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First Commonwealth
Financial Corporation
Annual Report
Two Thousand One
Our employeesareourvitallink
2 ............................................................................... Message to the Shareholders
11 ........................................................................................ Affiliate Management
12 ............................................................................................. Board of Directors
14 ............................................................ Corporate Information/Market Area
15 ................................................................... Independent Auditor’s Report
16 ...................................................... Consolidated Financial Statements
20 .................................. Notes to Consolidated Financial Statements
38 ....................................... Quarterly Summary of Financial Data
39 ...................................................... Selected Financial Data
40 .............. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
54 ...................... Common Stock Information
Inside Back Cover ......... Shareholder
Information
tothecommunities that we ser v e .
checking packages running the gamut from a high
Rick may be familiar to many of our shareholders
yielding money market account to a totally free
due to his frequent appearances as a commentator
checking product. This product is being launched with
and reporter on a variety of national financial
a massive direct mail campaign and a selection of
programs such as CNBC’s “The Money Club” and
exciting gifts for clients opening a new account.
“PowerLunch.” He is also a frequent guest on CNN
The new “Step-Up” certificate of deposit
and Bloomberg TV and has appeared as a market
guarantees an increasing interest rate each year over
commentator locally for WTAE and WPXI.
the four-year term of the instrument. This product has
First Commonwealth employees have recommitted
been very popular as many clients want to maximize
themselves to serving their communities since the
their current yield while protecting their return should
events of September 11. The role of our people in a
interest rates rise.
wide range of community and charitable organizations
Details about these and other new products can be
is indeed dramatic. In most cases, our employees are
obtained by calling our Convenience Banking Center
providing the critical leadership functions that truly
(800-711-BANK) or visiting our web site (fcfbank.com
make our communities great. I am exceptionally
or swbank.com). You will also want to check out the
proud of the individual contributions of our people in
new on-line banking services that have just been
making the places where we live, work, and do
introduced. These new features combine with
business even better.
“WebPay” to provide a complete on-line delivery
Another major initiative has been launched to
channel providing the convenience of banking from
bring all our partner organizations together under a
home twenty-four hours a day, seven days a week.
common brand. This move will enhance our name
The ability of our Growth Units to provide “Total
recognition and our ability to cost effectively market
Solutions” to their clients was greatly enhanced on
our products and services. This project is to be
March 1 when a partnership with Richard Applegate
completed before year-end 2002.
was announced. Rick brings his two well respected
The year 2001 was certainly eventful and one that
companies to the First Commonwealth family.
saw substantial progress at First Commonwealth. So
Strategic Capital Concepts, Inc. is a financial planning
far 2002 is off to an even faster start with the promise
and consulting firm and Strategic Financial Advisors,
of continued progress and success. As always I thank
Inc. is an asset management firm. Both firms are
our employees for their hard work and dedication, and
headquartered in the Pittsburgh suburb of Allison Park.
our shareholders for their continued confidence.
A n n u a l R e p o r t T w o T h o u s a n d O n e
3
We will trainandinvestresources
i s o u r commitment tosuccessful
tr a i n i n
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Careful planning, examination of industry trends, and, most of
all, vision, determine the successful evolution of a
corporation. At First Commonwealth Financial
Corporation, our vision for successful change and
growth begins and ends with our community. Because
of our communities’ needs, we develop effective
comprehensive services. For our communities’ well
being, we give our time, our philanthropy, our
commitment. Employees, shareholders, and directors
alike live, work, and interact in the very neighbor-
hoods where our clients are, where First Common-
wealth has a presence. We draw our strength, our
resources, and our business, from these communities.
One way to achieve successful growth is to give employees, our
number one resource, tools to be the best they can
be. Training is essential. Employees in our growth
units—First Commonwealth Bank, Southwest Bank,
First Commonwealth Trust Company, and First
Commonwealth Insurance Agency—are trained in the
inouremployees,our #1 resourc e ,
helping clients understand their needs in order to find
Preferred Way of the Selling®, a process that involves
Corporation and First Commonwealth Professional
solutions. Employees in Commonwealth Systems
Resources Incorporated are trained to support our
growth units, giving them tools to effectively serve
and attract clients. Giving these entities a unified
name and identity will also be important as we work
toward becoming a world class organization.
F i r s t C o m m o n w e a l t h F i n a n c i a l C o r p o r a t i o n
A n n u a l R e p o r t T w o T h o u s a n d O n e
5
There was a time when coming to the bank was the only way to
do business with a bank. At First Commonwealth
Financial Corporation, we recognize the need to deliver
our services in a variety of ways. Being responsive to
what works best for each of our clients has built
confidence in our organization; it has helped us to be
reliable community partners and to help our clients be
successful. People can still come to the bank, but they
also can do business over the phone, use a computer,
or have one of our employees come to them. The good
news for First Commonwealth clients is that we provide
complete integrated financial solutions from insurance
to financial planning—they need not go elsewhere to
get what they need, the way they need it. These
strategies serve to optimize long-term economic returns
and strengthen our communities.
Kuchera Defense Systems, Inc., in Windber, Pennsylvania, is a
perfect example of the way First Commonwealth
and we will delive r c o m p r e h e n s i v
delivers service to help a client meet with success.
their business, but also in building the
When William and Ronald Kuchera
asked for our help to “get
interested in building
started,” they were
community by providing jobs and giving opportunities
to people with special needs. We developed a working
relationship with Kuchera and helped them in their
development. Today, Kuchera employs over 200 people
and serves customers throughout the United States.
6
F i r s t C o m m o n w e a l t h F i n a n c i a l C o r p o r a t i o n
A n n u a l R e p o r t T w o T h o u s a n d O n e
e
i e n t s , b ecause
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Creating an environment where our success depends upon our
commitment to the community is important. We
encourage employees to give back to their communities
by giving their time to making their communities better.
Volunteering for local human service agencies, offering
talents or expertise to help local organizations make
decisions, even making financial contributions to
charitable groups builds communities and community
confidence in First Commonwealth. We donate to
charities each year and encourage the same of our
employees. Being the financial partners of our
communities is as important as attending community
events. First Commonwealth employees are community
members as well as financial service providers.
At the end of the day, many of our employees head off to coach
soccer games, participate in scouting events, help at a
local food pantry, attend charitable organization
meetings, or roll up their sleeves to clean up or build
or fix. For example, one employee volunteers for the
meansourcommunities are strong
out-of-home placement of youth and adolescents and
community based organization established to prevent
to enable family units to remain intact. ACRP has five
Alternative Community Resource Program (ACRP), a
programs to help at-risk youth develop self-esteem
and learn to be productive citizens. Actively encouraging
our employees to participate in these types of
programs builds the communities where our employees,
shareholders, directors, and clients live. Being good
neighbors is good business.
F i r s t C o m m o n w e a l t h F i n a n c i a l C o r p o r a t i o n
A n n u a l R e p o r t T w o T h o u s a n d O n e
9
It all comes back full circle. We are ever aware as well as
proud of the fact that First Commonwealth
Financial Corporation begins and ends with
the communities where a First Commonwealth
partner exists. Our goal is to improve our
services, the way we deliver those services, and
ourselves, so we can continue to improve our
communities. We are all shareholders in the
First Commonwealth Financial Corporation
circle of services and are collectively investing
in the strength of the organization and of the
communities where we live, we work, we
worship, we participate, we play, and we bank.
Our future will see us unify our corporate
image, perfect our skills as sales people and
service providers, and hone our now complete
line of client financial services. Employees are
e d .
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c
the people who link us to
those communities.
u
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Richard R. Applegate
Nationally recognized financial advisor
Rick Applegate, and his financial
planning companies, Strategic Capital
Concepts, Inc. and Strategic Financial
Advisors, Inc, have become partners of
First Commonwealth Financial
Corporation, capping our ability to offer
a comprehensive line of financial
services to clients. A Pennsylvania
native, Rick Applegate has filed many
reports for CNBC’s “The Money Club”
and comments regularly on CNBC’s
“PowerLunch.” A well-known speaker,
educator, commentator, and reporter,
Rick has been providing financial
planning, investment, insurance,
retirement plan, and employee benefit
advice and service since 1975. His
clients include non-profit organizations,
hospitals, Fortune 500 companies, and
many affluent individuals. Our new
partnership with Rick Applegate means
that First Commonwealth clients now
have access to superior financial
planning services.
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F i r
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First Commonwealth Affiliate Presidents
Richard R. Applegate
John O. Campbell
David S. Dahlmann
Johnston A. Glass
Sue McMurdy
William A. Mrozowski
Gerard M. Thomchick
Richard R. Applegate
Sue McMurdy
President, Strategic Capital Concepts, Inc., and
Strategic Financial Advisors, Inc., 4035 William Flynn
Highway, Allison Park, PA 15101 • (412) 492-8787
President & Chief Executive Officer, Commonwealth
Systems Corporation, 22 North Sixth Street, Indiana,
PA 15701 • (724) 349-4310
John O. Campbell
William A. Mrozowski
President, First Commonwealth Insurance Agency,
First Commonwealth Place, 654 Philadelphia Street,
Indiana, PA 15701 • (724) 349-6056
President & Chief Executive Officer, First
Commonwealth Trust Company, 614 Philadelphia
Street, Indiana, PA 15701 • (724) 465-3282
David S. Dahlmann
Gerard M. Thomchick
President & Chief Executive Officer, Southwest
Bank, 111 Main Street, Greensburg, PA 15601 •
(724) 834-2310
Johnston A. Glass
President & Chief Executive Officer, First Common-
wealth Bank, Central Offices, Philadelphia and Sixth
Streets, Indiana, PA 15701 • (724) 349-3400
President, First Commonwealth Professional
Resources Incorporated, 22 North Sixth Street,
Indiana, PA 15701 • (724) 349-7220. President,
Commonwealth Trust Credit Life Insurance
Company, 2700 North Third Street, Suite 2000,
Phoenix, AZ 85004
F i r s t C o m m o n w e a l t h F i n a n c i a l C o r p o r a t i o n
A n n u a l R e p o r t T w o T h o u s a n d O n e
11
Board of Directors
E. H. Brubaker
Sumner E. Brumbaugh
Ray T. Charley
Edward T. Côté
Ronald C. Geiser
Johnston A. Glass
Thomas J. Hanford
H. H. Heilman, Jr., Esq.
Dale P. Latimer
James W. Newill
Joseph E. O'Dell
Joseph W. Proske
David R. Tomb, Jr., Esq.
E. James Trimarchi
Robert C. Williams
12
F i r s t C o m m o n w e a l t h F i n a n c i a l C o r p o r a t i o n
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
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
President, Thomi Co.
