funds classified as equity securities having a book
value of $5.8 million. Additional security gains were
incurred during the fourth quarter of 1998 as a result of the
sale of Pennsylvania bank stocks having a book value of $5.2
million. The securities gains during 1997 resulted primarily
42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
from the sale of investments in Pennsylvania bank stocks
having a book value of $17.4 million which were sold for
gains of $6.7 million.
Trust income of $5.5 million for 1999 reflected an increase of
$274 thousand over 1998 levels and compared to $4.4 million
reported in 1997. Enhanced referral programs and integrated
growth plans for financial affiliates have been initiated to help
improve sales in various areas including trust assets managed.
The 1998 increase in trust income occurred primarily in fees
from employee benefit accounts, agency/custodial accounts
and retail mutual fund commissions and trailer fees. Service
charges on deposits increased $981 thousand during 1999 as
fee schedules for the Corporation’s subsidiary banks were
evaluated and modified. Additional noninterest income
analysis is planned for 2000 through the use of recently
implemented customer and product profitability systems
which will be augmented with the use of outside consultants.
Gains on sale of loans increased $3.4 million for 1999 to
$5.0 million from $1.6 million reported in 1998 and
compared to $207 thousand for 1997. Gains on sale of loans
for the 1999 period resulted primarily from the sale of $42.2
million of residential mortgage loans during the first quarter
of 1999 and the sale of its $20.4 million retail credit card
loans during the second quarter of 1999 which generated
gains of $890 thousand and $4.0 million, respectively. Gains
on sale of loans for 1998 resulted primarily from the sale of
$52.5 million of 1-4 family residential mortgage loans during
the fourth quarter of 1998 which resulted in a gain of $1.3
million. The Corporation mitigated prepayment risk through
the sale of mortgage loans bearing higher interest rates than
current market rates and reduced interest rate risk through
the sale of mortgage loans bearing interest rates which were
lower than current market rates.
Other income was $10.5 million in 1999 compared to $9.7
million in 1998 and $5.7 million in 1997. Other revenue for
1999 reflected increases in the cash surrender value of bank
owned life insurance of $761 thousand and increases in
merchant discount of $411 thousand over 1998 levels.
Insurance commissions, primarily those generated from
FCIA, increased $662 thousand during 1999 compared to
1998. As a result of branch analysis including the evaluation
of the potential sale or consolidation of branches competing
in the same market area, the Corporation sold two of its
branches located in State College, Pennsylvania during 1998.
The premium on sale of $10.1 million of deposits from the
State College branches resulted in a gain of $950 thousand in
the fourth quarter of 1998. Other income for 1998 reflected
increases in cash surrender value of bank owned life
insurance of $1.2 million and insurance commissions of
$288 thousand compared to 1997 revenues. Charges for
non-customer use of the Corporation’s ATMs also increased
other revenue for 1998 by $607 thousand over 1997 levels.
Total other operating expenses decreased $6.6 million to $93.6
million in 1999 compared to $100.2 million and $88.9 million
in 1998 and 1997, respectively. Employee costs were $49.8
million in 1999, representing 1.17% of average assets
compared to $48.7 million and 1.24% of average assets for
1998. Employee costs for 1997 were $47.1 million or 1.37%
of average assets. Salary and benefit costs increased only
2.3% for 1999 compared to 1998 and were favorably impacted
by the early retirement plan offered to employees during the
fourth quarter of 1998. The success of the early retirement
plan accelerated the process of right-sizing the Corporation
beyond normal attrition management by adjusting
employment levels quickly while continuing the Corporation’s
tradition of not laying off employees due to merger activity.
The number of full time equivalent employees at December
31, 1999 was 1,453 compared to 1,500 at December 31, 1998.
Increases in employee benefit expenses are anticipated in 2000
due to rate increases for health insurance of approximately
23% compared to 1999 rates.
Net occupancy and furniture and equipment costs decreased
for all periods presented. The 1999 period reflected
decreases in occupancy and furniture and equipment
expenses as a result of the sale of two branches in 1998 and
the closing or consolidation of several branches in 1999. All
categories of occupancy expense reflected decreases during
1998 while furniture and equipment expense included
decreases in maintenance and repairs which were partially
offset by an increase in depreciation during 1998.
Outside data processing expenses were $3.2 million for 1999
compared to $3.1 million and $3.0 million for 1998 and 1997
respectively. Outside data processing expenses are managed
by the Corporation’s data processing subsidiary along with
management of internal data processing costs. Outsourced
data processing needs are evaluated based on technology,
efficiency and cost considerations. Pennsylvania shares tax
expense increased $325 thousand during 1999 and $201
thousand in 1998.
