First Commonwealth
Financial Corporation
2000 Annual Report
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Message to Shareholders
Board of Directors
Affiliate Management
Corporate Information/Market Area
Independent Auditors’ Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Quarterly Summary of Financial Data
Selected Financial Data
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Common Stock Information
Shareholder Information
Message to Shareholders
N
et income for the year 2000 declined
most equities and many mutual funds. A de-
from a record $53 million in 1999 to
pendable and substantial dividend greatly
$47.2 million. Much of the difference for 2000
enhances the value of any investment in these
was the result of gains on the sale of loans which
times of market instability.
were realized during 1999. Higher funding costs
Much of our effort this past year has been
throughout the year also reduced the net inter-
devoted to building the structure necessary to
est margin and slowed overall growth.
support the integrated advisory sales model. The
Overall financial performance, while below
creation of a Growth Unit at the Corporate level
our expectations, was still solid. Return on av-
has accelerated the product integration between
erage assets was 1.10%. Return on average
our Banks, Insurance Agency and Trust
equity was 15.65% which represents our best
Company. A great deal of time and resource
result ever on this important measure.
has been dedicated to training our employees in
The stock market continued to exhibit ex-
the specific skills that make this integrated advi-
treme volatility throughout the year. The finan-
sory business model beneficial for our clients.
cial service sector generally bottomed out in the
The following pages highlight how an em-
first half with subsequent stronger performance
ployee team delivers value through our “Total
as more investors moved toward value stocks.
Solutions Financial Management” approach to
Recent interest rate reductions and increased
our commercial clients. The response of our small
consolidation activity have combined to pro-
business clients to this team driven/solution
vide a solid base for additional improvement in
oriented process has been extremely positive. The
share value.
growth team has adopted a motto to describe
First Commonwealth has once again in-
this process, “Listen-Advise-Sell-Support”.
creased the quarterly cash dividend for 2001
Commonwealth Systems Corporation con-
providing a very strong yield for our investors.
tinues to strengthen our infrastructure through
In fact, recent yields have exceeded the return
the installation of an entirely new operating plat-
available from most alternative investments such
form. They have completed a number of appli-
as treasury bonds, bank certificates of deposit,
cation conversions on schedule with remaining
2 First Commonwealth Financial Corporation
The Relationship Comes First
A
“In his own business, Jack
Manager, greets his friend
Rob Rogers, Relationship
and client, Jack B. Piatt.
t all First Commonwealth Financial
Corporation (FCFC) affiliates, we value
our relationships with our clients above anything else
for it is these strong relationships that provide for a
sustainable return to our shareholders. Relationships
fuel the power of Total Solutions Financial
Management—a strategy that marshals FCFC’s
products, services,
and professional staff
and unites them into
a comprehensive fi-
nancial service offer-
ing. Through finan-
cial guidance, we fo-
cus unique compre-
hensive solutions to
each client’s financial
needs. This approach
creates long-lasting
relationships based on trust. Our Relationship Man-
ager reaches out to our client providing them with
their own personal financial advisor. For example,
when Jack B. Piatt, Chairman of Millcraft Industries,
wanted to build a hotel, he turned to Rob Rogers at
Southwest Bank, a man he had worked with for ten
years, a man from his hometown whom he calls his
“friend and business partner.” He knew Rob would
give him trustworthy advice and would customize a
plan for him from FCFC’s complete range of finan-
cial services. “It’s quality service, and it’s complete ser-
vice,” Jack said. “It’s one-stop banking.”
gets the job done, and
that’s what we do for him.”
4 First Commonwealth Financial Corporation
The Power of Total Solutions Teamwork
J im Miller
Commercial Insurance
Representative
One day Rob called me
and said we were
partnering with Jack on the
construction of a hotel.
I then met with Jack’s
Chief Financial Officer,
Rich Miller, to get a clear
picture of their insurance
needs. After working the
numbers and researching
the options, I was able to
tailor for them the exact
coverage they needed for
lower costs.
W
ayne Freed
Vice President
Corporate Services Officer
Rob told me that Jack
wanted to apply for a Rural
Economic Credit Develop-
ment Authority guarantee
for his hotel construction. I
did the preparation and we
got the guarantee. It took
the risk out of the loan,
which thrilled Jack, and it
secured employment and
development for Washing-
ton County. My job is great
because we make a positive
difference in people’s lives.
J
anet Zombek
Vice President/
Regional Manager
Rob took me over one day
to meet with Jack and
discuss the banking needs of
his future hotel employees.
Because of Jack’s relation-
ship with us, we can offer
preferred pricing to his
employees, and they in turn
become valued customers.
I strive to know everyone on
a first-name basis. Here, we
take pride in treating all our
customers as individuals.
D oug Craig
Financial Consultant
Rob invited me to go with
him to their corporate
headquarters at
Southpointe and meet with
Jack about implementing a
new pension plan for his
Millcraft Industry employ-
ees. After meeting with
him, I drew up a cost
analysis that showed he
could outperform his
current plan and save on
pension management.
Service really is our top
priority, and that’s why I
like working here.
Matt Korosi
Cash Management/
Merchant Card Manager
Rob described the hotel
construction to me and took
me to meet with Jack and
Rich, his Chief Financial
Officer. Jack asked me to
design a credit card accep-
tance program compatible
with their front desk
software. I set up a system
from front-desk acceptance
all the way to when the
hotel gets paid. I’ve been
working with Jack for two
years now and check in
frequently to make sure I’m
doing all I can for him.
J oe Brennan
Vice President/Corporate
Services Officer
Rob introduced me to Jack
and I helped coordinate the
constructibility review,
prepare the construction
draw schedule, and monitor
advances. I spend a lot of
time out on the construction
site and coordinating the
advances as construction
proceeds. We believe in
going to the client for
face-to-face contacts.
In a way, you could say
we make house calls. It
shows our commitment to
putting the client at ease.
R ebecca Davidson
Vice President/Corporate
Services Officer
What works so well about
Total Solutions Financial
Management is that it’s a
process by which we get to
know our customers,
identify their actual needs,
and provide them with truly
valuable financial solutions.
It’s rewarding for everyone
involved. Customers like
Jack keep coming back as
their needs and circum-
stances change. We are all
in this for the long term.
At FCFC, we build power-
ful relationships.
R ob Rogers
Relationship Manager
Jack B. Piatt, Chairman of
Millcraft Industries, turns to
his Relationship Manager,
Rob Rogers for financial advice
and a full range of services.
Because Rob and the entire
FCFC team are working for Jack,
he has more time to relax at
home, practice his golf swing in
Palm Beach and spend more
time with his grandson, Miller.
2000 Annual Report 5
E. H. Brubaker
Sumner E. Brumbaugh
Ray T. Charley
Edward T. Côté
Clayton C. Dovey, Jr.
Ronald C. Geiser
Johnston A. Glass
Thomas J. Hanford
David L. Johnson
Robert F. Koslow
Dale P. Latimer
James W. Newill
John A. Robertshaw, Jr.
Laurie Stern Singer
David R. Tomb, Jr., Esq.
E. James Trimarchi
6 First Commonwealth Financial Corporation
Board of Directors
E. H. Brubaker Rockton
David L. Johnson Havertown
Retired, Former Chairman
of the Board, Deposit Bank,
DuBois
Sumner E. Brumbaugh
Duncansville
Former 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, Greensburg
Thomas L. Delaney
Jupiter, FL
Private Investor
Clayton C. Dovey, Jr.
Johnstown
Retired, Former 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
Vice Chairman, First
Commonwealth Financial
Corporation, and President
and Chief Executive Officer,
First Commonwealth Bank,
Indiana
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
Chairman of the Board,
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
2000 Annual Report 7
David S. Dahlmann
Thomas L. Delaney
H. H. Heilman, Jr., Esq.
David F. Irvin
Joseph E. O'Dell
Joseph W. Proske
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
Sue McMurdy, President & Chief Executive Officer, Com-
monwealth Systems Corporation, 22 North Sixth Street,
Indiana, PA 15701 • (724) 349-4310
Johnston A. Glass
Sue McMurdy
William A. Mrozowski, 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
William A. Mrozowski
Gerard M. Thomchick
8 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
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
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
Johnston A. Glass
Vice Chairman, Growth
Gerard M. Thomchick
Senior Executive Vice President and
Chief Operating Officer
John J. Dolan
Executive Vice President and Chief Financial Officer
Sue McMurdy
Senior Vice President and Chief Information Officer
David R. Tomb, Jr.
Senior Vice President,
Secretary and Treasurer
Thaddeus J. Clements
Senior Vice President,
Human Resources
William R. Jarrett
Senior Vice President,
Risk Management
R. John Previte
Senior Vice President, Investments
For shareholder information see
page 50 of this report.
For other information call our
Convenience Banking Center at
1-800-711-BANK (2265) or visit
our websites:
www.fcfbank.com
www.swbank.com
2000 Annual Report 9
Welcome to First Commonwealth Financial . . . Online
Providing total solutions means being there for our customers no mat-
ter when they need us. Through the web sites of our affiliates, First
Commonwealth Bank, www.fcfbank.com and Southwest Bank,
www.swbank.com, we offer an array of online solutions for you. From
discount brokerage services to instant term life insurance quotes; from
online check re-ordering to over 40 financial calculators; and now we
can make paying your bills a whole lot easier with our new Internet
bill payment & presentment solution . . . “WebPay”!
B anking Services
The one-stop source for
your total solutions
needs. An offering of
integrated solutions
covering bank, insurance,
investments and trust
products and services that
will save you time
because it’s all right here!
F
CFC Stock Ticker
Up to the minute corpo-
rate stock quote and yield
information for First
Commonwealth Financial
Corporation.
C
orporate Information
All the information you
need to know about our
holding company, First
Commonwealth Financial
Corporation, is in one
convenient place. Earn-
ings performance,
corporate news, dividend
reinvestment, annual
reports and much more!
10 First Commonwealth Financial Corporation
Total solutions . . .
online. Come and
visit us and find
the solution that’s
right for you.
WebPay
Pay anyone, anytime,
anywhere with our
convenient Internet
bill payment solution.
Best of all, the first
six months are free!
U
vest®
Open a discount
brokerage account and
manage your investment
portfolio online. Earnings
results, forecasts, stock
quotes, market updates
and more!
C
urrent Features
Our Current Features
assist you in accomplish-
ing your financial goals.
Getting ready for retire-
ment? Need to grow
your Small Business?
Our site has the tools
that can help.
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, 2000 and 1999, and the related consolidated statements of
income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31,
2000. 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 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 6 to the consolidated financial statements. We did not audit the statements of income,
shareholders’ equity, and cash flows of Southwest National Corporation for the year ended December 31,
1998, which statements reflect net interest income of 25% of the related consolidated total for the year then
ended. 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, is based
solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. 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 and the report of the other
auditors 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, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE, LLP
Pittsburgh, Pennsylvania
January 25, 2001
11
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 $398,661 in 2000 and $435,000 in 1999)
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 58,195,450 shares outstanding
in 2000; 62,525,412 shares issued and 58,142,848
shares outstanding in 1999
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock (4,329,962 and 4,382,564 shares at
December 31, 2000 and 1999, 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.