Dale P. Latimer New Alexandria
David S. Dahlmann
Clayton C. Dovey, Jr.
Edward T. Côté Rector
David L. Johnson
Robert F. Koslow
John A. Robertshaw, Jr.
Laurie Stern Singer
Associate, The Wakefield
Group, Murrysville
David S. Dahlmann
Greensburg
Vice Chairman, First
Commonwealth Financial
Corporation and President
and Chief Executive Officer,
Southwest Bank, Greensburg
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
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
A n n u a l R e p o r t T w o T h o u s a n d O n e
13
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
ARMSTRONG
CLEARFIELD
INDIANA
LAWRENCE
Reliable Bank
Bridgeville, PA
Strategic Capital
Concepts, Inc.
Allison Park, PA
Strategic
Financial
Advisors, Inc.
Allison Park, PA
First Bank of
Leechburg
Leechburg, PA
BLAIR
Central Bank
Hollidaysburg, PA
CAMBRIA
Cenwest Bank
Johnstown, PA
Deposit Bank
DuBois, PA
FRANKLIN
Unitas Bank
Chambersburg, PA
Peoples Bank of
Western Pennsylvania
New Castle, PA
SOMERSET
Peoples Bank
Jennerstown, PA
WESTMORELAND
Southwest Bank
Greensburg, PA
First Commonwealth
Financial Corporation
First Commonwealth
Bank
NBOC Bank
Commonwealth
Systems Corporation
First Commonwealth
Insurance Agency
First Commonwealth
Professional
Resources Inc.
First Commonwealth
Trust Company
Indiana, PA
14
F i r s t C o m m o n w e a l t h F i n a n c i a l C o r p o r a t i o n
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
inside back cover 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
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 (the “Corporation”) as of December 31, 2001 and 2000, and the related
consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2001. 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.
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 provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of First Commonwealth Financial Corporation and subsidiaries at December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE, LLP
Pittsburgh, Pennsylvania
January 25, 2002
15
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
ASSETS
Cash and due from banks
Interest-bearing bank deposits
Federal funds sold
Securities available for sale, at market
Securities held to maturity, at amortized cost, (Market value
$298,643 in 2001 and $398,661 in 2000)
Loans
Unearned income
Allowance for credit losses
Net loans
Premises 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
December 31,
2001
2000
$
$
$
98,130
4,250
-0-
1,469,118
293,290
2,569,231
(1,297)
(34,157)
2,533,777
46,366
1,619
136,980
4,583,530
412,695
2,680,455
3,093,150
427,736
28,358
35,000
629,220
664,220
4,213,464
$
$
$
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
349,804
2,714,342
3,064,146
272,171
44,984
35,000
621,855
656,855
4,038,156
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 58,451,624 shares outstanding in 2001;
62,525,412 shares issued and 58,195,450 shares outstanding in 2000
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock (4,073,788 and 4,329,962 shares at
December 31, 2001 and 2000, respectively at cost)
Unearned ESOP shares
Total shareholders’ equity
Total liabilities and shareholders’ equity
-0-
-0-
62,525
66,176
288,219
8,703
(51,431)
(4,126)
370,066
4,583,530
$
62,525
67,223
272,169
(7,808)
(54,666)
(5,287)
334,156
4,372,312
$
The accompanying notes are an integral part of these consolidated financial statements.
16
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, except per share data)
Years Ended December 31,
2001
2000
1999
$
202,173
$
208,548
$
195,010
93,961
9,534
2,661
492
70
308,891
118,165
11,227
3,325
34,453
37,778
167,170
141,721
11,495
130,226
3,329
4,995
11,160
3,192
4,618
12,930
40,224
54,521
6,520
9,050
3,296
3,825
27,795
105,007
65,443
15,254
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
1,951
3,419
10,451
33,683
52,529
6,577
8,154
3,310
3,495
25,396
99,461
61,535
14,289
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
1,537
2,126
13,827
34,225
49,806
6,537
7,653
3,449
3,477
24,647
95,569
72,642
19,612
$
$
$
50,189
$
47,246
$
53,030
57,885,478
58,118,057
57,558,929
57,618,671
60,333,092
60,569,322
0.87
0.86
$
$
0.82
0.82
$
$
0.88
0.88
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
Insurance commissions
Income from bank owned life insurance
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
Other operating expenses
Total other expenses
Income before income taxes
Applicable income taxes
Net Income
Average Shares Outstanding
Average Shares Outstanding Assuming Dilution
Per Share Data:
Basic Earnings Per Share
Diluted Earnings Per Share
The accompanying notes are an integral part of these consolidated financial statements.
17
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollar Amounts in Thousands)
Balance at December 31, 1998
Comprehensive income
Net income
Other comprehensive income, net of tax:
Unrealized holding gains (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
Net increase 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 (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
Tax benefit of stock options
Balance at December 31, 2000
Comprehensive income
Net income
Other comprehensive income, net of tax:
Unrealized holding gains (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 reissued
Tax benefit of stock options
Balance at December 31, 2001
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Unearned
ESOP
Shares
Total
Shareholders’
Equity
$
62,525
$
68,978
$ 235,623
$
2,199
$
(5,913)
$
(8,007)
$ 355,405
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
53
-0-
-0-
-0-
62,525
(358)
-0-
(343)
68,330
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
62,525
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(113)
(593)
-0-
(476)
75
67,223
-0-
-0-
-0-
-0-
-0-
-0-
31
53,030
-0-
-0-
(42,137)
-0-
-0-
53,030
(30,880)
-0-
-0-
-0-
-0-
257,773
(366)
(42,503)
(42,503)
-0-
-0-
-0-
-0-
-0-
(40,304)
47,246
-0-
-0-
33,630
-0-
-0-
47,246
(32,850)
-0-
-0-
-0-
-0-
-0-
272,169
(1,134)
32,496
32,496
-0-
-0-
-0-
-0-
-0-
-0-
(7,808)
50,189
-0-
-0-
18,639
-0-
-0-
50,189
(34,139)
-0-
(2,128)
16,511
16,511
-0-
-0-
-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-
-0-
-0-
-0-
-0-
62,525
$
(612)
(735)
269
66,176
$
-0-
-0-
-0-
$ 288,219
-0-
-0-
-0-
8,703
-0-
3,235
-0-
$ (51,431)
$
$
-0-
53,030
-0-
(42,137)
-0-
-0-
-0-
-0-
1,814
-0-
-0-
-0-
(6,193)
-0-
-0-
-0-
-0-
-0-
-0-
906
-0-
-0-
-0-
-0-
(5,287)
-0-
-0-
-0-
-0-
-0-
-0-
1,161
-0-
-0-
-0-
(4,126)
(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
50,189
18,639
(2,128)
16,511
66,700
(34,139)
1,192
(612)
2,500
269
$ 370,066
The accompanying notes are an integral part of these consolidated financial statements.
18
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
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
Decrease (increase) in interest receivable
Increase (decrease) in interest payable
Increase in income taxes payable
Change in deferred taxes
Other–net
Net cash provided by operating activities
Investing Activities
Transactions with securities held to maturity:
Sales
Maturities and redemptions
Purchases of investment securities
Transactions with securities available for sale:
Sales
Maturities and redemptions
Purchases of investment securities
Proceeds from sales of loans and other assets
Sale of subsidiary
Investment in bank owned life insurance
Net decrease (increase) in interest-bearing bank deposits
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
Years Ended December 31,
2000
1999
2001
$
50,189
$
47,246
$
53,030
11,495
7,760
(4,169)
(4,618)
3,559
(19,387)
3,491
(831)
(1,165)
46,324
-0-
133,666
(28,772)
85,737
497,640
(785,610)
90,241
-0-
(15,000)
(3,823)
(178,465)
(7,886)
(212,272)
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)
9,500
(974)
89,900
(70,493)
25,000
(50,319)
-0-
(612)
(33,809)
91,425
64,138
(9,591)
269
-0-
2,500
39,384
162,230
(3,718)
-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
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
101,848
98,130
$
$
101,373
101,848
$
97,615
101,373
The accompanying notes are an integral part of these consolidated financial statements.
19
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000 and 1999
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 the United States of America. 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 is subject to regulations of certain state and
federal agencies. These regulatory agencies periodically
examine the Corporation 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
2001. 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
20
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.
Loans
Loans are carried at the principal amount outstanding.
Unearned income on installment loans and leases is taken
into income on a declining basis which results in an
approximately level rate of return over the life of the loan or
lease. Interest is accrued as earned on nondiscounted loans.
The Corporation considers a loan to be impaired when, based
on current information and events, it is probable that a
creditor will be unable to collect principal or interest due
according to the contractual terms of the loan. Loan
impairment is measured based on the present value of
expected cash flows discounted at the loan’s effective
interest rate or, as a practical expedient, at the loan’s
observable market price or the fair value of the collateral if
the loan is collateral dependent.
Payments received on impaired loans are applied against the
recorded investment in the loan. For loans other than those
that the Corporation expects repayment through liquidation
of the collateral, when the remaining recorded investment in
the impaired loan is less than or equal to the present value of
the expected cash flows, income is recorded on a cash basis.
Mortgage Servicing Rights
When the Corporation purchases or originates mortgage
loans with a definitive plan to sell or securitize those loans
and retain the mortgage servicing rights, the Corporation
measures the mortgage servicing rights at cost by allocating
the cost of the mortgage loans between the mortgage
servicing rights and the mortgage loans (without the
mortgage servicing rights) based on their relative fair values
at the date of purchase or origination. When the Corporation
does not have a definitive plan at the purchase or origination
date and later sells or securitizes the mortgage loans and
retains the mortgage servicing rights, the Corporation
allocates the amortized cost of the mortgage loans between
the mortgage servicing rights and the mortgage loans
(without mortgage servicing rights) based on their relative
fair values at the date of sale. The amount capitalized as the
right to service mortgage loans is recognized as a separate
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
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.
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.
Other Real Estate Owned
Accounting for the Impairment of Long-Lived Assets
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 $84,788 and
$65,961 at December 31, 2001 and 2000, 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 Corporation records computer software in accordance
with the American Institute of Certified Public Accountants’
Statement of Position 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 Corporation reviews long-lived assets, such as premises
and equipment and intangibles for impairment whenever
events or changes in circumstances, such as a significant
decrease in the market value of an asset or the extent or
manner in which an asset is used indicate that the carrying
amount of an asset may not be recoverable. If there is an
indication that the carrying amount of an asset may not be
recoverable, future discounted cash flows expected to result
from the use of the asset are estimated. If the sum of the
expected cash flows is less than the carrying value of the
asset a loss is recognized for the difference between the
carrying value and fair market value of the asset.