Included in the 1998 period were merger and related charges
of $7.9 million. Merger expenses incurred during the
acquisition of Southwest National Corporation for legal,
accounting, printing, filing and other professional services
totaled $1.6 million and were expensed during the fourth
quarter of 1998. As part of the evaluation of appropriate
staffing levels for the Corporation after inclusion of
Southwest, an early retirement plan was offered to
employees during the fourth quarter of 1998. Salary and
benefit costs of the early retirement plan in the amount of
$4.7 million are included in merger and other related charges
for 1998, as approximately 5% of employees took advantage
of this opportunity. In anticipation of the merger of
Southwest benefit plans into those of the Corporation in the
near future, Southwest curtailed their postretirement benefit
43
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
plan during the fourth quarter of 1998. An additional accrual
adjustment of $1.1 million related to this curtailment is
included in merger and other related charges for 1998.
Additional merger and other related charges of $462
thousand were incurred during 1998 to standardize
depreciation for Southwest to that of the Corporation and to
write-off signs and supplies that become obsolete as a result
of the merger.
Other operating expenses remained stable during 1999 at
$24.6 million, compared to $24.5 million reported in 1998
and $22.6 million reported in 1997. Other operating
expenses for the 1999 period included an increase in the
write-down of mortgage servicing rights in the amount of
$336 thousand related to the disposition of BSI. The
disposition of BSI in 1999 also resulted in a loss on sale of
$202 thousand. Advertising, software maintenance and
charge card interchange expense reflected increases for the
1999 period of $265 thousand, $247 thousand, and $335
thousand, respectively compared to the 1998 period.
Increases in telephone expense of $265 thousand during
1999 are being analyzed during 2000 for potential cost
control in future periods. Other professional fees decreased
$757 thousand during 1999 as outside professionals
contracted during 1998 under limited engagements to
review the Corporation’s asset/liability management model,
provide consulting services for marketing, customer
profitability analysis and branch automation initiatives
were not extended to the 1999 period. The 1999 period
also reflected decreases in audit and accounting fees and
legal fees compared to 1998.
Lease residual insurance costs, operational losses and
charge-offs and software depreciation and maintenance
expenses for 1998 reflected increases of $192 thousand,
$403 thousand and $325 thousand respectively over 1997
levels. Loan processing expenses increased $353 thousand
for 1998 compared to 1997, while accelerated prepayment
speeds for loans in the fourth quarter of 1998 resulted in an
increase in the amortization of purchased mortgage servicing
rights of $336 thousand over 1997 amortization. Other
professional fees for 1998 increased $753 thousand over
amounts recorded for 1997.
Income tax expense was $19.6 million during 1999
representing an increase of $7.4 million over the 1998
amount of $12.2 million and compared to $17.3 million in
1997. The Corporation’s effective tax rate was 27.0% for
1999 compared to 26.5% for 1998 and 30.5% for 1997.
Extraordinary items for 1998 resulted from a single
transaction whereby the Corporation incurred a cost of $960
thousand for the prepayment of FHLB term borrowings.
This transaction was executed as part of the Corporation’s
repositioning of its balance sheet to reduce exposure to
declining interest rates.
44
Liquidity
Liquidity is a measure of the Corporation’s ability to
efficiently meet normal cash flow requirements of both
borrowers and depositors. In the ordinary course of
business, funds are generated from deposits (primary source)
and the maturity or repayment of earning assets, such as
securities and loans. As an additional secondary source,
short-term liquidity needs may be provided through the use
of overnight Federal funds purchased, borrowings through
the use of lines available for repurchase agreements, and
borrowings from the Federal Reserve Bank. Additionally,
the banking subsidiaries are members of the Federal Home
Loan Bank and may borrow under overnight and term
borrowing arrangements. The sale of earning assets may
also provide an additional source of liquidity.
Increased competition from nonbanking sources such as
mutual funds, insurance companies and brokerage and
investment banking firms have required banks to rely more
heavily on alternative funding from other borrowings. Many
of our competitors have significantly greater resources
(financial and other) than us and may offer certain services
that our banks do not provide at this time. In addition certain
of our banks’ competitors are not subject to the regulation
and supervision to which we and our banks are subject, and
therefore may have competitive advantages over our banks
and us. The impact of increased competition for deposits
could become more consequential in the future. The
Corporation monitors liquidity through regular computations
of prescribed liquidity ratios. The Corporation actively
manages liquidity within a defined range and has developed
liquidity contingency plans, including ensuring availability
of alternate funding sources to maintain liquidity under a
variety of business conditions. In addition to the previously
described funding sources the Corporation’s ability to access
the capital markets was demonstrated during 1999 through
the issuance of $35 million of capital securities and a $16
million bank loan to provide funding for stock buy-back.
The Corporation’s long-term liquidity source is a large core
deposit base and a strong capital position. Core deposits are
the most stable source of liquidity a bank can have due to the
long-term relationship with a deposit customer. Core
deposits decreased $41.2 million in 1999 while total deposits
increased $17.7 million for 1999. Non-core deposits, which
are time deposits in denominations of $100 thousand or more
represented 12.15% of total deposits at December 31, 1999,
up from 10.21% of total deposits at December 31, 1998.