12
December 31,
2000
1999
$
$
$
90,723
427
11,125
1,238,230
398,107
2,492,874
(2,047)
(33,601)
2,457,226
44,671
1,661
130,142
4,372,312
244,010
2,820,136
3,064,146
272,171
44,984
35,000
621,855
656,855
4,038,156
$
$
$
92,673
1,218
8,700
1,144,042
448,347
2,503,687
(3,628)
(33,539)
2,466,520
43,380
1,707
134,259
4,340,846
251,404
2,697,425
2,948,829
424,827
42,152
35,000
603,355
638,355
4,054,163
-0-
-0-
62,525
67,223
272,169
(7,808)
(54,666)
(5,287)
334,156
4,372,312
$
62,525
68,330
257,773
(40,304)
(55,448)
(6,193)
286,683
4,340,846
$
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, except per share data)
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
Years Ended December 31,
1999
2000
1998
$
208,548
$
195,010
$
201,739
89,723
9,638
3,657
234
82
311,882
115,507
22,218
3,325
33,489
36,814
174,539
137,343
10,030
127,313
1,745
5,555
10,562
257
15,564
33,683
52,529
6,577
8,154
3,310
3,495
-0-
25,396
99,461
61,535
14,289
47,246
-0-
47,246
57,558,929
57,618,671
0.82
0.00
0.82
0.82
0.00
0.82
$
$
$
$
$
$
$
$
$
$
$
$
$
$
88,266
9,479
3,108
105
121
296,089
103,331
13,832
1,007
34,483
35,490
152,653
143,436
9,450
133,986
565
5,525
10,645
4,996
12,494
34,225
49,806
6,537
7,653
3,449
3,477
-0-
24,647
95,569
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
282,067
113,960
10,214
-0-
24,108
24,108
148,282
133,785
15,049
118,736
1,457
5,251
9,628
1,630
11,420
29,386
48,710
6,750
7,485
3,354
3,152
7,915
24,529
101,895
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
(a) Where applicable, 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.
13
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollar Amounts in Thousands)
Balance at December 31, 1997
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
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury
Stock
Unearned
ESOP
Shares
Total
Shareholders’
Equity
$
63,322
$
74,998
$ 228,230
$
2,156
$ (11,947)
$
(2,436)
$ 354,323
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(795)
(2)
-0-
-0-
-0-
-0-
-0-
-0-
158
(1,016)
-0-
(38)
(5,107)
(17)
33,374
-0-
-0-
-0-
33,374
(25,981)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
971
(928)
43
43
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(2,123)
2,255
5,902
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(5,571)
-0-
-0-
-0-
-0-
-0-
33,374
971
(928)
43
33,417
(25,981)
(5,413)
(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
Balance at December 31, 1999
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
Tax benefit of stock options
Balance at December 31, 2000
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
53
-0-
-0-
-0-
62,525
(358)
-0-
(343)
68,330
53,030
-0-
-0-
-0-
-0-
53,030
(30,880)
-0-
-0-
-0-
-0-
257,773
(42,137)
(366)
(42,503)
(42,503)
-0-
-0-
-0-
-0-
-0-
(40,304)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
62,525
$
$
-0-
-0-
-0-
-0-
-0-
-0-
(113)
(593)
-0-
(476)
75
67,223
47,246
-0-
-0-
-0-
-0-
47,246
(32,850)
-0-
-0-
-0-
-0-
-0-
$ 272,169
$
33,630
(1,134)
32,496
32,496
-0-
-0-
-0-
-0-
-0-
-0-
(7,808)
The accompanying notes are an integral part of these consolidated financial statements.
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(51,331)
1,796
(55,448)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(873)
1,655
-0-
$ (54,666)
$
-0-
-0-
-0-
-0-
0-
-0-
1,814
-0-
-0-
-0-
(6,193)
-0-
-0-
-0-
-0-
-0-
-0-
906
-0-
-0-
-0-
-0-
(5,287)
53,030
(42,137)
(366)
(42,503)
10,527
(30,880)
1,867
(358)
(51,331)
1,453
286,683
47,246
33,630
(1,134)
32,496
79,742
(32,850)
793
(593)
(873)
1,179
75
$ 334,156
14
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 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
Stock option tax benefit
Acquisition of treasury stock
Reissuance of treasury stock
Net increase in deposits
Net cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
Years Ended December 31,
1999
2000
1998
$
47,246
$
53,030
$
33,374
10,030
7,480
(1,929)
(3,419)
(932)
7,620
255
1,533
(1,751)
66,133
-0-
67,735
(17,458)
22,391
108,636
(173,514)
36,482
-0-
(15,000)
790
(36,435)
(7,736)
(14,109)
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)
89,900
(70,493)
25,000
(50,319)
469,800
(37,576)
-0-
(593)
(32,553)
13,875
(166,531)
-0-
75
(873)
326
115,318
(51,549)
475
35,000
(358)
(27,825)
(45,025)
329,306
-0-
-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)
-0-
(2,123)
2,217
56,909
390,950
(14,765)
112,380
97,615
$
15
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
101,373
101,848 $
$
The accompanying notes are an integral part of these consolidated financial statements.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000, 1999 and 1998
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.
Reclassifications
Financial statement amounts in prior periods have been
reclassified to conform to the presentation format used in
2000. The reclassifications had no effect on the
Corporation’s financial condition or results of operations.
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
16
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. Debt and
equity securities not classified as either held-to-maturity
securities or trading securities are classified as securities
available-for-sale and are reported at fair value, with
unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders’ equity, net
of deferred taxes.
The Corporation has securities classified as either held-to-
maturity or available-for-sale. The Corporation does not
engage in trading activities. Net gain or loss on the sale of
securities is determined by using the specific identification
method.
Effective January 1, 1999, the Corporation adopted the
Financial Accounting Standards Board (“FASB”) Statement
No. 134, “Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise” (“FAS No. 134”).
FAS No. 134 amends FAS No. 65 “Accounting for Certain
Mortgage Banking Activities”. FAS No. 65 required that
after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities as trading securities
while FAS No. 134 requires the resulting mortgage-backed
securities or other retained interests be classified based on
the entity’s ability and intent to sell or hold those
investments. On the date FAS No. 134 is initially applied,
an enterprise may reclassify mortgage backed securities and
other beneficial interests retained after the securitization of
mortgage loans held for sale from the trading category,
except for those with sales commitments in place. The
Corporation currently holds no mortgage backed securities or
other beneficial interests retained after the securitization of
mortgage loans held for sale. The adoption of FAS No. 134
did not have a material impact on the Corporation’s financial
condition or results of operations.
Loans
Loans are carried at the principal amount outstanding.
Unearned income on installment loans and leases is taken
into income on a declining basis which results in an
approximately level rate of return over the life of the loan or
lease. Interest is accrued as earned on nondiscounted loans.
The Corporation considers a loan to be impaired when, based
on current information and events, it is probable that a
creditor will be unable to collect principal or interest due
according to the contractual terms of the loan. Loan
impairment is measured based on the present value of
expected cash flows discounted at the loan’s effective
interest rate or, as a practical expedient, at the loan’s
observable market price or the fair value of the collateral if
the loan is collateral dependent.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
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
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. 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 in the amount of
$65,961 and $48,382 at December 31, 2000 and 1999,
respectively.
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.
The Corportation records computer software in accordance
with the American Institute of Certified Public Accountants’
Statement of Postition 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use”
(“SOP 98-1”). The statement identifies the following three
stages of software development: the preliminary project stage,
the application development stage, and the post-
implementation stage. In compliance with SOP 98-1, the
Corporation expenses costs incurred during the preliminary
project stage and capitalizes certain costs incurred during the
application development stage. Once software is in operation,
maintenance costs are expensed over the maintenance period
while upgrades which result in additional functionality or
enhancement are capitalized. Training and data conversion
costs are expensed as incurred. Capitalized costs are amortized
on a straight-line basis over a period of 3-7 years, depending
on the life of the software license.
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.
17
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)
Employee Stock Ownership Plan
Income Taxes
The Corporation records taxes in accordance with the asset
and liability method utilized by FASB Statement No. 109
(“FAS No. 109”), whereby deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amount
of existing assets and liabilities and their respective tax bases
given the provisions of the enacted tax laws. Deferred tax
assets are reduced, if necessary, by the amount of such
benefits that are not expected to be realized based upon
available evidence.
Comprehensive Income Disclosures
For all periods presented, “other comprehensive income”
(comprehensive income excluding net income) includes only
one component, which is the change in unrealized holding
gains and losses on available for sale securities, net of related
tax effects.
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.
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 prior periods have been restated to reflect the
stock split as if it had occurred at the beginning of the
earliest period presented.
Accounting treatment for the Corporation’s Employee Stock
Ownership Plan (“ESOP”) described in NOTE 21 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 22).
18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued statement No. 133,
“Accounting for Derivative Instruments and Hedging
Activities” (“FAS No. 133”). FAS No. 133 establishes
accounting and reporting standards for derivative
instruments and for hedging activities which require that an
entity recognize all derivatives as either assets or liabilities
in a balance sheet and measure those instruments at fair
value. Changes in the fair value of derivatives must be
recognized in earnings when they occur unless the derivative
qualifies as a hedge. If a derivative qualifies as hedge, a
company can elect to use hedge accounting to eliminate or
reduce income-statement volatility that would arise from
reporting changes in a derivative’s fair value in income.
FAS No. 133 was amended by FASB statement No. 137
which delays the effective date of FAS No. 133 to the first
quarter of fiscal years beginning after June 15, 2000. FAS
No. 133 was also amended in June 2000 by FAS No. 138.
FAS No. 138 addresses and clarifies issues causing
implementation difficulties for numerous entities applying
FAS No. 133. FAS No. 138 includes amendments to FAS
No. 133 which resulted from decisions made by the FASB
related to the Derivatives Implementation Group (“DIG”)
process. The DIG was created by the FASB to facilitate
implementation by identifying issues that arise from
applying the requirements of FAS No. 133 and to advise the
FASB on how to resolve those issues. The Corporation
currently has no freestanding derivative or hedging
instruments.
Management has reviewed contracts from various functional
areas of the Corporation to identify potential derivatives
embedded within selected contracts. In accordance with the
guidance provided in DIG Issue 11-4, management had
identified embedded derivatives in some loan commitments
for residential mortgages where the Corporation has intent to
sell to an investor such as the Federal Home Loan Mortgage
Corporation (“Freddie Mac”) or the Federal National
Mortgage Association (“Fannie Mae”). Due to the short-term
nature of these loan commitments (30 days or less) and the
historical dollar amount of commitments outstanding at
period end, the adoption of FAS No. 133 will not have a
material impact on the Corporation’s financial condition or
results of operations.
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.