Income Taxes
The Corporation records taxes in accordance with the asset
and liability method utilized by 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%
21
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 1—Statement of Accounting Policies (continued)
Stock Split (continued)
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.
Employee Stock Ownership Plan
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 or paid
to the plan participants. 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
22
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).
Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Corporation adopted the
Financial Accounting Standards Board (“FASB”) Statement
No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“FAS No. 133”) as amended. 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 on
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 a 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 (“FAS No. 137”)
which delayed 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 by FASB Statement No. 138 (“FAS
No. 138”) which 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
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 C13, management 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 did not have a material impact on the Corporation’s
financial condition or results of operations.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
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” (“FAS No. 140”) which
replaces FASB Statement No. 125 (“FAS 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 did not have a material impact on the Corporation’s
financial condition or results of operations.
In July 2001, the FASB issued statement No. 141, “Business
Combinations” (“FAS No. 141”) which supersedes APB
Opinion No. 16 “Business Combinations” (“Opinion No.
16”) but carries forward the guidance in Opinion No. 16
related to the application of the purchase method of
accounting. FAS No. 141 requires the purchase method of
accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of interest method. FAS
No. 141 also specifies the types of acquired intangible assets
that are required to be recognized and reported separately
from goodwill. Intangible assets are recognized as assets
apart from goodwill if the asset arises from contractual or
other legal rights or the asset is capable of being separated
from the acquired entity and sold or exchanged. In addition
to the disclosure requirements in Opinion No. 16, FAS No.
141 requires disclosure of the primary reasons for the
business combination and the allocation of the purchase price
paid to the assets acquired and liabilities assumed by major
balance sheet caption. After initial recognition, goodwill and
other intangible assets acquired in a business combination
are accounted for following the provisions of FASB
statement No. 142 “Goodwill and Other Intangible Assets.”
Implementation of FAS No. 141 is not expected to have
material impact on the Corporation’s financial condition or
results of operations.
In July 2001, the FASB issued statement No. 142, “Goodwill
and Other Intangible Assets” (“FAS No. 142”), which
supersedes APB Opinion No. 17, “Intangible Assets” and is
effective for fiscal years beginning after December 15, 2001.
FAS No. 142 addresses how intangible assets acquired other
than by business combination should be accounted for in
financial statements upon their acquisition. This statement
also addresses financial accounting and reporting for
goodwill and other intangible assets subsequent to their
acquisition. Additional provisions of FAS No. 142 include
the reclassification of certain existing recognized intangibles
to goodwill and reclassification of certain intangibles out of
previously reported goodwill upon adoption. FAS No. 142
requires that goodwill and other intangible assets with
indefinite useful lives, including goodwill recorded in past
business combinations, no longer be amortized, but instead
be tested for impairment at least annually and written down
and charged to results of operations only in the periods in
which the recorded value is more than the estimated fair
value. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. This
statement also requires the Corporation to complete a
transitional goodwill impairment test including the
identification of reporting units for the purpose of assessing
potential future impairments of goodwill. After identifying
its reporting units, the Corporation must determine the
carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible
assets to those reporting units and then determine the fair
value of each reporting unit. If the carrying value of any
reporting unit exceeds its fair value, then detailed fair values
for each of the assigned assets (excluding goodwill) and
liabilities will be determined to calculate the amount of
goodwill impairment, if any. Any transitional impairment
loss resulting from the adoption of FAS No. 142 will be
recognized as the effect of a change in accounting principle
in the Corporation’s income statement.
FAS No. 142 requires disclosure of information about
goodwill and other intangible assets in years subsequent to
their acquisition which was not previously required,
including changes in the carrying amount of goodwill from
period to period, the carrying amount of intangible assets and
for assets subject to amortization, the estimated amortization
expense for the next five years.
As of December 31, 2001, the Corporation had goodwill, net
of accumulated amortization, of approximately $5,800,
which would be subject to the transitional assessment
provisions of FAS No. 142. Goodwill amortization expense
was $837 during fiscal 2001, or $0.014 per share. The
elimination of goodwill amortization is expected to reduce
other operating expenses in periods beginning after
23
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)
New Accounting Pronouncements (continued)
December 31, 2001, by $837 annually. Management is
currently assessing, but has not yet determined, the full
impact of FAS No. 142 on the Corporation’s financial
condition or results of operations.
In June 2001, the FASB issued statement No. 143,
“Accounting for Asset Retirement Obligations” (“FAS
No. 143”) which is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The statement
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets
and associated asset retirement costs. FAS No. 143 requires
that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently
allocated to expense over the asset’s useful life.
Implementation of FAS No. 143 is not expected to have a
material impact on the Corporation’s financial condition or
results of operations.
In August 2001, the FASB issued statement No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets” (“FAS No. 144”) which is effective for financial
NOTE 2—Supplemental Comprehensive Income Disclosures
statements issued for fiscal years beginning after December
15, 2001, including interim periods. This statement
supersedes FASB Statement No. 121 “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of”, and the accounting and reporting
provisions of APB Opinion No. 30, “Reporting the Results
of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions”. FAS
No. 144 requires that long-lived assets be reviewed 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 undiscounted cash flows
expected to result from the use and disposition 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 the market
value of the asset. This statement also requires measurement
of long-lived assets classified as held for sale at the lower of
their carrying amount or fair value less cost to sell and to
cease depreciation or amortization on these assets.
Implementation of FAS No. 144 is not expected to have a
material impact on the Corporation’s financial condition or
results of operations.
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, 2001
Tax
Pre-tax (Expense)
Amount Benefit
Net of
Tax
Amount
December 31, 2000
Tax Net of
Pre-tax (Expense) Tax
Amount
Benefit Amount
December 31, 1999
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
$ 28,676
$(10,037) $ 18,639
$ 51,739 $(18,109) $ 33,630
$ (64,826) $ 22,689
$(42,137)
(3,274)
25,402
$ 25,402
1,146
(8,891)
(2,128)
16,511
$ (8,891) $ 16,511
(1,745)
49,994
(1,134)
611
32,496
(17,498)
$ 49,994 $(17,498) $ 32,496
(563)
(65,389)
197
22,886
$ (65,389) $ 22,886
(366)
(42,503)
$(42,503)
24
NOTE 3—Supplemental Cash Flow Disclosures
NOTE 6—Subsequent Event
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
Cash paid during the year for:
Interest
Income taxes
2001
2000
1999
$ 186,558
$ 11,890
$ 166,919
$ 12,842
$ 150,839
$ 18,832
Noncash investing and financing activities:
ESOP loan reductions
$
1,161
$
906
$
1,814
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
$
5,246
$
6,405
$
4,936
$ 25,402
$ 49,994
$ (65,389)
$
-0-
$
852
$
-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.
NOTE 5—Sale of Subsidiary
Effective April 1, 1999, the Corporation sold all of the
outstanding common stock of BSI Financial Services, Inc.
(“BSI”), a wholly-owned subsidiary of the Corporation, to a
bank headquartered in Richmond, Indiana. Cash proceeds in
the amount of $1,709 were received, resulting in a loss on sale
of $202 which has been reflected in the financial statements.
BSI provided mortgage banking, loan servicing and collection
services to the Corporation’s subsidiary banks and unaffiliated
organizations. Services performed by BSI for the subsidiary
banks have been transferred to the subsidiary banks or other
nonbank subsidiaries of the Corporation.
Effective March 1, 2002, the Corporation acquired all of the
outstanding shares of Strategic Capital Concepts, Inc.
(“SCC”) and Strategic Financial Advisors, Inc. (“SFA”),
each a Pennsylvania corporation headquarted in Allison
Park, Pennsylvania. As a registered investment adviser,
Strategic Capital Concepts provides financial planning, asset
management and consulting services to individuals,
businesses, retirement plans, trusts and estates. Strategic
Financial Advisors offers investment and insurance products
as well as employee benefit services. Each of the
outstanding shares of Strategic Capital Concepts, Inc. and
Strategic Financial Advisors, Inc. were exchanged for shares
of the Corporation’s common stock. In addition, the
shareholders of SCC and SFA are entitled to receive
additional shares of the Corporation’s common stock for
each of the years 2002 through 2005 based on a formula
defined in the merger agreement which takes into
consideration the financial performance of SCC and SFA
after the merger date. The merger was accounted for as a
purchase transaction whereby the identifiable tangible and
intangible assets and liabilities of SCC and SFA have been
recorded at their fair values at the acquisition date. As
prescribed under the purchase method of accounting, the
results of operations of SCC and SFA from the date of
acquisition will be included in the Corporation’s financial
statements for the first quarter of 2002.
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 $4,269 during 2001 and $3,075 during 2000.
25
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, 2001
and 2000:
2001
2000
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
$
13,084
$
137
$
-0-
$
13,221
$
9,972
$
77
$
-0- $
10,049
Obligations of U.S.
Government Corporation
and Agencies:
Mortgage Backed Securities
Other
Obligations of States and
Political Subdivisions
Debt Securities Issued
by Foreign Governments
840,639
113,464
8,140
2,181
(954)
847,825
752,481
1,636
(7,126)
746,991
(5)
115,640
117,585
125
(370)
117,340
103,492
749
(1,599)
102,642
76,066
606
(1,376)
75,296
175
-0-
-0-
175
425
-0-
-0-
425
Corporate Securities
229,259
5,382
(3,657)
230,984
142,933
1,814
(6,271)
138,476
Other Mortgage Backed
Securities
Total Debt Securities
Equities
Total Securities
Available for Sale
110,512
1,410,625
2,438
19,027
(32)
(6,247)
112,918
1,423,405
97,922
1,197,384
336
4,594
(418)
(15,561)
97,840
1,186,417
45,091
622
-0-
45,713
52,824
-0-
( 1,011)
51,813
$ 1,455,716
$ 19,649
$
(6,247)
$ 1,469,118
$ 1,250,208
$ 4,594
$(16,572) $ 1,238,230
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 17 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, 2001 and 2000, 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, 2001, 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
$
16,783
248,220
11,042
183,429
459,474
951,151
$ 1,410,625
$
16,845
255,507
11,098
179,212
462,662
960,743
$ 1,423,405
Proceeds from the sales of securities available for sale were
$85,737, $22,391 and $39,282 during 2001, 2000 and 1999
respectively. Gross gains of $3,419, $1,752 and $541 and
gross losses of $224, $18 and $-0- were realized on those
sales during 2001, 2000 and 1999, respectively.