Non-core deposits increased by $58.8 million in 1999
primarily as a result of an increase in public funds. Time
deposits of $100 thousand or more at December 31, 1999,
1998 and 1997 had remaining maturities as follows:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Maturity Distribution of Large Certificates of Deposit
(Dollar Amounts in Thousands)
1998
1999
Amount
Percent
Amount
Percent
Remaining Maturity:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total
$ 273,376
13,372
14,503
57,010
$ 358,261
76%
4
4
16
100%
$ 151,121
40,363
27,546
80,382
$ 299,412
50%
14
9
27
100%
1997
Amount
Percent
$ 92,481
64,874
53,428
118,524
$ 329,307
28%
20
16
36
100%
Net loans increased $124.0 million during 1999 as commercial
loans secured by real estate and commercial loans not secured
by real estate increased by $108.6 million and $16.3 million
respectively, compared to year-end 1998. Increases during
1999 for commercial loans were partially offset by decreases in
loans secured by residential real estate and decreases in loans to
individuals. The reduction in residential mortgage loans was
primarily the result of the sale of $42.2 million of residential
mortgages in March of 1999. The mortgage loans were sold to
reduce the Corporation’s prepayment risk and to shorten the
average life of the fixed rate loan portfolio. The reduction in
loans to individuals was primarily the result of the sale of $20.4
million of consumer credit card loans in June of 1999.
Below is a schedule of loans by classification for the five
years ended December 31, 1999.
Commercial, financial,
agricultural and other
Real estate-construction
Real estate-commercial
Real estate-residential
Loans to individuals
Net leases
Gross loans and leases
Unearned income
Total loans, and leases
net of unearned income
1999
Amount Percent
Loans by Classification
(Dollar Amounts in Thousands)
1997
1998
1996
1995
Amount
Percent Amount
Percent Amount
Percent Amount
Percent
$
417,300
41,734
495,789
980,506
502,465
65,893
2,503,687
(3,628)
16% $ 377,733
33,097
2
387,166
20
39 1,009,903
517,907
20
56,423
3
100% 2,382,229
(7,379)
16% $ 363,699
35,308
1
384,794
16
1,048,405
42
22
569,742
3
51,245
100% 2,453,193
(16,856)
13%
14% $ 254,311
15% $ 316,550
2
32,914
2
39,120
1
18
347,543
16
356,106
16
801,306
40
941,147 41
43
519,949 26
25
578,204
23
1
2
2
24,190
36,329
100% 1,980,213
100% 2,267,456
100%
(44,275)
(30,933)
$ 2,500,059
$2,374,850
$ 2,436,337
$2,236,523
$1,935,938
An additional source of liquidity is marketable securities that
the Corporation holds in its investment portfolio. These
securities are classified as “securities available for sale”.
While the Corporation does not have specific intentions to sell
these securities, they have been designated as “available for
sale” because they may be sold for the purpose of obtaining
future liquidity, for management of interest rate risk or as part
of the implementation of tax management strategies. As of
December 31, 1999, securities available for sale had an
amortized cost of $1,206 million and an approximate fair
value of $1,144 million. Gross unrealized gains were $328
thousand and gross unrealized losses were $62.3 million.
Based upon the Corporation’s historical ability to fund
liquidity needs from other sources, the current available for
sale portfolio is deemed to be more than adequate, as the
Corporation does not anticipate a need to liquidate the
investments until maturity. Below is a schedule of the
contractual maturity distribution of securities held to maturity
and securities available for sale at December 31, 1999.
Maturity Distribution of Securities Held to Maturity
(Dollar Amounts in Thousands)
States and
Political
Subdivisions
$
3,941
21,600
31,536
77,693
$ 134,770
Other
Securities
$
-0-
24,506
355
-0-
$ 24,861
Total
Amortized
Cost
$
5,296
144,412
110,414
188,225
$ 448,347
U.S. Government Agencies
and Corporations
$
1,355
98,306
78,523
110,532
$ 288,716
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
*Yields are calculated on a tax-equivalent basis.
Weighted
Average
Yield*
5.57%
6.40
6.25
6.51
6.40%
45
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Maturity Distribution of Securities Available for Sale
At Amortized Cost
(Dollar Amounts in Thousands)
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
U.S. Treasury, and other
U.S. Government Agencies
and Corporations
States and
Political
Subdivisions
$
3,002
123,130
51,940
732,024
$ 910,096
$ 1,615
9,605
12,592
51,536
$ 75,348
Other
Securities
$
5
19,830
499
200,199
$ 220,533
Total
Amortized
Cost
$
4,622
152,565
65,031
983,759
$ 1,205,977
Weighted
Average
Yield*
6.86%
6.32
6.27
6.67
6.55%
*Yields are calculated on a tax-equivalent basis.
Interest Sensitivity
The objective of interest rate sensitivity management is to
maintain an appropriate balance between the stable growth of
income and the risks associated with maximizing income
through interest sensitivity imbalances. While no single
number can accurately describe the impact of changes in
interest rates on net interest income, interest rate sensitivity
positions, or “gaps” when measured over a variety of time
periods may be helpful.