New Accounting Pronouncements
In September 2000, the FASB issued statement No. 140,
“Accounting for Transfer and Servicing of Financial Assets
and Extinguishments of Liabilities” which replaces FASB
statement No. 125, issued in June 1996. FAS No. 140
revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires
certain disclosures, but it carries over most of the provisions
of FAS No. 125. The statement provides consistent
standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. FAS
No. 140 is effective for transfers occurring after March 31,
2001 and for disclosures relating to securitization
transactions and collateral for years ending after December
15, 2000. Implementation of FAS No. 140 will not have a
material impact on the Corporation’s financial condition or
results of operations.
NOTE 2—Supplemental Comprehensive Income Disclosures
The following table identifies the related tax effects allocated to each component of other comprehensive income in the
Statements of Changes in Shareholders’ Equity:
December 31, 2000
Tax
Pre-tax (Expense)
Amount Benefit Amount
Net of
Tax
December 31, 1999
Tax
Net of
Tax
Pre-tax (Expense)
Amount Benefit Amount
December 31, 1998
Tax
(Expense)
Net of
Tax
Benefit Amount
Pre-tax
Amount
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
$ 51,739
$ (18,109) $ 33,630
$(64,826) $22,689
$ (42,137)
$ 1,495
$
(524) $
971
(1,745)
49,994
$ 49,994
611
(17,498)
(1,134)
32,496
$ (17,498) $ 32,496
(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
19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 3—Supplemental Cash Flow Disclosures
NOTE 5—Sale of Subsidiary
$ 49,994
$ (65,389)
$
67
NOTE 6—Business Combination
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.
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 7—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 $3,075 during 2000 and $3,807 during 1999.
Cash paid during the year for:
Interest
Income taxes
2000
1999
1998
$ 166,919
$ 12,842
$ 150,839
$ 18,832
$ 147,123
14,200
$
Noncash investing and financing activities:
ESOP borrowings
ESOP loan reductions
$
$
-0-
906
$
$
-0-
1,814
$
$
6,000
429
$
6,405
$
4,936
$
6,624
Loans transferred to
other real estate owned
and repossessed assets
Gross increase (decrease) in
market value adjustment to
securities available for sale
Treasury stock reissued for
insurance agency interest
acquired
$
852
$
-0-
$
-0-
NOTE 4—Joint Venture Buy-Out of Insurance Agency
When the Corporation formed First Commonwealth
Insurance Agency (“FCIA”), its wholly-owned subsidiary, it
entered into a joint venture agreement with a partner to assist
FCIA in establishing itself as a full service insurance agency
in exchange for an undivided 50% interest in FCIA’s
expiring list of policy holders. Effective August 31, 2000
the Corporation acquired the 50% interest in the policy
holders’ list owned by its joint venture partner; thereby
becoming the sole owner of such list. In exchange the joint
venture partner received 89,742 shares of the Corporation’s
common stock.
20
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 8—Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of securities available for sale at December 31, 2000
and 1999:
2000
1999
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
$
9,972
$
77
$
-0-
$
10,049
$
4,970
$
-0- $
(27) $
4,943
Obligations of U.S.
Government Corporations
and Agencies:
Mortgage Backed Securities
Other
Obligations of States and
Political Subdivisions
Debt Securities Issued
by Foreign Governments
Other Mortgage Backed
Securities
Total Debt Securities
Equities
Total Securities
Available for Sale
752,481
117,585
1,636
125
(7,126)
(370)
746,991
117,340
781,690
123,436
104
(38,777)
743,017
-0-
(4,068)
119,368
76,066
606
(1,376)
75,296
75,348
210
(5,940)
69,618
Corporate Securities
142,933
1,814
(6,271)
138,476
425
-0-
-0-
425
97,922
1,197,384
52,824
336
4,594
(418)
(15,561)
97,840
1,186,417
-0-
(1,011)
51,813
430
70,252
85,521
1,141,647
64,330
-0-
11
-0-
430
(5,812)
64,451
-0-
325
(4,413)
(59,037)
81,108
1,082,935
3
(3,226)
61,107
$ 1,250,208
$ 4,594
$ (16,572)
$ 1,238,230
$ 1,205,977
$
328
$ (62,263) $1 ,144,042
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, 2000 and 1999, 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, 2000, 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
$
12,227
212,239
11,828
110,687
346,981
850,403
$ 1,197,384
$
12,247
213,924
11,824
103,591
341,586
844,831
$ 1,186,417
Proceeds from the sales of securities available for sale were
$22,391, $39,282 and $171,891 during 2000, 1999 and 1998
respectively. Gross gains of $1,752, $541 and $2,817 and
gross losses of $18, $0 and $1,284 were realized on those
sales during 2000, 1999 and 1998 respectively.
Securities available for sale with an approximate fair value of
$626,719 and $463,004 were pledged at December 31, 2000
and 1999, respectively, to secure public deposits and for
other purposes required or permitted by law.
21
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 9—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, 2000
and 1999:
2000
1999
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
$
148,522
$ 635
$
(604)
$
148,553
$
183,926
$
60
$ (4,231) $
179,755
Other
99,844
194
(129)
99,909
104,790
-0-
(2,436)
102,354
Obligations of States and
Political Subdivisions
Debt Securities Issued
by Foreign Governments
Corporate Securities
Other Mortgage Backed
Securities
Total Securities Held to
Maturity
126,514
1,355
(807)
127,062
134,770
176
(6,204)
128,742
357
22,154
-0-
140
-0-
(227)
357
22,067
358
22,212
716
-0-
(3)
713
2,291
-0-
-0-
-0-
-0-
(711)
358
21,501
(1)
2,290
$
398,107
$ 2,324
$
(1,770)
$
398,661
$
448,347
$
236
$ (13,583) $
435,000
The amortized cost and estimated market value of debt
securities at December 31, 2000, 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
$
$
15,956
129,737
28,994
74,182
248,869
149,238
398,107
$
$
15,935
129,848
29,640
73,972
249,395
149,266
398,661
There were no sales of securities held to maturity in 2000,
1999 or 1998.
Securities held to maturity with an amortized cost of
$245,908 and $282,388 were pledged at December 31, 2000
and 1999, respectively, to secure public deposits and for
other purposes required or permitted by law.
NOTE 10—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,
2000
1999
$
443,618
$
417,300
37,146
932,915
560,066
41,734
980,506
495,789
450,154
68,975
2,492,874
(2,047)
$ 2,490,827
502,465
65,893
2,503,687
(3,628)
$ 2,500,059
Most of the Corporation’s business activity was with
customers located within Pennsylvania. The portfolio is well
diversified, and as of December 31, 2000 and 1999, there
were no significant concentrations of credit.
22
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 11—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
2000
1999
1998
$ 33,539
$ 32,304
$ 25,932
1,299
1,381
1,950
10,030
9,450
15,049
11,267
$ 33,601
9,596
$ 33,539
10,627
$ 32,304
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
2000
1999
$
$
$
$
$
$
12,961
13,154
2,187
4,679
8,282
333
$
$
$
$
$
$
12,827
10,808
3,082
7,471
5,356
458
NOTE 12—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, 2000 and 1999, the Corporation did not
own or trade any other financial instruments with significant
off-balance-sheet risk including derivatives such as futures,
forwards, interest rate swaps, option contracts and the like,
although such instruments may be appropriate to use in the
future to manage interest rate risk.
The Corporation’s exposure to credit loss in the event of
nonperformance by the other party of the financial
instrument for commitments to extend credit, standby letters
of credit and commercial letters of credit written is
represented by the contract or notional amount of those
instruments. The Corporation uses the same credit policies
in making commitments and conditional obligations as it
does for on-balance-sheet instruments. The following table
identifies the notional amount of those instruments at
December 31, 2000 and 1999.
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
Standby letters of credit
Commercial letters of credit
2000
1999
$
$
$
445,200
37,787
471
$
$
$
421,871
39,847
514
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 13—Premises and Equipment
Premises and equipment are described as follows:
Land
Buildings and improvements
Leasehold improvements
Furniture and equipment
Software
Subtotal
Less accumulated depreciation
and amortization
Total premises and
equipment
Estimated
Useful Life
Indefinite
5 - 50 Years
7 - 39 Years
3 - 25 Years
3 - 7 Years
$
2000
5,336
45,296
9,839
48,643
9,926
119,040
$
1999
5,425
44,582
9,930
46,177
6,160
112,274
74,369
68,894
$
44,671
$
43,380
Depreciation and amortization related to premises and
equipment was $5,996 in 2000, $5,790 and $6,265 in 1999
and 1998, respectively.
23
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 14—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
2000
98,552
1,025,447
1,696,137
2,820,136
$
$
1999
$
98,545
1,073,789
1,525,091
$ 2,697,425
Interest-bearing deposits at December 31, 2000 and 1999,
include reallocations from demand deposits of $105,795 and
$97,883 and reallocations from NOW and Super NOW
accounts of $279,779 and $294,943 respectively into Savings
and MMDA accounts. These reallocations are based on a
formula and have been made to reduce the Corporation’s
reserve requirement in compliance with regulatory guidelines.
Included in time deposits at December 31, 2000 and 1999,
were certificates of deposit in denominations of $100 or
more of $455,382 and $358,261 respectively.
Interest expense related to $100 or greater certificates of
deposit amounted to $22,639 in 2000, $18,103 in 1999, and
$16,921 in 1998.
Included in time deposits at December 31, 2000, were
certificates of deposit with the following scheduled
maturities:
2001
2002
2003
2004
2005 and thereafter
$
$
981,884
465,459
179,499
30,190
36,622
1,693,654
NOTE 15—Short-term Borrowings
Short-term borrowings at December 31 were as follows:
2000
1999
Ending Average Average Ending Average Average
Balance Balance Rate
Balance Balance Rate
$ 16,825 $ 49,990 6.28% $
2,950 $ 94,161 5.22%
-0-
20,814 6.03% 100,000
49,037 5.21%
237,806
275,839 5.92% 262,301
124,904 4.66%
17,540
24,643 6.04% 59,576
11,167 4.81%
Federal funds
purchased
Borrowings
from FHLB
Securities
sold under
agreements
to repurchase
Treasury, tax
and loan
note option
Total
$ 272,171 $371,286 5.98% $ 424,827 $ 279,269 4.95%
$ 455,285
$ 424,960
Maximum
total at any
month-end
24
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
$
2000
3,138
1,256
16,335
1,489
$
1999
1998
4,913
2,557
5,825
537
$
4,119
1,051
4,305
739
$
22,218
$ 13,832
$ 10,214
NOTE 16—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
$35,000) 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 sole asset of the Trust is the $36,083
aggregate liquidation amount of the junior subordinated
debentures. 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
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
liquidation amount equal to the aggregate principal amount
of the debentures redeemed.
The net proceeds (after deduction of offering expenses and
the initial purchaser’s commission) from the sale of the
debentures to the Trust were approximately $34,200. 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 17—Other Long-term Debt
Other Long-term debt at December 31, follows:
2000
1999
Amount
Rate
Amount
Rate
$
5,287
Libor +1% $
6,193 Libor +1%
All Federal Home Loan Bank stock, along with an interest in
unspecified mortgage loans and mortgage-backed securities,
with an aggregate statutory value equal to the amount of the
preceding advances, have been pledged as collateral with the
Federal Home Loan Bank of Pittsburgh.