Securities available for sale with an approximate fair value
of $637,915 and $626,719 were pledged at December 31,
2001 and 2000, respectively, to secure public deposits and
for other purposes required or permitted by law.
26
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,
2001 and 2000:
2001
2000
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 Corporation
and Agencies:
Mortgage Backed Securities
$
133,687
$ 2,594
$
(166)
$
136,115
$
148,522
$
Other
29,998
1,360
-0-
31,358
99,844
635
194
$
(604) $
148,553
(129)
99,909
Obligations of States and
Political Subdivisions
Debt Securities Issued
by Foreign Governments
Corporate Securities
Other Mortgage Backed
Securities
Total Securities Held to
Maturity
107,130
1,545
(788)
107,887
126,514
1,355
(807)
127,062
383
22,092
-0-
808
-0-
-0-
-0-
-0-
-0-
383
22,900
357
22,154
-0-
140
-0-
(227)
357
22,067
-0-
716
-0-
(3)
713
$
293,290
$ 6,307
$
(954)
$
298,643
$
398,107
$ 2,324
$ (1,770) $
398,661
The amortized cost and estimated market value of debt
securities at December 31, 2001, 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
$
$
13,029
56,795
24,198
65,581
159,603
133,687
293,290
$
13,365
58,977
24,866
65,320
162,528
136,115
298,643
$
There were no sales of securities held to maturity in 2001,
2000 or 1999.
Securities held to maturity with an amortized cost of
$205,150 and $245,908 were pledged at December 31, 2001
and 2000, 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,
2001
2000
$
529,300
$
443,618
14,727
849,787
638,576
37,146
932,915
560,066
473,515
63,326
2,569,231
(1,297)
$ 2,567,934
450,154
68,975
2,492,874
(2,047)
$ 2,490,827
Most of the Corporation’s business activity was with
customers located within Pennsylvania. The portfolio is well
diversified, and as of December 31, 2001 and 2000, there
were no significant concentrations of credit.
27
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
Relationship to impaired loans:
Recorded investment in impaired loans
at end of period
Average balance for 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
2001
2000
1999
$ 33,601
$ 33,539
$ 32,304
1,281
1,299
1,381
11,495
10,030
9,450
12,220
$ 34,157
11,267
$ 33,601
9,596
$ 33,539
2001
2000
$
$
$
$
$
$
23,731
16,133
3,835
16,266
7,465
750
$
$
$
$
$
$
12,961
13,154
2,187
4,679
8,282
333
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, 2001 and 2000, 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
28
does for on-balance-sheet instruments. The following table
identifies the notional amount of those instruments at
December 31, 2001 and 2000:
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
Standby letters of credit
Commercial letters of credit
2001
2000
$
$
$
517,587
48,739
390
$
$
$
445,200
37,787
471
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
7-50 years
7-39 years
3-25 years
3-7 years
$
2001
5,338
45,910
9,960
50,771
14,231
126,210
$
2000
5,336
45,296
9,839
48,643
9,926
119,040
79,844
74,369
$
46,366
$
44,671
Depreciation and amortization related to premises and
equipment was $6,153 in 2001, $5,996 and $5,790 in 2000
and 1999, respectively.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
Interest expense on short-term borrowings for the years
ended December 31 is detailed below:
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
2001
61,791
1,028,368
1,590,296
2,680,455
$
$
2000
$
98,552
919,653
1,696,137
$ 2,714,342
Federal funds purchased
Borrowings from FHLB
Securities sold under agreements
$
to repurchase
Treasury, tax and loan note option
Total interest on
2001
1,527
243
2000
1999
$
3,138
1,256
$ 4,913
2,557
8,483
974
16,335
1,489
5,825
537
Interest-bearing deposits at December 31, 2001 and 2000,
include reallocations from NOW and Super NOW accounts of
$323,490 and $279,779 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, 2001 and 2000,
were certificates of deposit in denominations of $100 or
more of $497,318 and $455,382 respectively.
Interest expense related to $100 or greater certificates of
deposit amounted to $27,922 in 2001, $22,639 in 2000, and
$18,103 in 1999.
Included in time deposits at December 31, 2001, were
certificates of deposit with the following scheduled maturities:
2002
2003
2004
2005
2006 and thereafter
$ 977,218
278,473
240,294
54,277
39,813
$ 1,590,075
NOTE 15—Short-term Borrowings
Short-term borrowings at December 31 were as follows:
2001
2000
Ending Average Average Ending Average Average
Balance Balance Rate
Balance Balance Rate
Federal funds
purchased
$ 108,250 $ 46,608 3.28% $ 16,825 $ 49,990 6.28%
Borrowings from
FHLB
Securities
sold under
agreements
to repurchase
Treasury, tax
and loan
note option
40,000
9,918 2.45%
-0-
20,814 6.03%
216,486
214,900 3.95% 237,806
275,839 5.92%
63,000
28,747 3.39% 17,540
24,643 6.04%
Total
$ 427,736 $300,173 3.74% $ 272,171 $ 371,286 5.98%
Maximum
total at any
month-end
$ 427,736
$ 455,285
short-term borrowings
$
11,227
$ 22,218
$ 13,832
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
liquidation amount equal to the aggregate principal amount
of the debentures redeemed.
29
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
Capital securities included in total long-term debt on the
Consolidated Balance Sheets are excluded from NOTE 17,
but are described in NOTE 16.
Scheduled loan payments for other long-term debt are
summarized below:
2002
2003
2004
2005
2006 Thereafter
Loan payments
$102,321 $2,385
$2,261 $2,624 $1,576 $518,053
NOTE 18—Common Share Commitments
At December 31, 2001 and 2000, the Corporation had
100,000,000 common shares authorized and 62,525,412
shares outstanding. Outstanding shares were reduced by
4,073,788 shares of treasury stock at December 31, 2001 and
4,329,962 shares at December 31, 2000. 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 232,579, 59,742 and 236,230 shares at December 31,
2001, 2000 and 1999, respectively.
During 2000, 78,380 shares of treasury stock were acquired
at an average price of $11.14. Treasury shares consisting of
256,174 and 41,240 were reissued during 2001 and 2000
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.
NOTE 19—Income Taxes
The income tax provision consists of:
2001
2000
1999
Current tax provision for income
exclusive of securities transactions:
Federal
State
Securities transactions
Total current tax provision
Deferred tax provision (benefit)
Total tax provision
$ 14,865
55
1,165
16,085
(831)
$ 15,254
$ 12,155 $
(10)
611
12,756
1,533
$ 14,289 $
19,111
16
198
19,325
287
19,612
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, 2001 and 2000, were as follows:
NOTE 16—Company Obligated Mandatorily Redeemable
Capital Securities of Subsidiary Trust (Continued)
The net proceeds (after deduction of offering expenses and
the initial purchaser’s commission) from the sale of the
debentures to the Trust were approximately $34,200. 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:
2001
2000
Amount
Rate
Amount
Rate
4,126
Libor +1% $
5,287 Libor +1%
$
ESOP loan due
December, 2005
Borrowings from FHLB due:
November, 2002
December, 2002
September, 2007
February, 2008
February, 2008
May, 2008
November, 2008
December, 2008
February, 2010
December, 2010
April, 2011
March, 2016
December, 2017
June, 2019
April, 2020
50,000
50,000
5,000
100,000
100,000
100,000
50,000
65,000
25,000
55,000
7,121
1,935
6,798
8,375
865
50,000
5.82%
50,000
5.71%
6.94%
5,000
5.45% 100,000
5.48% 100,000
5.67% 100,000
50,000
5.03%
65,000
4.96%
25,000
6.12%
55,000
4.70%
-0-
5.68%
-0-
5.65%
7,038
6.17%
8,644
5.72%
886
7.37%
5.82%
5.71%
6.94%
5.45%
5.48%
5.67%
5.03%
4.96%
6.12%
4.70%
6.17%
5.72%
7.37%
$ 629,220
$ 621,855
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.
30
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
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
Unrealized gain on securities available
for sale
Other
Total deferred tax liabilities
2001
2000
$
11,965
$
11,765
1,005
237
0
1,060
14,267
(295)
(10,535)
(999)
(453)
(281)
(4,686)
(315)
(17,564)
996
439
4,204
894
18,298
(389)
(10,643)
(1,319)
(674)
(231)
-0-
(280)
(13,536)
Net deferred tax asset (liability)
$
(3,297)
$
4,762
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:
2001
2000
1999
% of
Pretax
Amount Income Amount Income Amount Income
% of
Pretax
% of
Pretax
35.0
$ 21,537
35.0 $ 25,425
35.0
Tax at statutory rate $ 22,905
Increase (decrease)
resulting from:
Effect of
nontaxable
income
State income
taxes
Other
Total tax
provision $ 15,254
55
(569)
(7,137) (10.9)
(6,595) (10.7)
(5,247)
(7.2)
0.1
(0.9)
(10)
(643)
(0.0)
(1.1)
16
(582)
0.0
(0.8)
23.3
$ 14,289
23.2 $ 19,612
27.0
NOTE 20—Retirement Plans
All employees with at least one year of service are eligible to
participate in the employee stock ownership plan (“ESOP”).
Contributions to the plan are determined by the board of
directors, and are based upon a prescribed percentage of the
annual compensation of all participants. During a prior
period the ESOP acquired shares of the Corporation’s
common stock in a transaction whereby the Corporation
borrowed the required funds and concurrently loaned this
amount to the ESOP. The borrowed 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 $1,173 in 2001, $1,005 in 2000 and $1,555
in 1999. (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. The 401(k) plan expense was $2,583 in 2001,
$2,444 in 2000 and $2,328 in 1999. Effective February 1,
2002, the Corporation’s 401(k) plan was modified to permit
each participating employee to contribute up to 80% of
compensation to the plan of which up to 4% is matched
100% by the employer’s contribution.
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.
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
$150 in 2001, $182 in 2000, and $153 in 1999.
Pension Plan of Acquired Subsidiary
The noncontributory defined benefit pension plan of
Southwest Bank covered all eligible employees and provided
benefits based on each employee’s years of service and
compensation. On December 31, 1998, the participants’
accrued benefit was frozen and participation in the First
Commonwealth Financial Corporation ESOP Plan with no
lapse in credited service began. The Southwest Bank
Pension Plan was terminated effective December 31, 2001.
As the result of the plan termination an asset reversion of
$1,271 and a gain, net of applicable excise tax, of $277 were
recognized.