An asset or liability is considered to be interest-sensitive if the
rate it yields or bears is subject to change within a
predetermined time period. If interest-sensitive assets (“ISA”)
exceeds interest-sensitive liabilities (“ISL”) during a prescribed
time period, a positive gap results. Conversely, when ISL
exceeds ISA during a time period, a negative gap results.
A positive gap tends to indicate that earnings will be
impacted favorably if interest rates rise during the period and
negatively when interest rates fall during the time period. A
negative gap tends to indicate that earnings will be affected
inversely to interest rate changes. In other words, as interest
rates fall, a negative gap should tend to produce a positive
effect on earnings and when interest rates rise, a negative gap
should tend to affect earnings negatively.
The primary components of ISA include adjustable rate
loans and investments, loan repayments, investment
maturities and money market investments. The primary
components of ISL include maturing certificates of deposit,
money market deposits, savings deposits, NOW accounts
and short-term borrowings.
The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods
indicated as of December 31, 1999 and 1998 (Dollar Amounts in Thousands):
Loans
Investments
Other interest-earning assets
Total interest-sensitive assets
Certificates of deposit
Other deposits
Borrowings
Total interest-sensitive liabilities
Gap
1999
0-90 Days
91-180 Days
181-365 Days
$
697,645
44,666
18,799
761,110
325,985
1,074,451
467,255
1,867,691
$(1,106,581)
$
$
113,547
39,497
2,759
155,803
231,804
-0-
961
232,765
(76,962)
$
204,090
66,465
4,532
275,087
277,769
-0-
127,108
404,877
$ (129,790)
ISA/ISL
Gap/Total assets
0.41
25.49%
0.67
1.77%
0.68
2.99%
Cumulative
0-365 Days
$ 1,015,282
150,628
26,090
1,192,000
835,558
1,074,451
595,324
2,505,333
$ (1,313,333)
0.48
30.26%
46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Loans
Investments
Other interest-earning assets
Total interest-sensitive assets
Certificates of deposit
Other deposits
Borrowings
Total interest-sensitive liabilities
Gap
ISA/ISL
Gap/Total assets
1998
0-90 Days
91-180 Days
181-365 Days
$
765,948
59,942
38,048
863,938
359,487
1,094,125
142,509
1,596,121
$ (732,183)
0.54
17.87%
$ 168,297
87,042
4,120
259,459
323,760
-0-
1,085
324,845
$ (65,386)
0.80
1.60%
$ 293,082
149,497
6,207
448,786
318,282
-0-
2,413
320,695
$ 128,091
1.40
3.13%
Cumulative
0-365 Days
$1,227,327
296,481
48,375
1,572,183
1,001,529
1,094,125
146,007
2,241,661
$ (669,478)
0.70
16.34%
Although the periodic gap analysis provides management with a
method of measuring current interest rate risk, it only measures
rate sensitivity at a specific point in time. Therefore, to more
precisely measure the impact of interest rate changes on the
Corporation’s net interest income, management simulates the
potential effects of changing interest rates through computer
modeling. The income simulation model used by the
Corporation captures all assets, liabilities, and off-balance sheet
financial instruments, accounting for significant variables that
are believed to be affected by interest rates. These variables
include prepayment speeds on mortgage loans and mortgage
backed securities, cash flows from loans, deposits and
investments and balance sheet growth assumptions. The model
also captures embedded options, such as interest rate caps/floors
or call options, and accounts for changes in rate relationships as
various rate indices lead or lag changes in market rates. The
Corporation is then better able to implement strategies which
would include an acceleration of a deposit rate reduction or lag
in a deposit rate increase. The repricing strategies for loans
would be inversely related.
The Corporation’s asset/liability management policy guidelines
limit interest rate risk exposure for the succeeding twenty-four
month period. Simulations are prepared under the base case
where interest rates remain flat and most likely case where
interest rates are defined using projections of economic factors.
Additional simulations are produced estimating the impact on
net interest income of a 300 basis point (3.00%) movement
upward or downward from the base case scenario. The
Corporation’s current asset/liability management policy
indicates that a 300 basis point (3.00%) change in interest rates
up or down cannot result in more than a 7.5% change in net
interest income when compared to a base case without Board
approval and a strategy in place to reduce interest rate risk
below the established maximum level. The analysis at
December 31, 1999, indicated that a 300 basis point (3.00%)
movement in interest rates in either direction over the next
twelve months would not have a significant impact on the
Corporation’s anticipated net interest income over that time nor
over the next twenty-four months and the Corporation’s position
would remain well within current policy guidelines.
The Corporation’s “Asset/Liability Management Committee”
(“ALCO”) is responsible for the identification, assessment and
management of interest rate risk exposure, liquidity, capital
adequacy and investment portfolio position. The primary
objective of the ALCO process is to ensure that the Corporation’s
balance sheet structure maintains prudent levels of risk within the
context of currently known and forecasted economic conditions
and to establish strategies which provide the Corporation with
appropriate compensation for the assumption of those risks. The
ALCO attempts to mitigate interest rate risk through the use of
strategies such as asset disposition, asset and liability pricing and
matched maturity funding. The ALCO strategies are established
by the Corporation’s senior management and are approved by the
Corporation’s board of directors.