Capital securities included in total long-term debt on the
Consolidated Balance Sheets are excluded from NOTE 17,
but are described in NOTE 16.
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. During the first and second quarters of 2000 the
parent company borrowed the remaining $4,000 available
and during the fourth quarter of 2000 repaid the entire
$20,000 amount outstanding.
Scheduled loan payments for other long-term debt are
summarized below:
2001
2002
2003
2004
2005 Thereafter
Loan payments
$1,691 $101,634
$1,659 $1,492 $1,810
$513,569
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.
ESOP loan due
December, 2005
Bank loan due
July, 2003
Borrowings from
FHLB due:
February, 2000
July, 2000
November, 2002
December, 2002
September, 2007
February, 2008
February, 2008
May, 2008
November, 2008
December, 2008
February, 2010
December, 2010
December, 2017
June, 2019
April, 2020
-0-
16,000 FF +1.25%
NOTE 18—Common Share Commitments
-0-
-0-
50,000
50,000
5,000
100,000
100,000
100,000
50,000
65,000
25,000
55,000
7,038
8,644
886
4.72%
25,000
4.72%
25,000
50,000
5.82%
50,000 5.71%
5.82%
5.71%
6.94%
-0-
5.45% 100,000
5.48% 100,000
5.67% 100,000
50,000
5.03%
65,000
4.96%
-0-
6.12%
-0-
4.70%
7,264
6.17%
8,898
5.72%
-0-
7.37%
5.45%
5.48%
5.67%
5.03%
4.96%
6.17%
5.72%
$ 621,855
$ 603,355
At December 31, 2000 and 1999, the Corporation had
100,000,000 common shares authorized and 62,525,412
shares outstanding. Outstanding shares were reduced by
4,329,962 shares of treasury stock at December 31, 2000 and
4,382,564 shares at December 31, 1999. The Corporation
may be required to issue additional shares to satisfy common
share purchases related to the employee stock ownership
plan described in NOTE 21. The dilutive effect of stock
options outstanding on average shares outstanding in the
diluted earnings per share reported on the income statement
were 59,742, 236,230 and 332,454 shares at December 31,
2000, 1999 and 1998 respectively.
During 2000 and 1999, 78,380 and 3,921,668 shares of
treasury stock were acquired at an average price of $11.14
and $13.09, respectively. Treasury shares consisting of
41,240 and 188,570 were reissued during 2000 and 1999
upon exercise of stock options.
During 2000, 89,742 shares of treasury stock were reissued
to fund the buy-out of the insurance agency’s joint-venture
partner, as described in NOTE 4.
25
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 19—Income Taxes
NOTE 20—Retirement Plans
The income tax provision consists of:
2000
1999
1998
Current tax provision for income
exclusive of securities transactions:
Federal
State
Securities transactions
Total current tax
provision
Deferred tax provision (benefit)
Total tax provision
$ 12,155
(10)
611
$ 19,111 $
16
198
13,097
(11)
547
12,756
1,533
$ 14,289
19,325
287
$ 19,612 $
13,633
(1,404)
12,229
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, 2000 and 1999, 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
Lease financing deduction
Loan origination fees and costs
Basis difference in assets acquired
Pension expense
Other
Total deferred tax liabilities
2000
1999
$
11,765
$
11,641
996
439
4,204
894
18,298
(389)
(10,643)
(1,319)
(674)
(231)
(280)
(13,536)
985
242
21,702
827
35,397
(250)
(9,372)
(628)
(892)
(200)
(262)
(11,604)
Net deferred tax asset
$
4,762
$
23,793
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:
2000
1999
1998
% of
Pretax
Amount Income Amount Income Amount Income
% of
Pretax
% of
Pretax
35.0
$ 25,425
35.0 $ 16,179
35.0
Tax at statutory rate $ 21,537
Increase (decrease)
resulting from:
Effect of
nontaxable
income
Merger expenses
State income taxes
Other
Total tax
provision
$ 14,289
26
(6,595) (10.7)
0.0
(0.0)
(1.1)
-0-
(10)
(643)
(5,247)
-0-
16
(582)
(7.2)
0.0
0.0
(0.8)
(3,894)
542
(11)
(587)
(8.4)
1.2
(0.0)
(1.3)
23.2
$ 19,612
27.0 $ 12,229
26.5
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 common shareholders’ equity.
Compensation costs related to the plan were $1,005 in 2000,
$1,555 in 1999 and $1,068 in 1998 (See NOTE 21).
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 of
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. The 401(k) plan expense was $2,444 in 2000,
$2,328 in 1999 and $2,261 in 1998.
Upon shareholder approval at the regular 1998 meeting the
Corporation established a “Supplemental Executive
Retirement Plan” (“SERP”) to provide deferred
compensation for a select group of management. The
purpose of this plan is to restore some of the benefits lost to
the highly compensated employees compared to other
employees due to limits and restrictions incorporated into the
Corporation’s 401(k) and ESOP plans. The Corporation’s
401(k) and ESOP plans include restrictions on maximum
compensation, actual deferral percentage, actual
contribution, maximum contribution and maximum salary
reduction which are required in order to meet specific legal
requirements.
Participants in the SERP may elect to contribute up to 10%
of plan compensation (compensation in excess of limits of
the Corporation’s 401(k) and ESOP plans) into the SERP,
through salary reduction. The Corporation will make an
elective contribution to the SERP equal to the elective
contribution of the participant. Each participant of the SERP
will also receive a matching contribution equal to 100% of
the employee’s elective contribution up to 4%, and an
additional non-elective contribution from the employer equal
to 8% of plan compensation. For 1998, each participant
could make an elective contribution for up to 5% of plan
compensation which was matched by an employers’
contribution equal to 80% of the employee’s contribution.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
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
$182 in 2000, $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.
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.
Net periodic pension cost of this plan for each of the last
three years was as follows:
The following table sets forth the change in plan assets:
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
2000
1999
$ 6,485 $ 7,132
261
-0-
(908)
$ 6,785 $ 6,485
542
-0-
(242)
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
2000
1999
6.0% 6.0%
N/A
6.5
N/A
6.5
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:
2000
1999
1998
2000
1999
1998
Service cost
Interest cost on projected benefit obligation
Actual return on plan assets
Net amortization and deferral
Net periodic pension cost (benefit)
$
-0- $
-0- $ 365
469
(425)
(179)
$ (106) $ (20) $ 230
343
(542)
93
394
(261)
(153)
Service cost
Interest cost on projected benefit obligation
Amortization of transition obligation
Loss amortization
Net periodic benefit cost
$
7
190
2
-0-
$ 199
$
$
13 $
197
2
48
61
259
55
82
260 $ 457
The following table sets forth the plan’s funded status and
the amounts recognized on the Corporation’s Consolidated
Balance Sheet as of December 31:
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
2000
1999
$ 3,413 $ 2,762
14
183
2,959
-0-
14
163
3,590
-0-
3,590
(19)
(729)
2,959
(21)
(56)
$ 2,842 $ 2,882
Market value of plan assets, primarily registered
investment companies, U.S. government and agency
obligations and money markets
Projected benefit obligation
Plan assets 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 $5,665 and $5,588
2000
1999
$ 6,785
5,822
$ 6,485
5,765
963
(62)
(223)
720
(92)
(56)
$
678
$ 572
$ 5,822
$ 5,765
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)
Benefit obligation at end of year
2000
1999
$ 5,765 $ 7,926
-0-
394
(908)
(1,647)
$ 5,822 $ 5,765
-0-
343
(242)
(44)
27
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 20—Retirement Plans (continued)
Postretirement Benefits other than Pensions for Acquired
Subsidiary (continued)
The following table sets forth the change in benefit
obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefit payments
Actuarial loss (gain)
Benefit obligation at end of year
2000
1999
$ 2,959 $ 3,414
13
197
(225)
(440)
7
190
(239)
673
$ 3,590 $ 2,959
The discount rates used in determining the actuarial present
value of the accumulated postretirement benefit obligation
were 6.75% for 2000 and 1999. The health care cost trend
rates used for 2000 were projected at an initial rate of 6.75%
decreasing over time to an annual rate of 4.25% for
grandfathered participants and an initial rate of 6.00%
decreasing over time to an annual rate of 4.25% for non-
grandfathered participants. 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. This grandfathering is related to
cost sharing requirements for different groups of participants
for these benefits.
The health care cost trend rate assumption can have a
significant impact on the amounts reported for this plan. A
one-percentage-point change in assumed health care cost
trend rates would have the following effects:
1-Percentage-
1-Percentage-
Point Increase Point Decrease
Effect on total of service and interest
cost components
Effect on postretirement benefit
obligation
on the Corporation’s financial condition or results of
operations.
NOTE 21—Unearned ESOP Shares
The Corporation had borrowed amounts which were
concurrently loaned to the First Commonwealth Financial
Corporation Employee Stock Ownership Plan Trust
(“ESOP”) on the same terms. The combined balances of the
ESOP related loans were $5,287 at December 31, 2000 and
$6,193 at December 31, 1999.
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 five
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, 1998
Shares allocated during 1999
Shares in suspense
December 31, 1999
Shares allocated during 2000
Shares in suspense
December 31, 2000
Total
Old
Shares
New
Shares
730,614
(131,927)
178,878
(32,300)
551,736
(99,627)
598,687
(105,166)
146,578
(25,748)
452,109
(79,418)
493,521
120,830
372,691
$
15
$
(13)
$ 219
$ (196)
The fair market value of the new shares remaining in
suspense was approximately $3,727 and $5,425 at December
31, 2000 and 1999 respectively.
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
Interest on ESOP loans was $446 in 2000, $460 in 1999 and
$255 in 1998. During 2000, 1999 and 1998, dividends on
unallocated shares in the amount of $354, $369 and $196
respectively were used for debt service while all dividends
on allocated shares were allocated to the participants.
NOTE 22—Stock Option Plan
At December 31, 2000, 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 4.5 million shares of the Corporation’s
common stock through October 15, 2005. Although the
vesting requirements and terms of future options granted are
28
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
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, all options granted
during 1999 became vested on December 31, 1999 and
expire ten years from the grant date and all options granted
during 2000 became vested on or before December 31, 2000
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:
2000
1999
1998
As
Pro
As
Pro
As
Pro
Reported Forma Reported Forma Reported Forma
$ 47,246 $47,130 $ 53,030 $ 52,197 $33,374 $ 33,374
$
$
0.82 $
0.82 $
0.88 $
0.87 $
0.54 $
0.54
0.82 $
0.82 $
0.88 $
0.86 $
0.54 $
0.54
Net Income
Basic earnings
per share
Diluted earnings
per share
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:
2000
1999
1998
5.65% per annum 4.29% per annum 3.75% per annum
Dividend yield
Expected volatility
Risk-free interest rate
Expected option life
61.7%
5.3%
9.1 years
31.4%
6.3%
9.1 years
90.0%
5.1%
9.1 years
A summary of the status of the Corporation’s outstanding
stock options as of December 31, 2000, 1999 and 1998 and
changes for the years ending on those dates is presented
below:
2000
Weighted
Average
Exercise
Price
1999
1998
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
1,680,178 $ 11.07 1,306,346 $10.53 1,052,548 $ 8.75
705,429 $ 11.06
404,016 $14.69
610,416 $11.56
(41,240) $ 7.93 (188,570) $ 8.66 (131,138) $ 8.72
(19,080) $ 9.81
(48,014) $12.08
(133,716) $ 11.63
2,210,651 $ 11.12 1,680,178 $11.07 1,306,346 $10.53
2,210,651 $ 11.12 1,680,178 $11.07
956,058 $11.06
The following table summarizes information about the stock
options outstanding at December 31, 2000.