31
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 20—Retirement Plans (continued)
Net periodic benefit cost of this plan was as follows:
Pension Plan of Acquired Subsidiary (continued)
Net periodic pension cost of this plan for each of the last
three years was as follows:
Service cost
Interest cost on projected benefit obligation
Expected return on plan assets
Net amortization and deferral
Net periodic pension cost (benefit)
2001
2000
1999
$
-0- $
-0- $
346
(438)
(33)
$ (125) $ (106) $
343
(542)
93
-0-
394
(261)
(153)
(20)
The following table sets forth the plan’s funded status and
the amounts recognized on the Corporation’s Consolidated
Balance Sheet as of December 31:
Market value of plan assets
Projected benefit obligation
Plan assets greater than projected benefit obligation
Unrecognized net transition asset
Unrecognized net loss (gain)
Settlement loss (gain)
Prepaid pension expense recognized on
the balance sheet
Actuarial present value of accumulated benefits,
including vested benefits of $0 and $5,665
2001
$ 1,271
-0-
2000
$ 6,785
5,822
1,271
-0-
-0-
(1,271)
963
(62)
(223)
-0-
$
$
-0- $ 678
-0- $ 5,822
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)
Settlement loss
Benefit obligation at end of year
2001
$ 5,822
-0-
346
(6,496)
-0-
328
2000
$ 5,765
-0-
343
(242)
(44)
-0-
-0- $ 5,822
$
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
2001
$ 6,785
982
-0-
(6,496)
$ 1,271
2000
$ 6,485
542
-0-
(242)
$ 6,785
Assumptions used in determining the actuarial present value
of the projected benefit obligation were as follows at
December 31:
2001
2000
1999
Service cost
Interest cost on projected benefit obligation
Amortization of transition obligation
Loss amortization
Net periodic benefit cost
$
6
232
2
65
$ 305
$
7 $
13
197
2
48
$ 199 $ 260
190
2
-0-
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
Actives
Total accumulated postretirement benefit obligation
Plan assets at fair value
2001
2000
$ 3,941
210
4,151
-0-
$ 3,413
177
3,590
-0-
Accumulated postretirement benefit obligation
4,151
in excess of plan assets
(18)
Unrecognized transition obligation
Unrecognized net loss
(1,262)
Accrued benefit liability recognized on the balance sheet $ 2,871
3,590
(19)
(729)
$ 2,842
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)
2001
$ 3,590
6
232
(276)
599
2000
$ 2,959
7
190
(239)
673
Benefit obligation at end of year
$ 4,151
$ 3,590
The discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation
was 6.75% for 2001 and 2000. The health care cost trend
rates used for 2001 and 2000 were projected at an initial rate
of 6.75% decreasing over time to an annual rate of 4.25% for
indemnity plan participants and an initial rate of 6.00%
decreasing over time to an annual rate of 4.00% for non-
indemnity plan participants.
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:
Discount rates
Rates of increase in compensation levels
Expected long-term rate of return on assets
2000
2001
6.0% 6.0%
N/A
N/A
6.5% 6.5%
Effect on total of service and interest
cost components
Effect on postretirement benefit
obligation
1-Percentage-
1-Percentage-
Point Increase Point Decrease
$
18
$ 259
$
(16)
$ (235)
Postretirement Benefits other than Pensions for Acquired
Subsidiary
Employees of Southwest were covered by a postretirement
benefit plan.
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
32
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
(“ESOP”) on the same terms. The combined balances of the
ESOP related loans were $4,126 at December 31, 2001 and
$5,287 at December 31, 2000.
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 shares” and “new
shares”)
Shares in suspense
December 31, 1999
Shares allocated during 2000
Shares in suspense
December 31, 2000
Shares allocated during 2001
Shares in suspense
December 31, 2001
Total
Old
Shares
New
Shares
598,687
(105,166)
146,578
(25,748)
452,109
(79,418)
493,521
(120,961)
120,830
(29,616)
372,691
(91,345)
372,560
91,214
281,346
The fair market value of the new shares remaining in
suspense was approximately $3,241 and $3,727 at December
31, 2001 and 2000, respectively.
Interest on ESOP loans was $263 in 2001, $446 in 2000 and
$460 in 1999. During 2001, 2000 and 1999, dividends on
unallocated shares in the amount of $301, $354 and $369
respectively were used for debt service while all dividends
on allocated shares were allocated or paid to the participants.
NOTE 22—Stock Option Plan
At December 31, 2001, 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
at the discretion of the executive compensation committee,
all options granted during the years 1997, 1998, 1999, 2000
and 2001 were exercisable by December 31 of each year,
respectively, 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:
2001
2000
1999
As
Pro
As
Pro
As
Pro
Reported Forma Reported Forma Reported Forma
$ 50,189 $48,211 $ 47,246 $ 47,130 $53,030 $ 52,197
$
0.87 $
0.83 $
0.82 $
0.82 $
0.88 $
0.87
$ 0.86 $ 0.83 $ 0.82 $ 0.82 $ 0.88 $ 0.86
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:
Dividend yield
Expected
volatility
Risk-free
interest rate
Expected
option life
2001
2000
5.59% per annum 5.65% per annum 4.29% per annum
1999
55.1%
5.1%
61.7%
5.3%
31.4%
6.3%
10.0 years
9.1 years
9.1 years
A summary of the status of the Corporation’s outstanding
stock options as of December 31, 2001, 2000 and 1999 and
changes for the years ending on those dates is presented
below:
2001
Weighted
Average
Exercise
Price
2000
1999
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
Shares
Shares
2,210,651 $ 11.12 1,680,178 $11.07 1,306,346 $10.53
705,429 $11.06
610,416 $11.56
796,743 $ 10.75
(256,174) $ 9.76
(41,240) $ 7.93 (188,570) $ 8.66
(63,333) $ 11.89 (133,716) $11.63 (48,014) $12.08
2,687,887 $ 11.13 2,210,651 $11.12 1,680,178 $11.07
2,687,887 $ 11.13 2,210,651 $11.12 1,680,178 $11.07
Outstanding at
beginning
of year
Granted
Exercised
Forfeited
Outstanding at
end of year
Exercisable at
end of year
33
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 22—Stock Option Plan (continued)
The following table summarizes information about the stock
options outstanding at December 31, 2001:
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
$ 2.79
$ 4.04
$9.19-$9.25
$10.75
$11.06
$11.56
$14.69
Total
Weighted-
Average Weighted-
Weighted-
Number Remaining Average Number Average
Outstanding Contract Exercise Exercisable Exercise
at 12/31/01
at 12/31/01
Price
Price
Life
9,680
8,800
463,804
777,076
592,471
519,424
316,632
2,687,887
0.3
1.2
4.9
9.1
8.0
7.0
6.2
$ 2.79
$ 4.04
$ 9.23
$ 10.75
$ 11.06
$ 11.56
$ 14.69
$ 11.13
9,680
8,800
463,804
777,076
592,471
519,424
316,632
2,687,887
$ 2.79
$ 4.04
$ 9.23
$ 10.75
$ 11.06
$ 11.56
$ 14.69
$ 11.13
NOTE 23—Commitments and Contingent Liabilities
In 1994, a Bank which is now a subsidiary, and its President
at that time, were named as defendants in a lender liability
action. The Plaintiffs filed a multi-million dollar claim, plus
punitive damages. The case, originally scheduled for trial in
the first quarter 2002 has been rescheduled for the second
quarter 2002. Although the Corporation believes it has
meritorious defenses and is vigorously defending itself, it is
not possible to predict the outcome of this matter.
Insurance may cover some or all of a judgment up to a policy
limit of $10 million. Depending upon the specific elements
of an adverse judgment, it is possible there will be no
insurance coverage for the claims. It is the opinion of
management and its legal counsel that the resolution of this
matter will not produce a material impact on the
Corporation’s financial statements.
There are no other material proceedings to which the
Corporation or its subsidiaries are a party, or of which their
property is the subject, except proceedings which arise in the
normal course of business and, in the opinion of
management, will not have a material adverse effect on the
consolidated operations or financial position of the
Corporation and its subsidiaries.
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.
34
The following is an analysis of loans to those parties whose
aggregate loan balances exceeded $60 during 2001:
Balances December 31, 2000
Advances
Repayments
Other
Balances December 31, 2001
$
$
9,416
6,432
(6,507)
(1,454)
7,887
“Other” primarily reflects the change in those classified as a
“related party” as a result of mergers, resignations and
retirements.
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, 2001, dividends from subsidiary banks were restricted
not to exceed $74,233. 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, 2001, the Corporation and its banking
subsidiaries meet all capital adequacy requirements to which
they are subject.
As of December 31, 2001, 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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
Actual
Amount
Ratio
Regulatory Minimum
Ratio
Amount
To Be Well Capitalized Under
Prompt Corrective Action Provisions
Amount
Ratio
$ 423,649
$ 299,167
94,835
$
$ 389,492
$ 272,389
87,594
$
14.0%
12.4%
16.4%
12.9%
11.3%
15.1%
$ 241,615
$ 192,870
46,349
$
$ 120,807
96,435
$
23,174
$
$ 389,492
$ 272,389
87,594
$
8.5%
7.7%
8.5%
$ 138,144
$ 106,422
30,895
$
$ 401,516
$ 283,624
91,416
$
$ 367,915
$ 257,789
84,656
$
14.5%
12.9%
16.9%
13.3%
11.7%
15.7%
$ 221,294
$ 175,783
43,261
$
$ 110,647
87,891
$
21,631
$
$ 367,915
$ 257,789
84,656
$
8.5%
7.8%
8.5%
$ 129,749
98,994
$
29,758
$
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
$ 241,087
57,936
$
10.0%
10.0%
Not Applicable Not Applicable
$ 144,652
34,762
$
6.0%
6.0%
Not Applicable Not Applicable
$ 177,371
51,492
$
5.0%
5.0%
Not Applicable Not Applicable
$ 219,728
54,077
$
10.0%
10.0%
Not Applicable Not Applicable
$ 131,837
32,446
$
6.0%
6.0%
Not Applicable Not Applicable
$ 164,990
49,596
$
5.0%
5.0%
As of December 31, 2001
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, 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
NOTE 26—Condensed Financial Information of First Commonwealth Financial Corporation (parent company only)
Balance Sheets
Statements of Income
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
December 31,
2001
2000
$
7,667
270
540
387,626
4,570
6,437
3,986
8,099
2,280
$ 421,475
$
2,432
8,768
4,126
36,083
370,066
$
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
$ 421,475
$ 386,458
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
Years Ended December 31,
$
2001
42
40,442
(3,724)
-0-
16
(7,033)
$
2000
1999
41
61,664
(5,335)
-0-
31
(7,451)
$
149
36,506
(1,758)
57
15
(11,476)
29,743
3,495
48,950
4,340
23,493
4,421
33,238
53,290
27,914
16,951
(6,044)
25,116
Net income
$ 50,189
$ 47,246
$ 53,030
35
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) (continued)
Statements of Cash Flows
Years Ended December 31,
2001
2000
1999
$ 50,189
1,140
-0-
431
(16,951)
(592)
34,217
(123)
-0-
(61)
(90)
(792)
-0-
(1,066)
Operating Activities
Net income
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization
Net 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 in cash
Cash at beginning of year
Cash at end of year
(612)
-0-
2,499
(33,809)
269
(31,653)
1,498
6,169
$ 7,667
$47,246
$53,030
1,263
-0-
1,655
144
212
(242)
6,044
97
(25,116)
(803)
54,862
28,668
-0-
-0-
1
(337)
(3,861)
-0-
-0-
102
17
(1,491)
(2,406)
1,709
(4,197)
(2,069)
-0-
-0-
-0-
-0-
4,000
(20,000)
36,083
16,000
-0-
(593)
(873)
326
(32,553)
75
(358)
(51,331)
1,453
(27,825)
-0-
(49,618)
1,047
5,122
$ 6,169
(25,978)
621
4,501
$ 5,122
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.