Final loan maturities and rate sensitivity of the loan portfolio excluding consumer installment and mortgage loans and before
unearned income at December 31, 1999 were as follows (Dollar Amounts in Thousands):
Commercial and industrial
Financial institutions
Real estate-construction
Real estate-commercial
Other
Totals
Loans at fixed interest rates
Loans at variable interest rates
Totals
$
Within One
Year
157,993
-0-
18,460
78,823
25,365
280,641
$
$
One to
5 Years
72,231
93
7,246
73,323
12,953
$ 165,846
147,617
18,229
$ 165,846
After
5 Years
$ 66,269
-0-
16,028
343,643
82,396
$ 508,336
367,732
140,604
$ 508,336
Total
$ 296,493
93
41,734
495,789
120,714
$ 954,823
47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Review
Maintaining a high quality loan portfolio is of great
importance to the Corporation. The Corporation manages
the risk characteristics of the loan portfolio through the use
of prudent lending policies and procedures and monitors risk
through a periodic review process provided by internal
auditors, regulatory authorities and our loan review staff.
These reviews include the analysis of credit quality,
diversification of industry, compliance to policies and
procedures, and an analysis of current economic conditions.
In the management of its credit portfolio, the Corporation
emphasizes the importance of the collectibility of loans and
leases as well as asset and earnings diversification. The
Corporation immediately recognizes as a loss all credits
judged to be uncollectible and has established an allowance
for credit losses that may exist in the portfolio at a point in
time, but have not been specifically identified.
The Corporation’s written lending policy requires certain
underwriting standards to be met prior to funding any loan,
including requirements for credit analysis, collateral value
coverage, documentation, and terms. The principal factor
used to determine potential borrowers’ creditworthiness is
business cash flows or consumer income available to service
debt payments. Secondary sources of repayment, including
collateral or guarantees, are frequently obtained.
The lending policy provides limits for individual and bank
committees lending authorities. In addition to the bank loan
approval process, requests for borrowing relationships which
will exceed one million dollars must also be approved by the
Corporation’s Credit Committee. This Committee consists
of a minimum of three members of the Corporation’s board
of directors.
Commercial and industrial loans are generally granted to
small and middle market customers for operating,
expansion or asset acquisition purposes. Operating cash
flows of the business enterprise are identified as the
principal source of repayment, with business assets held as
collateral. Collateral margins and loan terms are based
upon the purpose and structure of the transaction as set
forth in loan policy.
Commercial real estate loans are granted for the acquisition
or improvement of real property. Generally, commercial real
estate loans do not exceed 75% of the appraised value of
property pledged to secure the transaction. Repayment of
such loans are expected from the operations of the subject
real estate and are carefully analyzed prior to approval.
Real estate construction loans are granted for the purposes of
constructing improvements to real property, both commercial
and residential. On-site inspections are conducted by
qualified individuals prior to periodic permanent project
48
financing, which is generally committed prior to the
commencement of construction financing.
Real estate loans secured by 1-4 family residential housing
properties are granted subject to statutory limits in effect for
each bank regarding the maximum percentage of appraised
value of the mortgaged property. Residential loan terms are
normally established in compliance with secondary market
requirements. Residential mortgage portfolio interest rate
risk is controlled by secondary market sales, variable interest
rate loans and balloon maturities.
Loans to individuals represent financing extended to
consumers for personal or household purposes, including
automobile financing, education, home improvement, and
personal expenditures. These loans are granted in the form of
installment, credit card, or revolving credit transactions.
Consumer creditworthiness is evaluated on the basis of ability
to repay, stability of income sources, and past credit history.
The Corporation maintains an allowance for credit losses at
a level deemed sufficient to absorb losses which are
inherent in the loan and lease portfolios at each balance
sheet date. Management reviews the adequacy of the
allowance on at least a quarterly basis to ensure that the
provision for credit losses has been charged against
earnings in an amount necessary to maintain the allowance
at a level that is appropriate based on management’s
assessment of probable estimated losses. The Corporation’s
methodology for assessing the appropriateness of the
allowance for credit losses consists of several key elements.
These elements include a specific allowance for primary
watch list classified loans, an allowance based on historical
trends, an additional allowance for special circumstances,
and an unallocated portion. The Corporation consistently
applies the following comprehensive methodology and
procedure at the subsidiary bank level.
The allowance for primary watch list classified loans
addresses those loans maintained on the Corporation’s
primary watch list which are assigned a rating of
substandard, doubtful, or loss. Substandard loans are those
with a well-defined weakness or a weakness which
jeopardizes the repayment of the debt. A loan may be
classified as substandard as a result of impairment of the
borrower’s financial condition and repayment capacity.