Options Outstanding
Options Exercisable
Weighted-
Average Weighted-
Weighted-
Number Remaining Average Number Average
Outstanding Contract Exercise Exercisable Exercise
at 12/31/00
at 12/31/00
Price
Price
Life
Range of
Exercise
Prices
9,680
$ 2.79
8,800
$ 4.035
649,364
$ 9.1875-9.25
658,709
$ 11.0625
$ 11.1825-11.5625 553,902
330,196
$ 14.6875
2,210,651
Total
1.3
2.2
6.0
9.1
8.1
7.2
9,680
2.79
$
8,800
4.04
$
649,364
$
9.22
658,709
$ 11.06
553,902
$ 11.56
$ 14.69
330,196
$ 11.12 2,210,651
$ 2.79
$ 4.04
$ 9.22
$11.06
$11.56
$14.69
$11.12
NOTE 23—Commitments and Contingent Liabilities
There are no material legal proceedings to which the
Corporation or its subsidiaries are a party, or of which any of
their property is the subject, except proceedings which arise
in the normal course of business and, in the opinion of
management, will not have any material adverse effect on the
consolidated operations or financial position of the
Corporation and its subsidiaries.
NOTE 24—Related Party Transactions
Some of the Corporation’s or its subsidiaries’ directors,
executive officers, principal shareholders and their related
interests, had transactions with the subsidiary banks in the
ordinary course of business. All loans and commitments to
loans in such transactions were made on substantially the
same terms, including collateral and interest rates, as those
prevailing at the time for comparable transactions. In the
opinion of management, these transactions do not involve
more than the normal risk of collectibility nor do they
present other unfavorable features. It is anticipated that
further such extensions of credit will be made in the future.
The following is an analysis of loans to those parties whose
aggregate loan balances exceeded $60 during 2000.
Balances December 31, 1999
Advances
Repayments
Other
Balances December 31, 2000
$
$
8,404
8,394
(7,114)
(268)
9,416
“Other” primarily reflects the change in those classified as a
“related party” as a result of mergers, resignations and
retirements.
29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 25—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, 2000, dividends from subsidiary banks were restricted
not to exceed $91,344. 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, 2000, the Corporation and its banking
subsidiaries meet all capital adequacy requirements to which
they are subject.
As of December 31, 2000, 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 institutions’ category.
Actual
Amount
Ratio
Regulatory Minimum
Ratio
Amount
To Be Well Capitalized Under
Prompt Corrective Action Provisions
Amount
Ratio
$ 401,516
$ 283,624
91,416
$
$ 367,915
$ 257,789
84,656
$
$ 367,915
$ 257,789
84,656
$
$ 384,368
$ 287,968
92,933
$
$ 351,085
$ 261,744
86,322
$
$ 351,085
$ 261,744
$ 86,322
14.5%
12.9%
16.9%
13.3%
11.7%
15.7%
8.5%
7.8%
8.5%
14.4%
13.7%
17.6%
13.2%
12.4%
16.3%
7.4%
7.2%
8.2%
$ 221,294
$ 175,783
43,261
$
$ 110,647
87,891
$
21,631
$
$ 129,749
98,994
$
29,758
$
$ 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%
8.0%
8.0%
8.0%
4.0%
4.0%
4.0%
3.0%
3.0%
3.0%
Not Applicable Not Applicable
10.0%
$ 219,728
10.0%
54,077
$
Not Applicable Not Applicable
6.0%
$ 131,837
6.0%
32,446
$
Not Applicable Not Applicable
5.0%
$ 164,990
5.0%
49,596
$
Not Applicable Not Applicable
10.0%
$ 210,859
10.0%
52,886
$
Not Applicable Not Applicable
6.0%
$ 126,515
6.0%
31,731
$
Not Applicable Not Applicable
5.0%
$ 181,207
5.0%
52,983
$
As of December 31, 2000
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
As of December 31, 1999
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
30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 26—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,
2000
1999
$
6,169
81
479
355,680
3,980
6,813
3,757
7,325
2,174
$ 386,458
$
2,493
8,439
5,287
36,083
334,156
$
5,122
103
480
330,400
3,477
7,064
2,786
3,574
2,639
$ 355,645
$
2,544
8,141
22,193
36,083
286,684
$ 386,458
$ 355,645
Years Ended December 31,
$
2000
41
61,664
(5,335)
-0-
31
(7,451)
$
1999
149
36,506
(1,758)
57
15
(11,476)
$
1998
251
28,559
(255)
203
1,008
(8,111)
48,950
4,340
23,493
4,421
21,655
2,348
53,290
27,914
24,003
(6,044)
$ 47,246
25,116
$ 53,030
9,371
$ 33,374
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
2000
-0-
906
$
$
1999
1998
-0- $ 6,000
429
$
$
$ 1,814
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
Issuance of subordinated
debentures
Issuance of other long-term debt
Repayment of other long-term debt
Discount on dividend reinvestment
plan purchases
Treasury stock acquired
Treasury stock reissued
Cash dividends paid
Stock option tax benefit
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,
2000
1999
1998
$ 47,246
$53,030
$33,374
1,263
1,655
1,470
-0-
144
(203)
212
(242)
13
6,044
97
(25,116)
(803)
(9,371)
(1,627)
54,862
28,668
23,656
-0-
-0-
1
-0-
(10,091)
102
13,709
17
(28)
(337)
(1,491)
(2,051)
(3,861)
-0-
(2,406)
1,709
(1,770)
-0-
(4,197)
(2,069)
(231)
-0-
4,000
(20,000)
(593)
(873)
326
(32,553)
75
36,083
16,000
-0-
(358)
(51,331)
1,453
(27,825)
-0-
-0-
-0-
-0-
(1,016)
(2,123)
2,217
(25,746)
-0-
(49,618)
1,047
5,122
$ 6,169
(25,978)
621
4,501
$ 5,122
(26,668)
(3,243)
7,744
$ 4,501
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 common shareholders’ equity. Loan
payments in the amount of $906 in 2000, $1,814 in 1999 and
$429 in 1998 were made by the ESOP thereby reducing the
outstanding amount related to unearned ESOP shares to
$5,287 at December 31, 2000.
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 27—Fair Values of Financial Instruments
Below are various estimated fair values at December 31,
2000 and 1999, 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, 2000 and 1999.
2000
1999
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
32
Carrying
Amount
90,723
$
427
$
$
11,125
$1,238,230
$ 398,107
$2,457,226
$ 3,064,146
$ 272,171
$ 656,855
Estimated
Fair
Value
90,723
$
427
$
$
11,125
$1,238,230
$ 398,661
$2,530,430
$3,047,713
$ 272,171
$ 630,511
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
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 for the years ended December 31, 2000 and 1999 are as follows (Amounts in
prior periods have been reclassified to conform to the presentation format used at December 31, 2000. The reclassifications
had no effect on net income or earnings per share.):
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
Diluted earnings per share
Average shares outstanding
Average shares outstanding assuming dilution
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)
2000
First
Quarter
$ 76,943
41,504
35,439
2,505
Second
Quarter
$ 77,317
42,443
34,874
2,415
Third
Quarter
$ 78,471
44,734
33,737
2,505
Fourth
Quarter
$79,151
45,858
33,293
2,605
32,934
32,459
31,232
30,688
-0-
7,358
25,150
15,142
3,691
$ 11,451
0.20
$
0.20
$
57,505,462
57,606,948
First
Quarter
$ 71,463
36,740
34,723
2,213
1,686
8,254
25,048
17,351
4,261
$ 13,090
0.23
$
0.23
$
57,515,772
57,566,079
Second
Quarter
$ 73,266
36,989
36,277
2,337
-0-
8,242
24,709
14,765
3,209
$ 11,556
0.20
$
0.20
$
57,565,411
57,601,162
1999
Third
Quarter
$ 74,939
38,154
36,785
2,363
59
8,084
24,554
14,277
3,128
$11,149
0.19
$
0.19
$
57,648,021
57,699,795
Fourth
Quarter
$76,421
40,770
35,651
2,537
32,510
33,940
34,422
33,114
563
8,140
24,674
16,539
4,534
$ 12,005
0.20
$
0.20
$
61,152,708
61,432,570
-0-
10,834
24,010
20,764
5,938
$ 14,826
0.24
$
0.24
$
61,203,388
61,376,932
2
7,476
23,344
18,556
4,804
$ 13,752
0.22
$
0.22
$
61,290,374
61,491,946
-0-
7,210
23,541
16,783
4,336
$12,447
0.22
$
0.21
$
57,713,182
58,003,391
(a) Where applicable, 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.
33
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.
Financial statement amounts for prior periods have also been reclassified to conform to the presentation format used in 2000.
The reclassifications had no effect on the Corporation’s financial condition or result of operations.
Years Ended December 31,
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for
credit losses
Securities gains
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
$
$
$
$
$
$
$
$
$
2000
311,882
174,539
137,343
10,030
127,313
1,745
31,938
-0-
99,461
61,535
14,289
47,246
-0-
47,246
0.82
0.00
0.82
0.565
57,558,929
0.82
0.00
0.82
0.565
57,618,671
4,372,312
1,636,337
2,490,827
33,601
3,064,146
35,000
621,855
334,156
$
$
$
$
$
$
$
$
$
1999
296,089
152,653
143,436
9,450
133,986
565
33,660
-0-
95,569
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
$
$
$
$
$
$
$
$
$
1998
282,067
148,282
133,785
15,049
118,736
1,457
27,929
7,915
93,980
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
$
$
$
$
$
$
$
$
$
1997
253,917
124,427
129,490
10,152
119,338
6,825
20,599
-0-
89,885
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
1.10%
15.65%
80.19%
68.90%
7.00%
1.25%
15.44%
83.64%
58.52%
8.10%
0.85%
9.13%
79.92%
82.41%
9.28%
1.15%
11.31%
83.57%
64.06%
10.16%
$
$
$
$
$
$
$
$
$
1996
234,957
109,189
125,768
6,301
119,467
1,599
18,482
-0-
86,191
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
1.17%
11.07%
80.23%
61.67%
10.53%
(a) Where applicable, 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.
34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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, 2000, 1999 and 1998 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.