NOTE 27—Fair Values of Financial Instruments
Below are various estimated fair values at December 31,
2001 and 2000, 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
36
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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
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, 2001 and 2000:
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
2001
2000
Carrying
Amount
98,130
$
4,250
$
$
-0-
$ 1,469,118
293,290
$
$ 2,533,777
$ 3,093,150
427,736
$
664,220
$
Estimated
Fair
Value
98,130
$
4,250
$
$
-0-
$ 1,469,118
$ 298,643
$ 2,633,443
$ 3,123,845
$ 427,736
$ 650,106
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
$
37
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, 2001 and 2000 are as follows:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for
credit losses
Securities gains
Other operating income
Other operating expenses
Income before income taxes
Applicable income taxes
Net income
First
Quarter
$ 79,080
44,848
34,232
2,407
2001
Second
Quarter
$ 77,371
43,413
33,958
2,557
Third
Quarter
$ 77,557
42,000
35,557
3,542
Fourth
Quarter
$74,883
36,909
37,974
2,989
31,825
31,401
32,015
34,985
205
9,062
25,456
15,636
3,613
$ 12,023
1,790
8,583
26,003
15,771
3,737
$ 12,034
1,330
9,429
26,033
16,741
4,023
$ 12,718
4
9,821
27,515
17,295
3,881
$13,414
Basic earnings per share
Diluted earnings per share
Average shares outstanding
Average shares outstanding assuming dilution
$
$
0.21
0.21
57,721,959
57,802,012
$
$
0.21
0.21
57,799,443
58,035,585
$
$
0.22
0.22
57,975,650
58,342,525
$
$
0.23
0.23
58,040,370
58,284,340
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
First
Quarter
$ 76,943
41,504
35,439
2,505
2000
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
1,686
8,254
25,048
17,351
4,261
$ 13,090
-0-
8,242
24,709
14,765
3,209
$ 11,556
59
8,084
24,554
14,277
3,128
$11,149
Basic earnings per share
Diluted earnings per share
Average shares outstanding
Average shares outstanding assuming dilution
$
$
0.20
0.20
57,505,462
57,606,948
$
$
0.23
0.23
57,515,772
57,566,079
$
$
0.20
0.20
57,565,411
57,601,162
$
$
0.19
0.19
57,648,021
57,699,795
38
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 2001.
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
$
$
$
$
$
$
$
$
$
2001
308,891
167,170
141,721
11,495
130,226
3,329
36,895
-0-
105,007
65,443
15,254
50,189
-0-
50,189
0.87
0.00
0.87
0.585
57,885,478
0.86
0.00
0.86
0.585
58,118,057
4,583,530
1,762,408
2,567,934
34,157
3,093,150
35,000
629,220
370,066
1.11%
13.85%
81.92%
67.24%
8.01%
$
$
$
$
$
$
$
$
$
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
1.10%
15.65%
80.19%
68.90%
7.00%
$
$
$
$
$
$
$
$
$
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
1.25%
15.44%
83.64%
58.52%
8.10%
$
$
$
$
$
$
$
$
$
1998
282,067
148,282
133,785
15,049
$
1997
253,917
124,427
129,490
10,152
118,736
119,338
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
0.85%
9.13%
79.92%
82.41%
9.28%
$
$
$
$
$
$
$
$
6,825
20,599
-0-
89,885
56,877
17,338
39,539
-0-
39,539
0.64
0.00
0.64
0.410
61,671,898
0.64
0.00
0.64
0.410
61,845,674
3,668,557
1,015,798
2,436,337
25,932
2,884,343
-0-
193,054
354,323
1.15%
11.31%
83.57%
64.06%
10.16%
(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.
39
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
This discussion and the related financial data are presented to
assist in the understanding and evaluation of the consolidated
financial condition and the results of operations of First
Commonwealth Financial Corporation including its
subsidiaries (The “Corporation”) for the years ended
December 31, 2001, 2000 and 1999 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. 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 statement amounts in prior periods have been
reclassified to conform to the presentation format used in
2001. The reclassifications had no effect on the
Corporation’s financial condition or results of operations.
Results of Operations
Net income for 2001 was $50.2 million, reflecting an
increase of $3.0 million from 2000 results of $47.2 million
and compared to $53.0 million reported in 1999.
The increase in net income for 2001 resulted primarily from
increases in net interest income, gains on sale of assets and
insurance commissions of $4.4 million, $1.8 million and
$1.2 million, respectively compared to 2000 levels. Gains
on the sale of assets includes securities gains of $3.3 million
and $1.7 million in 2001 and 2000, respectively as well as
$999 thousand gain on the sale of a branch and a block of
mortgages in 2001. The decrease in net income for 2000 was
primarily the result of gains on sale of loans which were
realized during 1999.
Basic earnings per share was $0.87 for 2001 compared to
$0.82 for 2000, while diluted earnings per share was $0.86
for 2001 compared to $0.82 for 2000. Basic earnings per
share and diluted earnings per share were $0.88 for 1999.
Basic earnings per share, excluding gains on sale of assets,
was $0.82 for 2001 compared to $0.79 for 2000 representing
an increase of 3.8%. Return on average assets was 1.11%
and return on average equity was 13.85% during 2001
compared to 1.10% and 15.65%, respectively for 2000.
Return on average assets was 1.25% during 1999 while
return on average equity was 15.44%.
The following is an analysis of the impact of changes in net
income on basic earnings per share:
Net income per share, prior year
Increase (decrease) from changes in:
Net interest income
Provision for credit losses
Security transactions
Insurance commissions
Income from bank owned life insurance
Other income
Salaries and employee benefits
Occupancy and equipment costs
Other expenses
Provision for income taxes
2001
vs.
2000
0.82
$
2000
vs.
1999
$ 0.88
0.06
(0.02)
0.03
0.02
0.02
0.04
(0.03)
(0.01)
(0.04)
(0.02)
0.01
(0.02)
0.02
0.01
0.02
(0.04)
(0.09)
(0.02)
(0.03)
0.08
Net income per share
$
0.87
$ 0.82
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 $141.7 million in 2001 compared to
$137.3 million in 2000 and $143.4 million in 1999. 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, 2001.
40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
2001
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
2000
1999
Average
Balance
Income/ Yield or
Rate(a)
Expense
Average
Balance
Income/ Yield or
Rate(a)
Expense
Average
Balance
Income/ Yield or
Rate(a)
Expense
$
1,842
1,724,725
9,521
$
70
106,156
492
3.81% $
6.45
5.17
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
2,548,596
202,173
8.11
2,503,036
208,548
8.50
2,408,450
195,010
8.21
4,284,684
308,891
7.43
4,080,367
311,882
7.87
4,020,858
296,089
7.56
Assets
Interest-earning assets:
Time deposits with banks
Investment securities
Federal funds sold
Loans, net of unearned
income (b) (c)
Total interest-
earning assets
Noninterest-earning assets:
Cash
Allowance for credit losses
Other assets
Total noninterest-
earning assets
Total Assets
72,806
(34,078)
198,051
236,779
$ 4,521,463
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
74,178
(34,296)
191,534
231,416
$ 4,311,783
80,716
(33,757)
174,063
221,022
$ 4,241,880
$
388,495
684,298
1,728,056
300,173
663,063
$
7,039
16,061
95,065
11,227
37,778
1.81% $
2.35
5.50
3.74
5.70
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
3,764,085
167,170
4.44
3,628,613
174,539
4.81
3,521,633
152,653
4.33
368,983
26,008
362,387
757,378
349,259
31,971
301,940
683,170
$ 4,311,783
345,311
31,439
343,497
720,247
$ 4,241,880
$ 141,721
3.53%
$137,343
3.59%
$143,436
3.76%
Shareholders’ Equity
$ 4,521,463
Net Interest Income and
Net Yield on Interest-
earning Assets
(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 decreased over
2000 levels primarily as a result of rate decreases during
2001 which were partially offset by volume increases. Asset
yields, on a tax-equivalent basis, decreased 44 basis points
(0.44%) during 2001 to 7.43% from 7.87% reported in 2000
and compared to 7.56% reported in 1999. The cost of funds
for 2001 decreased 37 basis points (0.37%) over 2000 costs
of 4.81% and compared to costs of 4.33% for 1999. Average
interest earning assets increased $204.3 million or 5.0%
while average interest-bearing liabilities increased $135.5
million or 3.7% for 2001 compared to 2000 averages.
Interest and fees on loans decreased $6.4 million for 2001
over 2000 levels, primarily as a result of rate decreases for
commercial loans and revolving credit loans which were
partially offset by increases due to volume for commercial
loans. Average loans for 2001 increased $45.6 million
41
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-bearing
funding sources
Total Liabilities and
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
compared to 2000 averages and included increases in
commercial loans and municipal loans which were partially
offset by decreases in average consumer loans. The
Corporation continued to focus lending activities on variable
rate commercial loans to counter-balance the interest rate
risk inherent in fixed rate consumer lending during the
current period of historically low interest rates. Enhanced
marketing strategies continue to enable the Corporation to
capitalize on lending opportunities with small to mid-sized
commercial customers, including Small Business
Administration (“SBA”) loans generated through the
Corporation’s preferred lender status. The Corporation has
been successful in competing with larger financial
institutions for small business customers becoming one of
the top small business lenders in Pennsylvania during 2001.