Loans for which repayment plans have not been met or
collateral equity margins do not protect the Corporation may
also be classified as substandard. Doubtful loans have the
characteristics of substandard loans with the added
characteristic that collection or liquidation in full, on the
basis of presently existing facts and conditions, is highly
improbable. Although the possibility of loss is extremely
high for doubtful loans, the classification of loss is deferred
until pending factors, which might improve the loan, have
been determined. Loans rated as doubtful in whole or in part
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
are placed in nonaccrual status. Loans which are classified
as loss are considered uncollectible and are charged to the
allowance for credit losses at the next meeting of the
Corporation’s credit committee after placement in this
category. There were no loans classified as loss on the
primary watch list as of December 31, 1999.
allowance for credit losses which is based on historical
trends. Before applying the historical loss experience
percentages, loan balances are reduced by the portion of the
loan balances which are subject to guarantee by a
government agency. Loan balances are also adjusted for
unearned discount on installment loans.
Loans on the primary watch list may also be impaired loans,
which are defined as nonaccrual loans or troubled debt
restructurings which are not in compliance with their
restructured terms. Each of the classified loans on the
primary watch list are individually analyzed to determine the
level of the potential loss in the credit under the current
circumstances. The specific reserve established for these
criticized and impaired loans is based on careful analysis of
the loan’s performance, the related collateral value, cash
flow considerations and the financial capability of any
guarantor. The allowance for primary watch list classified
loans is equal to the total amount of potential unconfirmed
losses for the individual classified loans on the watch list.
Primary watch list loans are managed and monitored by
assigned account officers within the Corporation in
conjunction with Senior Management.
The allowance based on historical trends uses charge-off
experience of the Corporation to estimate potential
unconfirmed losses in the balances of the loan and lease
portfolios. The historical loss experience percentage is
based on the charge-off history for the twenty most recent
quarters. Historical loss experience percentages are applied
to all non-classified loans to obtain the portion of the
The additional allowance for special circumstances provides
management with the opportunity to estimate additional
potential allowance amounts which may be needed to cover
specific factors. The specific factors that management
currently evaluates consist of portfolio risk or concentrations
of credit, off balance sheet risk, economic conditions,
management or staff considerations, and comparative peer
analysis variances. Portfolio risks include unusual changes
or recent trends in specific portfolios such as unexpected
changes in the trends or levels of delinquency or charge-offs,
unusual repossession activities or large levels of unsecured
loans in a portfolio.
The Corporation also maintains an unallocated allowance.
The unallocated allowance is used to cover any factors or
conditions which may cause a potential credit loss but are
not specifically identifiable. It is prudent to maintain an
unallocated portion of the allowance because no matter how
detailed an analysis of potential credit losses is performed
these estimates by definition lack precision. Management
must make estimates using assumptions and information
which is often subjective and changing rapidly.
Since all identified losses are immediately charged off, no portion of the allowance for credit losses is restricted to any
individual credit or groups of credits, and the entire allowance is available to absorb any and all credit losses. However, for
analytical purposes, the following table sets forth an allocation of the allowance for credit losses at December 31 according to
the categories indicated:
Commercial, industrial, financial,
agricultural and other
Real estate-construction
Real estate-commercial
Real estate-residential
Loans to individuals
Lease financing receivables
Unallocated
Total
Allowance as percentage of average total loans
1999
$ 6,321
831
7,675
9,928
5,131
586
3,067
$33,539
1.39%
Allocation of the Allowance for Credit Losses
(Dollar Amounts in Thousands)
1997
1996
1998
$ 4,375
414
5,119
10,319
5,223
512
6,342
$32,304
1.32%
$ 3,726
415
4,912
8,595
4,583
393
3,308
$25,932
1.11%
$ 3,628
461
4,731
8,145
4,933
285
3,051
$25,234
1.22%
1995
$ 2,482
330
4,170
6,420
3,892
162
6,347
$ 23,803
1.29%
Other than those described below, there are no material credits
that management has serious doubts as to the borrower’s ability
to comply with the present loan repayment terms. The
following table identifies nonperforming loans at December 31.
A loan is placed in a nonaccrual status at the time when ultimate
collectibility of principal or interest, wholly or partially, is in
doubt. Past due loans are those loans which were contractually
past due 90 days or more as to interest or principal payments but
are well secured and in the process of collection. Renegotiated
loans are those loans which terms have been renegotiated to
provide a reduction or deferral of principal or interest as a result
of the deteriorating financial position of the borrower.