Financial statements amounts in prior periods have been
reclassified to conform to the presentation format used in
2000. The reclassifications had no effect on the
Corporation’s financial condition or results of operations.
Results of Operations
Net income in 2000 was $47.2 million, reflecting a decrease
of $5.8 million from 1999 results of $53.0 million and
compared to $33.4 million reported in 1998. The decrease in
net income for 2000 was primarily the result of gains on sale
of loans which were realized during 1999. The 1998 period
was impacted negatively by a number of merger and other
related charges totaling $7.9 million. These charges
included merger expenses for the acquisition of Southwest
National Corporation, early retirement and postretirement
benefit accruals and premises and equipment expenses to
standardize depreciation methods. 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.
Basic earnings per share and diluted earnings per share were
$0.82 for 2000 compared to basic earnings per share and
diluted earnings per share of $0.88 for 1999. Basic earnings
per share and diluted earnings per share were $0.54 for 1998.
Basic earnings per share excluding gains on sale of assets
was $0.79 for 2000 compared to $0.82 for 1999. Return on
average assets was 1.10% and return on average equity was
15.65% during 2000 compared to 1.25% and 15.44%,
respectively for 1999. Return on average assets was 0.85%
during 1998 while return on average equity was 9.13%.
The following is an analysis of the impact of changes in net
income on basic earnings per share:
2000
vs.
1999
1999
vs.
1998
Net income per share, prior year
$
0.88
$ 0.54
Increase (decrease) from changes in:
Net interest income
Provision for credit losses
Security transactions
Gain on sale of loans
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
0.01
(0.02)
0.02
(0.08)
0.07
(0.09)
(0.02)
0.00
(0.03)
0.08
0.00
0.20
0.09
(0.01)
0.06
0.05
(0.03)
0.00
0.13
(0.03)
(0.13)
0.01
Net income per share
$
0.82
$ 0.88
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 $137.3 million in 2000 compared to
$143.4 million in 1999 and $133.8 million in 1998. 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, 2000.
35
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
2000
1999
1998
Average
Balance
Income/ Yield or
Rate(a)
Expense
Average
Balance
Income/ Yield or
Rate(a)
Expense
Average
Balance
Income/ Yield or
Rate(a)
Expense
$
1,220
1,572,290
3,821
$
82
103,018
234
6.71% $
6.88
6.12
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
2,503,036
208,548
8.50
2,408,450
195,010
8.21
2,439,436
201,739
8.38
4,080,367
311,882
7.87
4,020,858
296,089
7.56
3,749,968
282,067
7.69
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
74,178
(34,296)
191,534
231,416
$ 4,311,783
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
80,716
(33,757)
174,063
221,022
$ 4,241,880
78,999
(27,388)
138,114
189,725
$ 3,939,693
$
386,149
652,647
1,585,694
371,286
632,837
$
9,593
17,027
88,887
22,218
36,814
2.48% $
2.61
5.61
5.98
5.82
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
85,002
10,214
24,108
2.22%
2.99
5.55
5.23
5.60
3,628,613
174,539
4.81
3,521,633
152,653
4.33
3,214,151
148,282
4.61
345,311
31,439
343,497
720,247
328,720
31,177
365,645
725,542
Shareholders’ Equity
$ 4,311,783
$ 4,241,880
$ 3,939,693
Net Interest Income and
Net Yield on Interest-
earning Assets
$ 137,343
3.59%
$ 143,436
3.76%
$ 133,785
3.73%
(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
1999 levels as a result of both volume increases and rate
increases. Average interest-earning assets increased $59.5
million while average interest-bearing liabilities increased
$107.0 million in 2000. Asset yields, on a tax-equivalent
basis, increased 31 basis points (0.31%) during 2000 to
7.87%, from 7.56% reported in 1999 and compared to 7.69%
reported in 1998. The cost of funds for 2000 increased 48
basis points (0.48%) over 1999 costs of 4.33% and compared
to costs of 4.61% for 1998.
Interest and fees on loans increased $13.5 million for 2000 over
1999 levels, primarily as a result of volume and rate increases
for commercial loans. Enhanced marketing strategies continue
to enable the Corporation to capitalize on lending opportunities
36
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-
349,259
31,971
301,940
bearing funding sources
683,170
Total Liabilities and
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
with small to mid-sized commercial customers, including Small
Business Administration (“SBA”) loans generated through the
Corporation’s preferred lender status. Average loans for 2000
increased $94.6 million compared to 1999 averages and
included increases in commercial loans and municipal loans
which were partially offset by decreases in average consumer
loans. The decrease in average consumer loans for the 2000
period resulted from the sale of $42.2 million of 1-4 family
residential mortgage loans in the first quarter of 1999 and the
sale of $20.4 million of consumer credit card loans during the
second quarter of 1999.
Interest and fees on loans also reflected increases due to rate
of $6.2 million during 2000 as loan yields increased 29 basis
points (0.29%) during 2000 to 8.50% from 8.21% reported
for 1999 and compared to 8.38% during 1998. Mortgage
portfolio yields rose 17 basis points (0.17%) for 2000
compared to 1999 as “teaser-rates” on innovative loan
products introduced in previous years were phased out.
Yields on commercial loans, municipal loans, and both
secured and unsecured revolving credit loans for 2000 also
reflected increases compared to 1999 yields reflecting the
increase in general interest rates.
Interest income on investments increased $2.2 million for
2000 compared to 1999, as rate increases during 2000 were
only partially offset by volume decreases. Yields on
investments for 2000 were 6.88% compared to 6.59% for
1999 and 6.43% for 1998. Increases in interest income due
to rate for U.S. government agency securities were $2.4
million during 2000 as yields on U.S. government agency
securities increased 22 basis points (0.22%) compared to
1999 yields. Prepayment speeds of mortgage backed
securities which had slowed during 1999 as interest rates
rose, began to accelerate at the end of 2000 as interest rates
began to decline. The primary risk of owning MBS relates
to the uncertainty of prepayments of the underlying
mortgages. Interest rate changes have a direct impact on
prepayment speeds. As interest rates increase, prepayment
speeds generally decline, resulting in a longer average life of
a MBS. Conversely as interest rates decline, prepayment
speeds increase, resulting in a shorter average life of a MBS.
Using computer simulation models, the Corporation tests the
average life and yield volatility of all MBSs under various
interest rate scenarios on a regular 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.
Decreases in interest income on investments due to volume
of $2.4 million during 2000 resulted primarily from volume
decreases for U.S. government agency securities which were
partially offset by volume increases for corporate bonds.
Average balances of U.S. government agency securities
decreased $111.6 million for 2000 compared to 1999
averages as an inverted yield curve prevented a reinvestment
of proceeds generated by paydowns at a positive spread.
Average balances of corporate bonds increased $66.1 million
over the same time period primarily as a result of investment
in trust preferred securities.
Interest on deposits increased $12.2 million for 2000
compared to 1999 as both volumes and rates increased over
1999 levels. Average time deposits increased $85.8 million
for 2000 compared to 1999, resulting in an increase in
interest expense due to volume of $4.4 million. Increases in
average time deposits for 2000 compared to 1999 averages
were partially offset by decreases in average savings deposits
of $60.0 million. The cost of time deposits for 2000
increased by 46 basis points (0.46%) compared to 1999 costs
of 5.15%, resulting in an increase in interest expense due to
rate of $7.3 million. Interest on total savings deposits for
2000 also reflected increases due to rate of $2.0 million as
deposit costs for total savings deposits increased 18 basis
points (0.18%) for 2000 compared to 1999. Average
balances of noninterest-bearing demand deposits for 2000
reflected an increase of $3.9 million compared to 1999
averages.
Interest expense on short-term borrowings increased $8.4
million during 2000 as the average balance of repurchase
agreements increased $150.9 million. The cost of short-term
borrowings for 2000 also increased by 103 basis points
(1.03%) compared to 1999 costs of 4.95%.
Interest expense on long-term debt increased $1.3 million for
2000 compared to the 1999 period. The long-term debt
increase for 2000 resulted primarily from the funding of the
repurchase of 3.8 million shares of the Corporation’s
common stock through a “modified Dutch Auction” tender
offer during 1999. The aggregate amount of $49.7 million
paid by the Corporation in connection with the repurchase of
common shares was funded through the issuance of capital
securities and the issuance of a bank loan from an unrelated
financial institution. Capital securities borrowings in the
amount of $35 million were issued during the third quarter of
1999 bearing an interest rate of 9.50% and maturing in thirty
years, consequently interest expense on capital securities for
2000 was $3.3 million compared to $1.0 million for 1999.
The parent company incurred a $16 million bank loan during
1999 primarily to fund the remaining cost of the stock
repurchase. (See NOTE 16 to the financial statements for a
description of the Company obligated mandatorily
37
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
redeemable capital securities of subsidiary trust and NOTE
17 to the financial statements for a description of the bank
loan incurred).
The Corporation’s use of computer modeling to manage
interest rate risk is described in the “Interest Sensitivity”
section of this discussion herein.
Net interest margin (net interest income, on a tax-equivalent
basis as a percentage of average earning assets), was 3.59%
during 2000 compared to 3.76% in 1999 and 3.73% in 1998.
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)
2000 Change from 1999
Change Due
to Volume
Change Due
to Rate
Total
Change
$
(39)
2,165
129
13,538
15,793
12,176
8,386
1,324
21,886
$ (6,093)
$
(41)
(2,383)
86
7,765
5,427
2,922
4,558
(601)
6,879
$ (1,452)
$
2
4,548
43
5,773
10,366
9,254
3,828
1,925
15,007
$ (4,641)
Total
Change
$
(109)
22,648
(1,788)
(6,729)
14,022
(10,629)
3,618
11,382
4,371
$ 9,651
1999 Change from 1998
Change Due
to Volume
Change Due
to Rate
$
(115)
21,682
(1,781)
(2,596)
17,190
(815)
4,389
11,927
15,501
$ 1,689
$
6
966
(7)
(4,133)
(3,168)
(9,814)
(771)
(545)
(11,130)
$ 7,962
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 $10.0 million in 2000 compared to $9.5
million in 1999 and $15.0 million in 1998. 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 $33.6
million at December 31, 2000, for a ratio of 1.35% of actual
loans outstanding. The ratio of the allowance for credit
losses to total loans outstanding as of December 31, 2000 has
increased slightly from the 1.34% reported as of December
31, 1999. Net charge-offs for 2000 reflected increases in
charge-offs of commercial loans not secured by real estate of
$2.0 million and revolving credit loans of $269 thousand
which were partially offset by decreases in net charge-offs of
1-4 family residential mortgages, consumer installment and
commercial loans secured by real estate. Net charge-offs
against the allowance for credit losses were $10.0 million, or
0.40% of average total loans in 2000. This compared to net
charge-offs of $8.2 million in 1999 and $8.7 million in 1998.
Net charge-offs were 0.34% and 0.36% of average total
loans during 1999 and 1998, respectively. For an analysis of
credit quality, see the “Credit Review” section of this
discussion.