Interest and fees on loans reflected decreases due to rate of
$10.2 million during 2001 as loan yields decreased 39 basis
points (0.39%) during 2001 to 8.11% from 8.50% reported
for 2000 and compared to 8.21% during 1999. Time and
demand (primarily commercial) loan yields decreased 93
basis points (0.93%) for the 2001 period while yields on
home equity and personal credit lines decreased 166 basis
points (1.66%) and 170 basis points (1.70%), respectively
compared to 2000 yields, reflecting a decrease in general
interest rates.
Interest income on investments increased $3.1 million for
2001 compared to 2000, as volume increases during 2001
were only partially offset by rate decreases. Volume
increases which accounted for the increase in interest income
for U.S. government agency securities, corporate bonds and
asset backed securities were $1.9 million, $7.6 million and
$1.8 million, respectively for the 2001 period. Yields on
investments for 2001 were 6.45% compared to 6.88% for
2000 and 6.59% for 1999. Decreases in interest income due
to rate for U.S. government agency securities were $5.0
million during 2001 as yields on U.S. government agency
securities decreased 45 basis points (0.45%) compared to
2000 yields. Prepayment speeds of mortgage backed
securities (“MBS”) which had slowed during 1999 as interest
rates rose, began to accelerate at the end of 2000 and into
2001 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
MBS under various interest rate scenarios on a continuing
basis to insure that volatility falls within acceptable limits.
The Corporation holds no “high risk” securities nor does the
Corporation own any securities of a single issuer exceeding
42
10% of shareholders’ equity other than U.S. government and
agency securities.
Interest on deposits increased $2.7 million for 2001
compared to 2000 as increases due to volume of $8.9 million
were partially offset by decreases due to rate of $6.2 million
over 2000 levels. Average time deposits increased $142.4
million for 2001 compared to 2000 averages, resulting in an
increase in interest expense due to volume of $8.0 million.
Additional increases in interest expense due to volume
during 2001 also occurred for money market deposit
accounts and savings accounts.
The cost of interest-bearing demand deposits for 2001
decreased by 67 basis points (0.67%) compared to 2000 costs
of 2.48%, resulting in a decrease in interest expense due to
rate of $2.6 million. Interest expense on total savings
deposits and time deposits for 2001 also reflected decreases
due to rate of $1.8 million for both savings deposits and time
deposits as deposit costs for these categories decreased 26
basis points (0.26%) and 11 basis points (0.11%),
respectively for 2001 compared to 2000.
Interest expense on short-term borrowings decreased $11.0
million during 2001 as a result of volume decreases of $4.3
million and rate decreases of $6.7 million compared to 2000.
Average short-term borrowings decreased $71.1 million for
2001 over 2000 averages while the cost of short-term
borrowings decreased 224 basis points (2.24%) compared to
2000 costs. Interest on repurchase agreements decreased
$7.9 million for the 2001 period as average balances
decreased $60.9 million and costs decreased 197 basis points
(1.97%) compared to the corresponding period of 2000.
Interest expense on long-term debt increased $964 thousand
for 2001 compared to the 2000 period as increases due to
volume of $1.8 million were partially offset by decreases due
to rate of $794 thousand. Average long-term debt for 2001
increased $30.2 million compared to 2000 averages as
maturities were extended for short-term borrowings from the
Federal Home Loan Bank, to take advantage of lower
interest rates. Long-term debt also reflected an increase for
2000 compared to 1999 levels, primarily due to 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 also incurred a $16 million bank loan
during 1999, primarily to fund the remaining cost of the
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
stock repurchase. (See NOTE 16 to the financial statements
for a description of the Company obligated mandatorily
redeemable capital securities of subsidiary trust.)
Net interest margin (net interest income, on a tax-equivalent
basis as a percentage of average earning assets), was 3.53%
during 2001 compared to 3.59% in 2000 and 3.76% in 1999.
Although net interest margin decreased for the full year of
2001, net interest margin for the fourth quarter of 2001
improved to 3.66%, up 20 basis points (0.20%) from the
fourth quarter of 2000, primarily because of the ability to
reprice liabilities in the declining interest rate environment.
The Corporation’s use of computer modeling to manage
interest rate risk is described in the “Interest Sensitivity”
section of this discussion herein.
The following table shows the effect of changes in volumes
and rates on interest income and interest expense:
Analysis of Year-to-Year Changes in Net Interest Income
(Dollar Amounts in Thousands)
2001 Change from 2000
Change Due
to Volume
Total
Change
Change Due
to Rate
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
$
(12)
3,138
258
(6,375)
(2,991)
2,658
(10,991)
964
(7,369)
$ 4,378
$
42
10,491
349
3,871
14,753
8,865
(4,256)
1,758
6,367
$ 8,386
$
(54)
(7,353)
(91)
(10,246)
(17,744)
(6,207)
(6,735)
(794)
(13,736)
$ (4,008)
Total
Change
$
(39)
2,165
129
13,538
15,793
12,176
8,386
1,324
21,886
$ (6,093)
2000 Change from 1999
Change Due
to Volume
Change Due
to Rate
$ (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)
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 $11.5 million in 2001 compared to $10.0
million in 2000 and $9.5 million in 1999. The allowance for
credit losses was $34.2 million at December 31, 2001, for a
ratio of 1.33% of actual loans outstanding. The ratio of the
allowance for credit losses to total loans outstanding as of
December 31, 2001 has decreased slightly from the 1.35%
reported as of December 31, 2000. Net charge-offs for 2001
reflected increases in net charge-offs of residential
mortgages of $937 thousand and commercial loans secured
by real estate of $2.2 million which were partially offset by
decreases in net charge-offs of loans to individuals and
commercial loans not secured by real estate of $1.3 million
and $454 thousand, respectively. Net charge-offs against the
allowance for credit losses were $10.9 million, or 0.43% of
average total loans in 2001. This compared to net charge-
offs of $10.0 million in 2000 and $8.2 million in 1999. Net
charge-offs were 0.40% and 0.34% of average total loans
during 2000 and 1999, respectively. For an analysis of credit
quality, see the “Credit Review” section of this discussion.
43
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents an analysis of the consolidated allowance for credit losses for the five years ended December 31,
2001 (Dollar Amounts in Thousands):
Loans outstanding at end of year
$ 2,567,934
$ 2,490,827
$ 2,500,059
$ 2,374,850
$ 2,436,337
Average loans outstanding
$ 2,548,596
$ 2,503,036
$ 2,408,450
$ 2,439,436
$ 2,330,657
2001
Summary of Loan Loss Experience
1999
1998
2000
1997
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
$
33,601
$
33,539
$
32,304
$
25,932
$
25,234
3,297
4,199
-0-
2,300
1,818
606
12,220
456
757
-0-
-0-
49
19
1,281
10,939
11,495
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
Balance, end of year
$
34,157
$
33,601
$
33,539
$
32,304
$
25,932
Ratios:
Net charge-offs as a percentage of
average loans outstanding
Allowance for credit losses as
a percentage of average loans
outstanding
0.43%
0.40%
0.34%
0.36%
0.41%
1.34%
1.34%
1.39%
1.32%
1.11%
Net securities gains increased $1.6 million during 2001 from
$1.7 million reported in 2000 and compared to $565 thousand
in 1999. The securities gains during 2001 resulted primarily
from the sales of fixed rate corporate bonds classified as
“available for sale” and Pennsylvania bank stocks with book
values of $37.4 million and $12.7 million, respectively. 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 security gains of $167 and
$317 thousand, respectively.
Trust income was $5.0 million for 2001 compared to $5.6
million for 2000 and $5.5 million for 1999. Trust income for
2001 reflected decreases in income from personal trusts,
estates and mutual fund fees as market values declined.
Enhanced referral programs and integrated growth plans for
financial affiliates have been initiated to help improve sales
in various areas including trust assets managed. The
Corporation’s success in building relationships with
commercial customers will also provide fee based affiliates
with additional sales opportunities through the “Total
Solutions Financial Management” process. This strategy
marshals products, services and professional staff from the
Corporation’s trust, insurance and banking affiliates and
unites them into a comprehensive financial services offering.
Service charges on deposits increased $598 thousand for
2001 compared to 2000 and included increases in insufficient
funds fees “NSF” and bank club fees. Standardization of
service charge routines achieved during conversion of the
Corporation’s deposit system during 2001 also generated
additional fee revenue. The new deposit processing system
implemented during the third quarter of 2001 will also
facilitate the offering of enhanced deposit products and
44
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
services such as lockbox and cash management services,
which are expected to increase deposit fees in future periods.
Service charges on deposits decreased $83 thousand for 2000
compared to 1999 as the average balances of transaction
accounts which generate fee revenue decreased compared to
1999 levels.
Insurance commissions, which have continued to increase
since First Commonwealth Insurance Agency’s (“FCIA”)
formation in 1998, increased $1.2 million for 2001 from
2000 commissions of $2.0 million and compared to $1.5
million for 1999. Insurance revenue for 2001 included
increases in credit insurance, employee benefits and
annuities compared to 2000 levels. As part of the previously
discussed “Total Solutions Financial Management” process
FCIA will continue to have expanded opportunities to meet
the insurance needs of commercial customers. In addition,
the Corporation has developed “FOCUS”, a financial
planning tool designed to help consumers prioritize and
assess their financial needs. The “FOCUS” concept results
in a systematic approach covering a wide range of personal
financial goals, including personal budgeting, funding for an
emergency, using credit wisely, building financial security
and estate planning as well as protecting what is important
through appropriate insurance coverage.
Income from bank owned life insurance was $4.6 million for
2001 compared to $3.4 million for 2000 and $2.1 million for
1999. The 2001 period included an additional investment in
bank owned life insurance of $15.0 million compared to
2000 levels. The 2000 period included an increase in income
from bank owned life insurance of $1.3 million compared to
1999, resulting primarily from claim income and the impact
of an additional $15.0 million investment during 2000.
Other income for 2001 was $12.9 million, representing an
increase of $2.4 million over 2000 income of $10.5 million
and compared to $13.8 million for 1999. 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 one of its branches during 2001.
The premium on the sale of $10.4 million of deposits from
the branch resulted in a gain of $767 thousand. Termination
of the Southwest Bank pension plan during 2001 resulted in
a gain of $277 thousand (net of applicable excise taxes),
which is included in other income. Other income for the
2001 period also reflected increases in bank club income,
debit card interchange and merchant discount of $207
thousand, $173 thousand and $222 thousand, respectively,
compared to 2000 revenues. Mutual fund sales also resulted
in an increase in other income for 2001 of $336 thousand.