49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nonperforming and Impaired Assets and Effect
on Interest Income Due to Nonaccrual
(Dollar Amounts in Thousands)
Loans on nonaccrual basis
Past due loans
Renegotiated loans
Total nonperforming loans
Nonperforming loans as a percentage of total loans
Allowance as percentage of nonperforming loans
1999
$12,765
15,815
62
$28,642
1.15%
117.10%
1998
$ 9,677
15,780
64
$25,521
1.07%
126.58%
1997
$11,387
13,955
67
$25,409
1.04%
102.06%
1996
$ 9,536
14,046
280
$23,862
1.07%
105.75%
1995
$ 8,782
9,410
803
$ 18,995
0.98%
125.31%
Other real estate owned
$ 1,707
$ 2,370
$ 1,950
$ 1,732
$ 1,467
Gross income that would have been
recorded at original rates
Interest that was reflected in income
Net reduction to interest income due to nonaccrual
$
$
724
458
266
$
$
961
286
675
$ 1,017
146
871
$
$
$
799
223
576
$
$
946
241
705
The reduction of income due to renegotiated loans was less
than $50 thousand in any year presented.
million. Amounts paid to fund the discount on reinvested
dividends reduced equity by $358 thousand.
The level of nonperforming loans at year-end 1999 increased
$3.1 million over 1998 levels as a result of increases in
nonaccrual loans. Increases for nonaccrual commercial loans
secured by real estate, commercial loans not secured by real
estate and construction loans of $2.2 million, $1.4 million and
$1.1 million, respectively were partially offset by decreases of
$1.6 million for nonaccrual loans secured by residential real
estate. Nonperforming loans as a percentage of total loans for
1999 also increased over 1998 levels. Although the allowance
for credit losses as a percentage of nonperforming loans of
117.10% at December 31, 1999 has decreased over 1998
levels, this ratio has not decreased below historic levels.
Management believes that the allowance for credit losses and
nonperforming loans remained safely within acceptable levels.
Capital Resources
Equity capital decreased $68.7 million in 1999 to $286.7
million. On July 13, 1999, the Corporation announced that
the Board of Directors authorized a repurchase of up to 4
million shares (post split) of its outstanding common stock.
The Corporation purchased 3,819,420 shares in a “modified
Dutch Auction” which reduced equity by $50.1 million for
the cost of the shares. The Corporation also purchased an
additional 102,248 treasury shares in open market
transactions which reduced equity by $1.3 million. Proceeds
from the reissuance of treasury shares to provide for stock
options exercised increased equity capital by $1.5 million.
Dividends declared decreased equity by $30.9 million during
1999, an increase over dividends for the 1998 period as the
dividend rate was increased. The retained net income of
$22.2 million remained in permanent capital to fund future
growth and expansion. Long-term debt payments and fair
value adjustments to unearned ESOP shares increased equity
capital by $1.9 million. The market value adjustment to
securities available for sale decreased equity by $42.5
50
A capital base can be considered adequate when it enables the
Corporation to intermediate funds responsibly and provide
related services while protecting against future uncertainties.
The evaluation of capital adequacy depends on a variety of
factors, including asset quality, liquidity, earnings history and
prospects, internal controls and management caliber. In
consideration of these factors, management’s primary
emphasis with respect to the Corporation’s capital position is
to maintain an adequate and stable ratio of equity to assets.
See NOTE 22 for an analysis of regulatory capital guidelines
and the Corporation’s capital ratios relative to these
measurement standards.
Year 2000 Analysis
The Corporation began evaluating the size and complexity of
the year 2000 issue during 1995. Project teams were
established to identify and prioritize critical systems and
processes affected by the year 2000 date change. By fully
dedicating numerous technical staff from Commonwealth
Systems Corporation, the Corporation’s data processing
subsidiary and utilizing additional staff from various
functional areas, multiple computer systems were addressed
concurrently. All mission critical systems operated as
expected when the date changed to January 1, 2000. The
Corporation’s greatest asset in successfully dealing with the
year 2000 issue was its dedicated staff.
The Corporation utilized internal resources to evaluate,
reprogram and test software and hardware for year 2000 issues
to the extent possible. Salary and benefit costs related to year
2000 activities were expensed as incurred. External year 2000
expenditures included amounts for capitalized hardware and
software which will be amortized over three years for software
and five years for hardware. In most cases, the new software
and hardware offer additional benefits in processing capability
or efficiencies gained from modernization in addition to
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
achieving year 2000 compliance. Mainframe software and
hardware replaced will result in enhancements or features of
potential benefit in serving banking customers or processing
financial transactions. Year 2000 expenditures which were
expensed as incurred during the past three years included the
cost of leased off-site testing of mainframe systems, outside
professionals utilized for independent verification, travel and
lodging during off-site testing and vendor testing. Cash
outlays were funded through operating cash flows.
The following table summarizes year 2000 expenditures
during 1999, 1998 and 1997.