38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
The following table presents an analysis of the consolidated allowance for credit losses for the five years ended December 31,
2000 (Dollar Amounts in Thousands):
Summary of Loan Loss Experience
2000
1999
1998
1997
1996
Loans outstanding at end of year
$ 2,490,827
$ 2,500,059
$ 2,374,850
$ 2,436,337
$ 2,236,523
Average loans outstanding
$ 2,503,036
$ 2,408,450
$ 2,439,436
$ 2,330,657
$ 2,060,196
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
$
33,539
$
32,304
$
25,932
$
25,234
$
23,803
4,335
5,521
-0-
130
874
407
11,267
406
826
-0-
-0-
42
25
1,299
9,968
10,030
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
Balance, end of year
$
33,601
$
33,539
$
32,304
$
25,932
$
25,234
Ratios:
Net charge-offs as a percentage of
average loans outstanding
Allowance for credit losses as
a percentage of average loans
outstanding
0.40%
0.34%
0.36%
0.41%
0.24%
1.34%
1.39%
1.32%
1.11%
1.22%
Net securities gains increased $1.2 million during 2000 from
$565 thousand reported in 1999 and compared to $1.5
million in 1998. The securities gains during 2000 resulted
primarily from the sale of Pennsylvania bank stocks with a
book value of $19.9 million. The securities gains during
1999 resulted in part from the sales of fixed rate U.S.
government agency securities and U.S. treasury securities
classified as securities “available for sale” having book
values of $15.0 million and $21.9 million, respectively,
which resulted in 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 of 1999. 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 sale of U.S. treasury securities 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
and the sale of Pennsylvania bank stocks having a book
value of $5.2 million. 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.
39
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Trust income of $5.6 million for 2000 compared to $5.5
million for 1999 and $5.3 million for 1998. Enhanced
referral programs and integrated growth plans for financial
affiliates have been initiated to help improve sales in various
areas including trust assets managed. Additional noninterest
income analysis is planned for 2001 through the use of
recently implemented customer and product profitability
systems. Conversion of deposit processing systems utilized
by the Corporation’s data processing subsidiary to new
software during 2001 will facilitate the offering of enhanced
deposit products and services which are expected to increase
deposit fees in future periods.
Gains on sale of loans decreased $4.7 million for 2000 from
1999 gains on sale of loans of $5.0 million and compared to
$1.6 million reported in 1998. 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.
Other income for 2000 was $15.6 million representing an
increase of $3.1 million over 1999 income of $12.5 million
and compared to $11.4 for 1998. Other income for the 2000
period reflected a gain on sale of fixed assets of $515
thousand and increases in merchant discount of $401
thousand and MAC interchange fees of $628 thousand
compared to 1999 revenues. Insurance commissions, which
have continued to increases since FCIA’s formation in 1998,
generated increases of $415 thousand during 2000 compared
to 1999. Other income for the 2000 period also included an
increase in income from bank owned life insurance of $1.3
million, resulting from claim income and the impact of an
additional $15 million investment during 2000. 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 that resulted in a
gain of $950 thousand, which is included in other revenue
for 1998.
Total other operating expenses increased $3.9 million to
$99.5 million for 2000 compared to $95.6 million and
$101.9 million in 1999 and 1998, respectively. Total
noninterest expense as a percent of average assets was
2.31% for the 2000 period compared to 2.26% for 1999.
Employee costs were $52.5 million in 2000, representing
1.22% of average assets compared to $49.8 million and
1.17% of average assets for 1999. Employee costs for 1998
were $48.7 million or 1.24% of average assets. Salary and
benefit costs for 2000 were negatively impacted by
40
decreases in deferred loan origination costs as loan volumes
for 2000 decreased over 1999 volumes. Although increases
in employee insurance expenses of $498 thousand
represented an increase of 12.1% for 2000 compared to 1999,
these increases were less than anticipated. The Corporation
continues to address hospitalization and other employee
insurance costs in future periods by utilizing the expertise of
FCIA’s staff to enable dependable and high quality benefits
to be offered in the most cost effective manner. Additional
increases in employee benefit costs during 2000 occurred in
401(k) plan expenses as employees took advantage of
contribution and investment enhancements to the plan
instituted during 1999. The 2000 period included decreases
in employee benefit costs for pension and postretirement
benefits totaling $504 thousand at Southwest as a result of
plan curtailment discussed below.
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.
Furniture and equipment expenses of $8.2 million for 2000
reflected increases of $501 thousand over 1999 levels and
included increases in software depreciation and maintenance
costs totaling $358 thousand as well as increases in furniture
and equipment depreciation and repairs. 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. Computer software depreciation and maintenance
costs are expected to increase in future periods as software
utilized by the Corporation’s data processing subsidiary to
process loan and deposit accounts is replaced and placed in
service during 2001. The new application software will
enable the subsidiary banks to provide customers with
enhanced products and services including internet banking.
Technology continues to have a great impact on financial
services companies and their ability to compete in the
marketplace. The Corporation is committed to providing
banking, trust and insurance services through traditional
branch and telephone channels in the markets we serve, as
well as meeting the changing needs of our customers.
Outside data processing expenses were $3.3 million for 2000
compared to $3.4 million for both 1999 and 1998. 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. This cost would be expected to be reduced
by 2002 as Southwest Bank is converted from an outsourced
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
environment to our internal systems.
Included in the 1998 period were merger and related charges
of $7.9 million. Merger expenses incurred during the
acquisition of Southwest National Corporation for legal,
accounting, printing, filing and other professional services
totaled $1.6 million and were expensed during the fourth
quarter of 1998. As part of the evaluation of appropriate
staffing levels for the Corporation after inclusion of
Southwest, an early retirement plan was offered to
employees during the fourth quarter of 1998. Salary and
benefit costs of the early retirement plan in the amount of
$4.7 million are included in merger and other related charges
for 1998, as approximately 5% of employees took advantage
of this opportunity. In anticipation of the merger of
Southwest benefit plans into those of the Corporation in the
near future, Southwest curtailed their postretirement benefit
plan during the fourth quarter of 1998. An additional accrual
adjustment of $1.1 million related to this curtailment is
included in merger and other related charges for 1998.
Additional merger and other related charges of $462
thousand were incurred during 1998 to standardize
depreciation for Southwest to that of the Corporation and to
write-off signs and supplies that become obsolete as a result
of the merger.
Other operating expenses for 2000 were $25.4 million, an
increase of $749 thousand over the $24.6 million reported
for 1999. Collection and repossession expenses increased
$454 thousand for 2000 compared to 1999 as accelerated
collection efforts attempted to reduce nonperforming loan
levels and minimize risk of loss in future periods. FDIC
expenses increased $180 thousand during 2000, primarily as
a result of rate changes implemented when the FDIC Bank
Insurance Fund and Savings and Loan Insurance Fund rates
were standardized. Express freight charges for 2000
increased $198 thousand compared to 1999 partially because
of the impact of gasoline prices on carrier providers. Other
operating expenses for 2000 also included increases in
advertising and promotions, charge card interchange and
checkbook printing expenses. Increases in other operating
expenses for 2000 were partially offset by decreases in other
professional fees, postage and printing costs of $210
thousand, $171 thousand and $116 thousand, respectively
compared to 1999 costs.
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, charge card
interchange and telephone expense reflected increases for the
1999 period of $265 thousand, $335 thousand, and $265
thousand, respectively compared to the 1998 period. Since
1999, telephone expenses have been analyzed and
successfully reduced during 2000. Other professional fees,
legal fees and audit and accounting fees decreased for 1999
compared to 1998.
Income tax expense was $14.3 million during 2000
representing a decrease of $5.3 million over the 1999 amount
of $19.6 million and compared to $12.2 million in 1998.
The Corporation’s effective tax rate was 23.2% for 2000
compared to 27.0% for 1999 and 26.5% for 1998. The
reduction in the Corporation’s effective tax rate was
primarily the result of increased tax free income from
municipal loans and bank owned life insurance.
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.
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.
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.
41
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Deposits
increased $115.3 million in 2000 and included an increase of
$18.2 million in core deposits. Non-core deposits, which are
time deposits in denominations of $100 thousand or more
represented 14.86% of total deposits at December 31, 2000,
up from 12.15% of total deposits at December 31, 1999.
Non-core deposits increased by $97.1 million in 2000 and
$58.8 million 1999 due in part to an increase in public funds.
The increase in non-core deposits during 2000 also included
the issuance of brokered time deposits in the amount of
$26.1 million. Although the Corporation’s primary source of
funds remains traditional deposits from within the
communities served by its banking subsidiaries, future
sources of deposits utilized could include the use of brokered
time deposits offered outside the Corporation’s traditional
market area. Time deposits of $100 thousand or more at
December 31, 2000, 1999 and 1998 had remaining maturities
as follows:
Maturity Distribution of Large Certificates of Deposit
(Dollar Amounts in Thousands)
1999
2000
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
$ 358,112
36,941
19,241
41,088
$ 455,382
79%
8
4
9
100%
$ 273,376
13,372
14,503
57,010
$ 358,261
76%
4
4
16
100%
1998
Amount
Percent
$ 151,121
40,363
27,546
80,382
$ 299,412
50%
14
9
27
100%
Net loans decreased $9.3 million during 2000 as residential
real estate loans and loans to individuals decreased by $47.6
million and $52.3 million respectively, compared to year-end
1999. Decreases during 2000 for consumer loans were
partially offset by increases in commercial loans secured by
real estate and increases in municipal loans of $64.3 million
and $35.5 million over the same time period.
Below is a schedule of loans by classification for the five
years ended December 31, 2000.
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
2000
Amount Percent
Loans by Classification
(Dollar Amounts in Thousands)
1998
1999
1997
1996
Amount
Percent Amount
Percent Amount
Percent Amount
Percent
$ 443,618
37,146
560,066
932,915
450,154
68,975
2,492,874
(2,047)
2
22
37
18
3
18% $ 417,300
41,734
495,789
980,506
502,465
65,893
100% 2,503,687
(3,628)
2
20
39
20
3
16% $ 377,733
33,097
387,166
1,009,903
517,907
56,423
100% 2,382,229
(7,379)
1
16
42
22
3
16% $ 363,699
35,308
384,794
1,048,405
569,742
51,245
100% 2,453,193
(16,856)
1
16
43
23
2
15% $ 316,550
39,120
356,106
941,147
578,204
36,329
100% 2,267,456
(30,933)
14%
2
16
41
25
2
100%
$ 2,490,827
$2,500,059
$ 2,374,850
$2,436,337
$2,236,523
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, 2000, securities available for
sale had an amortized cost of $1,250 million and an
approximate fair value of $1,238 million. Gross unrealized
gains were $4.6 million and gross unrealized losses were
$16.6 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. The following is a
schedule of the contractual maturity distribution of securities
held to maturity and securities available for sale at December
31, 2000.