(Dollar Amounts in Thousands)
Capitalized hardware
and software
Non-employee expenses
including testing
Employee related costs
Subtotal
Capitalized hardware and
software replaced without
acceleration due to year 2000
Total expenditures
12 Months
Ended
12/31/99
12 Months
Ended
12/31/98
12 Months
Ended
12/31/97
$
152
$
250
$
106
87
793
1,032
152
1,003
1,405
20
163
289
723
$ 1,755
2,043
$ 3,448
70
359
$
Inflation and Changing Prices
Management is aware of the impact inflation has on interest
rates and therefore the impact it can have on a bank’s
performance. The ability of a financial institution to cope with
inflation can only be determined by analysis and monitoring of
its asset and liability structure. The Corporation monitors its
asset and liability position with particular emphasis on the mix
of interest-sensitive assets and liabilities in order to reduce the
effect of inflation upon its performance. However, it must be
remembered that the asset and liability structure of a financial
institution is substantially different from an industrial
corporation in that virtually all assets and liabilities are
monetary in nature, meaning that they have been or will be
converted into a fixed number of dollars regardless of changes
in general price levels. Examples of monetary items include
cash, loans and deposits. Nonmonetary items are those assets
and liabilities which do not gain or lose purchasing power
solely as a result of general price level changes. Examples of
nonmonetary items are premises and equipment.
Inflation can have a more direct impact on categories of
noninterest expenses such as salaries and wages, supplies
and employee benefit costs. These expenses are very closely
monitored by management for both the effects of inflation
and increases relating to such items as staffing levels, usage
of supplies and occupancy costs.
COMMON STOCK INFORMATION
First Commonwealth Financial Corporation (the “Corporation”) is listed on the New York Stock Exchange under the symbol
“FCF.” The approximate number of holders of record of the Corporation’s common stock is 12,500. The table below sets
forth the high and low sales prices per share and cash dividends declared per share for common stock of the Corporation.
Period
1999
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Period
1998
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Sale
Low Sale
$ 12.406
$ 12.188
$ 12.750
$ 14.313
$ 10.156
$ 10.375
$ 11.031
$ 11.625
High Sale
Low Sale
$ 17.125
$ 14.875
$ 15.281
$ 13.406
$ 13.656
$ 13.156
$ 11.500
$ 11.500
Cash
Dividends
Per Share
$ 0.115
$ 0.130
$ 0.130
$ 0.140
Cash
Dividends
Per Share
$ 0.110
$ 0.110
$ 0.110
$ 0.115
51
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
OUR MISSION
THE MISSION OF FIRST COMMONWEALTH FINANCIAL CORPORATION
IS TO MAXIMIZE THE LONG-TERM TOTAL RETURN TO SHAREHOLDERS.
Shareholder Value
Send Certificates For Transfers and Address Changes To:
First Commonwealth is committed to building share-
Receive and Deliver Department - 11W
holder value. It is our mission, our highest priority.
P.O. Box 11002
Value is delivered through a combination of total return
Church Street Station
(dividend yields plus market price appreciation), market
New York, NY 10286
liquidity (the ease of buying or selling First Common-
wealth shares), and shareholder services. This section of
our annual report summarizes the many services that are
made available to our shareholders.
Annual Meeting
The Annual Meeting of Shareholders will be held at:
First Commonwealth Place
654 Philadelphia St., Indiana, PA
On Monday, April 24, 2000 at 3:00 PM.
Common Stock
First Commonwealth Financial Corporation common
stock is listed on The New York Stock Exchange and is
Dividend Payments
Subject to the approval of the Board of Directors, quarterly
cash dividends are paid on or about the 15th day of January,
April, July and October.
Dividend Reinvestment
First Commonwealth Financial Corporation's Dividend
Reinvestment Plan offers shareholders an opportunity to
reinvest their dividends in additional shares of the
Corporation's common stock. Once enrolled in the plan,
participants may also purchase shares through voluntary cash
investments. For more information on the plan, please call The
Bank of New York, Plan Administrator, at 1-800-524-4458.
traded under the symbol FCF. Current market prices for
For shareholders who do not participate in the Dividend
First Commonwealth Financial Corporation common
Reinvestment Plan, Automated Direct Dividend Deposit
stock can be obtained from your local stock broker or by
Service is available for direct deposit of quarterly dividend
calling the Corporation at (724) 349-7220 (in Indiana,
payments to a checking or savings account. To enroll, please
PA) or 1-800-331-4107 (outside Indiana, PA).
call The Bank of New York at 1-800-524-4458 for an
Transfer Agent
The Bank of New York
Authorization Form (completed forms must be received by
the Bank 30 days prior to dividend payment date).
Telephone Inquiries: 1-800-524-4458
Form 10K
Address Shareholder Inquiries To:
Shareholder Relations Department - 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
E-Mail Address:
Shareowner-svcs@bankofny.com
The Bank of New York's Stock Transfer Website:
http://stock.bankofny.com
52
A copy of the Form 10K as filed with the Securities and
Exchange Commission will be provided to any shareholder
on request to the Corporation, to the attention of the
Corporate Secretary.
Investor/Shareholder Inquiries
Requests for information or assistance regarding the
Corporation should be directed to the Corporation, to the
attention of Shareholder Relations, 1-800-331-4107.
First Commonwealth Financial Corporation
Old Courthouse Square
22 North Sixth Street
Indiana, Pennsylvania 15701
(724) 349-7220
(800) 711-BANK (2265)
www.fcfbank.com