42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
U.S. Government Agencies
and Corporations
$
13,341
96,448
29,857
108,720
$ 248,366
Maturity Distribution of Securities Held to Maturity
(Dollar Amounts in Thousands)
States and
Political
Subdivisions
$
3,957
19,636
28,739
74,182
$ 126,514
Other
Securities
$
-0-
22,972
255
-0-
$ 23,227
Total
Amortized
Cost
$ 17,298
139,056
58,851
182,902
$ 398,107
Maturity Distribution of Securities Available for Sale
At Amortized Cost
(Dollar Amounts in Thousands)
U.S. Treasury, and other
U.S. Government Agencies
and Corporations
States and
Political
Subdivisions
$
10,032
117,555
58,385
694,066
$ 880,038
$ 1,945
6,860
11,829
55,432
$ 76,066
Other
Securities
$
250
101,131
6,316
186,407
$ 294,104
Total
Amortized
Cost
$
12,227
225,546
76,530
935,905
$ 1,250,208
Weighted
Average
Yield*
5.90%
6.46
6.96
6.56
6.56%
Weighted
Average
Yield*
6.60%
6.67
6.54
6.77
6.73%
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
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.
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.
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.
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.
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, 2000 and 1999 (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
2000
0-90 Days
91-180 Days
181-365 Days
$
621,536
130,220
11,552
763,308
274,963
1,018,205
274,673
1,567,841
$ (804,533)
$
$
130,374
47,279
-0-
177,653
264,805
-0-
884
265,689
(88,036)
$
244,605
105,423
-0-
350,028
470,828
-0-
457
471,285
$ (121,257)
ISA/ISL
Gap/Total assets
0.49
18.40%
0.67
2.01%
0.74
2.77%
Cumulative
0-365 Days
$
996,515
282,922
11,552
1,290,989
1,010,596
1,018,205
276,014
2,304,815
$(1,013,826)
0.56
23.19%
43
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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)
0.41
25.49%
$ 113,547
39,497
2,759
155,803
231,804
-0-
961
232,765
$ (76,962)
0.67
1.77%
$ 204,090
66,465
4,532
275,087
277,769
-0-
127,108
404,877
$(129,790)
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%
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
twelve 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, 2000, indicated that a
300 basis point (3.00%) movement in interest rates in either
direction over the next twelve months would not have a
significant impact on the Corporation’s anticipated net
interest income over that time 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.
44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Final loan maturities and rate sensitivity of the loan portfolio excluding consumer installment and mortgage loans and before
unearned income at December 31, 2000 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
Credit Review
$
Within One
Year
157,096
160
13,854
84,316
23,985
279,411
$
$
One to
5 Years
80,434
-0-
6,166
92,191
15,934
$ 194,725
144,198
50,527
$ 194,725
After
5 Years
$ 53,898
-0-
17,126
383,559
112,111
$ 566,694
359,826
206,868
$ 566,694
Total
$ 291,428
160
37,146
560,066
152,030
$1,040,830
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. Early in 2000, the Corporation initiated an
additional level of approval for credit relationships between
$500 thousand and $1.0 million. This procedure requires
approval of those credits by a committee consisting of senior
lenders of the Corporation.
Commercial and industrial loans are generally granted to
small and middle market customers for operating, expansion
or asset acquisition purposes. Operating cash flows of the
business enterprise are identified as the principal source of
repayment, with business assets held as collateral. Collateral
margins and loan terms are based upon the purpose and
structure of the transaction as set forth in loan policy.
Commercial real estate loans are granted for the acquisition
or improvement of real property. Generally, commercial real
estate loans do not exceed 75% of the appraised value of
property pledged to secure the transaction. Repayment of
such loans are expected from the operations of the subject
real estate and are carefully analyzed prior to approval.
Real estate construction loans are granted for the purposes of
constructing improvements to real property, both commercial
and residential. On-site inspections are conducted by
qualified individuals prior to periodic permanent project
financing, which is generally committed prior to the
commencement of construction financing.
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.
45
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Corporation maintains an allowance for credit losses at a
level deemed sufficient to absorb losses which are inherent
in the loan and lease portfolios at each balance sheet date.
Management reviews the adequacy of the allowance on at
least a quarterly basis to ensure that the provision for credit
losses has been charged against earnings in an amount
necessary to maintain the allowance at a level that is
appropriate based on management’s assessment of probable
estimated losses. The Corporation’s methodology for
assessing the appropriateness of the allowance for credit
losses consists of several key elements. These elements
include a specific allowance for primary watch list classified
loans, an allowance based on historical trends, an additional
allowance for special circumstances, and an unallocated
portion. The Corporation consistently applies the following
comprehensive methodology and procedure at the subsidiary
bank level.
The allowance for primary watch list classified loans
addresses those loans maintained on the Corporation’s
primary watch list which are assigned a rating of
substandard, doubtful, or loss. Substandard loans are those
with a well-defined weakness or a weakness which
jeopardizes the repayment of the debt. A loan may be
classified as substandard as a result of impairment of the
borrower’s financial condition and repayment capacity.
Loans for which repayment plans have not been met or
collateral equity margins do not protect the Corporation may
also be classified as substandard. Doubtful loans have the
characteristics of substandard loans with the added
characteristic that collection or liquidation in full, on the
basis of presently existing facts and conditions, is highly
improbable. Although the possibility of loss is extremely
high for doubtful loans, the classification of loss is deferred
until pending factors, which might improve the loan, have
been determined. Loans rated as doubtful in whole or in part
are placed in nonaccrual status. Loans which are classified
as loss are considered uncollectible and are charged to the
allowance for credit losses at the next meeting of the
Corporation’s credit committee after placement in this
category. There were no loans classified as loss on the
primary watch list as of December 31, 2000.
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 allowance for
credit losses which is based on historical trends. Before
applying the historical loss experience percentages, loan
balances are reduced by the portion of the loan balances
which are subject to guarantee by a government agency.
Loan balances are also adjusted for unearned discount on
installment loans.
The additional allowance for special circumstances provides
management with the opportunity to estimate additional
potential allowance amounts which may be needed to cover
specific factors. The specific factors that management
currently evaluates consist of portfolio risk or concentrations
of credit, off balance sheet risk, economic conditions,
management or staff considerations, and comparative peer
analysis variances. Portfolio risks include unusual changes
or recent trends in specific portfolios such as unexpected
changes in the trends or levels of delinquency or charge-offs,
unusual repossession activities or large levels of unsecured
loans in a portfolio.
The Corporation also maintains an unallocated allowance.
The unallocated allowance is used to cover any factors or
conditions which may cause a potential credit loss but are
not specifically identifiable. It is prudent to maintain an
unallocated portion of the allowance because no matter how
detailed an analysis of potential credit losses is performed
these estimates by definition lack precision. Management
must make estimates using assumptions and information
which is often subjective and changing rapidly.
46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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
2000
$ 6,263
643
9,064
10,211
4,938
638
1,844
$33,601
1.34%
Allocation of the Allowance for Credit Losses
(Dollar Amounts in Thousands)
1998
1997
1999
$ 6,321
831
7,675
9,928
5,131
586
3,067
$33,539
1.39%
$ 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%
1996
$ 3,628
461
4,731
8,145
4,933
285
3,051
$ 25,234
1.22%
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.
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
2000
$10,698
22,086
2,263
$35,047
1.41%
95.87%
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%
Other real estate owned
$ 1,661
$ 1,707
$ 2,370
$ 1,950
$ 1,732
Gross income that would have been
recorded at original rates
Interest that was reflected in income
$
750
333
Net reduction to interest income due to nonaccrual
$
417
The reduction of income due to renegotiated loans was less
than $50 thousand in any year presented.
The level of nonperforming loans at year-end 2000
increased by $6.4 million over 1999 levels as increases in
past due and renegotiated loans were only partially offset by
decreases in nonaccrual loans. Increases for past due loans
primarily resulted from increases for commercial loans
secured by real estate and commercial and industrial loans
of $5.1 million and $2.1 million, respectively. The major
portion of these increases relate to small business loans, of
which $1.6 million were guaranteed by the SBA. The
Corporation continues to aggressively collect these loans.
$
$
724
458
266
$
$
961
286
675
$ 1,017
146
871
$
$
$
799
223
576
Also, early in 2000 the Corporation initiated an additional
level of approval for credit relationships between $500
thousand and $1.0 million. This procedure requires approval
of those credits by a committee consisting of senior lenders
of the Corporation. The increase in renegotiated loans for
2000 compared to 1999 was the result of the modification of
loan terms for one commercial borrower. Decreases for
nonaccrual loans for 2000 occurred primarily in commercial
loans which reflected decreases of $658 thousand for
commercial loans secured by real estate and decreases for
commercial and industrial loans of $1.5 million compared to
1999. Nonperforming loans as a percentage of total loans
47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
was 1.41% at December 31, 2000 compared to 1.15% at
December 31, 1999.
The Corporation’s loan portfolio continues to be monitored by
senior management to identify potential portfolio risks and
detect potential credit deterioration in the early stages. Credit
risk is mitigated through the use of sound underwriting
policies and collateral requirements. Management attempts to
minimize loan losses by analyzing and modifying collection
techniques on a periodic basis. Management believes that the
allowance for credit losses and nonperforming loans remained
safely within acceptable levels.
Capital Resources
Equity capital increased $47.5 million in 2000 to $334.2
million. Dividends declared decreased equity by $32.9
million during 2000, an increase over dividends for the 1999
period as the dividend rate was increased. The retained net
income of $14.4 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 $793 thousand. The
market value adjustment to securities available for sale
increased equity by $32.5 million. Amounts paid to fund the
discount on reinvested dividends reduced equity by $593
thousand. The cost of purchasing treasury shares decreased
equity by $873 thousand while proceeds from the reissuance
of treasury shares to provide for stock options exercised
increased equity by $327 thousand during 2000. Equity
capital during 2000 also reflected an increase of $852
thousand from the reissuance of treasury shares to fund the
buy-out of the insurance agency’s joint venture partner (See
NOTE 4 to the Consolidated Financial Statements).
A capital base can be considered adequate when it enables
the Corporation to intermediate funds responsibly and
provide related services while protecting against future
uncertainties. The evaluation of capital adequacy depends on
a variety of factors, including asset quality, liquidity,
earnings history and prospects, internal controls and
management caliber. In consideration of these factors,
management’s primary emphasis with respect to the
Corporation’s capital position is to maintain an adequate and
stable ratio of equity to assets. See NOTE 25 for an analysis
of regulatory capital guidelines and the Corporation’s capital
ratios relative to these measurement standards.
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.
48
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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 12,800. 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
2000
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Period
1999
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Sale
Low Sale
$ 12.000
$ 11.625
$ 10.188
$ 10.875
$ 8.625
$ 9.063
$ 8.750
$ 8.875
High Sale
Low Sale
$ 12.406
$ 12.188
$ 12.750
$ 14.313
$ 10.156
$ 10.375
$ 11.031
$ 11.625
Cash
Dividends
Per Share
$ 0.140
$ 0.140
$ 0.140
$ 0.145
Cash
Dividends
Per Share
$ 0.115
$ 0.130
$ 0.130
$ 0.140
49
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 23, 2001 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://www.stockbny.com
50
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
www.swbank.com