Other income for 1999 included gains on the sale of loans
resulting primarily from the sale of $42.2 million of
residential mortgage loans during the first quarter of 1999
and the sale of $20.4 million of retail credit card loans during
the second quarter of 1999 which generated gains of $890
thousand and $4.0 million, respectively.
Total other operating expenses increased $5.5 million to
$105.0 million for 2001 compared to $99.5 million and $95.6
million for 2000 and 1999, respectively. Total noninterest
expense as a percent of average assets was 2.32% for the
2001 period compared to 2.31% for 2000. Employee costs
were $54.5 million in 2001, representing 1.21% of average
assets compared to $52.5 million and 1.22% of average
assets for 2000. Employee costs for 1999 were $49.8 million
or 1.17% of average assets. Employee benefit costs
increased $331 thousand for 2001 compared to the 2000
period and included increases in 401(k) plan expenses and
employee stock ownership plan “ESOP” expenses which
were partially offset by decreases in hospitalization costs.
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. The
Corporation continues to develop quality employee benefit
plan enhancements while effectively managing costs.
Net occupancy expense has remained stable over several
years at $6.5 million for 2001 and 1999 and $6.6 million for
2000 as increases in insurance and utility costs have been
offset by decreases in building depreciation, repairs and
maintenance. Furniture and equipment expenses of $9.1
million for 2001 reflected increases of $896 thousand over
2000 levels, primarily as a result of increases for
depreciation on computer software and software
maintenance. The 2000 period also reflected increases in
computer software depreciation and maintenance, as well as
increases in furniture and equipment depreciation and repairs
compared to 1999. Computer software depreciation and
maintenance cost increases were primarily related to the
replacement of software utilized by Corporation’s data
processing subsidiary to process loan and deposit accounts.
Software depreciation is also expected to increase for 2002
as a full year of depreciation is included for systems placed
in service during the third and fourth quarters of 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, but is also committed to meeting the
changing needs of our customers.
Outside data processing expenses were $3.3 million for 2001
compared to $3.3 million for 2000 and $3.4 million for 1999.
Outside data processing expenses are managed by the
Corporation’s data processing subsidiary along with
management of internal data processing costs. Outsourced
45
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
data processing needs are evaluated based on technology,
efficiency and cost considerations. This cost is expected to
be reduced in 2002 as the benefits of Southwest Bank being
converted from an outsourced environment to our internal
systems is realized. Pennsylvania shares tax expense of $3.8
million for 2001 reflected an increase of $330 thousand over
the $3.5 million reported for each of the two previous years.
Other operating expenses for 2001 were $27.8 million, an
increase of $2.4 million over the $25.4 million reported for
2000 and compared to $24.6 million for 1999. The 2001
period included increases in filing and recording fees, legal
fees, other professional fees and telephone expenses of $165
thousand, $216 thousand, $666 thousand and $352 thousand,
respectively, compared to 2000 levels. The 2001 period also
included increases in losses on sale of leased vehicles as the
used auto market continues to be weak compared to expected
residual values. Customer disclosures, required as a result of
new privacy legislation and changes in customer loan and
deposit accounts due to standardization during 2001 system
conversions, caused increases for postage and printing costs
for 2001. The Corporation also continues to support the
communities in which we serve, resulting in additional
charitable contributions for 2001. The 2001 period included
decreases in insurance expense, Pennsylvania use tax,
promotions and deferred loan origination costs compared to
2000 levels.
Included in other operating expense increases for 2000
compared to 1999 were increases in collection and
repossession expenses 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.
Other operating expenses for 2000 also included increases in
advertising and promotions, express freight charges, charge
card interchange and checkbook printing expenses, which
were partially offset by decreases in other professional fees,
postage and printing costs 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.
Income tax expense was $15.3 million during 2001
representing an increase of $965 thousand over the 2000
amount of $14.3 million and compared to $19.6 million in
1999. The Corporation’s effective tax rate was 23.3% for
2001 compared to 23.2% for 2000 and 27.0% for 1999. The
Corporation’s effective tax rate continues to be favorably
impacted by tax free income from certain loans, investments
and bank owned life insurance.
46
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.
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 $29.0 million in 2001 and included increases in
noninterest-bearing deposits and savings deposits which
were partially offset by decreases in time deposits. Non-core
deposits, which are time deposits in denominations of $100
thousand or more represented 16.08% of total deposits at
December 31, 2001, up from 14.86% of total deposits at
December 31, 2000. Non-core deposits increased by $41.9
million in 2001 and $97.1 million in 2000 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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, 2001,
2000 and 1999 had remaining maturities as follows:
Maturity Distribution of Large Certificates of Deposit
(Dollar Amounts in Thousands)
2000
2001
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
$ 133,017
57,222
89,436
217,643
$ 497,318
27%
11
18
44
100%
$ 358,112
36,941
19,241
41,088
$ 455,382
79%
8
4
9
100%
1999
Amount
Percent
$ 273,376
13,372
14,503
57,010
$ 358,261
76%
4
4
16
100%
Net loans increased $76.6 million during 2001 as
commercial loans increased by $134.1 million and loans to
individuals increased by $23.4 million compared to year-end
2000. The 2001 period reflected decreases of $83.1 million
in residential real estate loans, due in part to the sale of $12.9
million of 30 year residential mortgage loans with significant
prepayment exposure during falling interest rates.
Below is a schedule of loans by classification for the five
years ended December 31, 2001:
2001
Amount Percent
Loans by Classification
(Dollar Amounts in Thousands)
1999
2000
1998
1997
Amount
Percent Amount
Percent Amount
Percent Amount
Percent
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
$
529,300
14,727
638,576
849,787
473,515
1
25
33
18
63,326 2
2,569,231
(1,297)
21% $ 443,618
2
37,146
22
560,066
37
932,915
450,154
18
68,975 3
18% $ 417,300
41,734
495,789
980,506
502,465
2
20
39
20
65,893 3
16% $ 377,733
1
33,097
16
387,166
42
1,009,903
517,907
22
56,423 3
15%
16% $ 363,699
1
35,308
16
384,794
43
1,048,405
569,742
23
51,245 2
100% 2,492,874
(2,047)
100% 2,503,687
(3,628)
100% 2,382,229
(7,379)
100% 2,453,193
(16,856)
100%
$ 2,567,934
$2,490,827
$ 2,500,059
$2,374,850
$2,436,337
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, 2001, securities available for sale had an
amortized cost of $1,456 million and an approximate fair
value of $1,469 million. Gross unrealized gains were $19.6
million and gross unrealized losses were $6.2 million. Based
upon the Corporation’s historical ability to fund liquidity
needs from other sources, the current available for sale
portfolio is deemed to be more than adequate, as the
Corporation does not anticipate a need to liquidate the
investments until maturity. Below is a schedule of the
contractual maturity distribution of securities held to maturity
and securities available for sale at December 31, 2001.
47
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
After 10 years
Total
U.S. Government Agencies
and Corporations
$
10,032
25,417
29,098
99,138
$ 163,685
Maturity Distribution of Securities Held to Maturity
(Dollar Amounts in Thousands)
States and
Political
Subdivisions
$
3,031
14,595
23,923
65,581
$ 107,130
Other
Securities
$
- 0-
22,200
275
- 0-
$ 22,475
Total
Amortized
Cost
$
13,063
62,212
53,296
164,719
$ 293,290
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
$
11,111
143,738
99,523
712,815
$ 967,187
$
5,588
8,166
10,897
78,841
$ 103,492
Other
Securities
$
100
134,431
15,000
235,506
$ 385,037
Total
Amortized
Cost
$
16,799
286,335
125,420
1,027,162
$ 1,455,716
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
Over 10 years
Total
Interest Sensitivity
Weighted
Average
Yield*
6.22%
6.47
6.66
6.17
6.33%
Weighted
Average
Yield*
3.89%
5.73
5.78
6.36
6.16%
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.
The objective of interest rate sensitivity management is to
maintain an appropriate balance between the stable growth of
income and the risks associated with maximizing income
through interest sensitivity imbalances. While no single
number can accurately describe the impact of changes in
interest rates on net interest income, interest rate sensitivity
positions, or “gaps” when measured over a variety of time
periods may be helpful.
An asset or liability is considered to be interest-sensitive if the
rate it yields or bears is subject to change within a
predetermined time period. If interest-sensitive assets (“ISA”)
exceeds interest-sensitive liabilities (“ISL”) during a
prescribed time period, a positive gap results. Conversely,
when ISL exceeds ISA during a time period, a negative gap
results.
A positive gap tends to indicate that earnings will be
impacted favorably if interest rates rise during the period and
negatively when interest rates fall during the time period. A
negative gap tends to indicate that earnings will be affected
inversely to interest rate changes. In other words, as interest
rates fall, a negative gap should tend to produce a positive
effect on earnings and when interest rates rise, a negative gap
should tend to affect earnings negatively.
The primary components of ISA include adjustable rate loans
and investments, loan repayments, investment maturities and
money market investments. The primary components of ISL
include maturing certificates of deposit, money market
deposits, savings deposits, N.O.W. accounts and short-term
borrowings.
48
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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, 2001 and 2000 (Dollar Amounts in Thousands):
Loans
Investments
Other interest-earning assets
Total interest-sensitive assets
Certificates of deposits
Other deposits
Borrowings
Total interest-sensitive liabilities
GAP
ISA/ISL
Gap/Total assets
Loans
Investments
Other interest-earning assets
Total interest-sensitive assets
Certificates of deposits
Other deposits
Borrowings
Total interest-sensitive liabilities
GAP
0-90 Days
$
839,279
154,327
4,250
997,856
329,825
1,090,160
430,189
1,850,174
$ (852,318)
2001
91-180 Days
181-365 Days
$
155,276
90,890
-0-
246,166
284,518
-0-
350
284,868
(38,702)
$
$
276,760
180,001
-0-
456,761
407,188
-0-
750
407,938
48,823
$
Cumulative
0-365 Days
$ 1,271,315
425,218
4,250
1,700,783
1,021,531
1,090,160
431,289
2,542,980
(842,197)
$
0.54
18.60%
0.86
0.84%
1.12
0.67
1.07%
18.37%
0-90 Days
$
621,536
130,220
11,552
763,308
274,963
1,018,205
274,673
1,567,841
$ (804,533)
2000
91-180 Days
181-365 Days
$
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)
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)
ISA/ISL
Gap/Total assets
0.49
18.40%
0.67
2.01%
0.74
2.77%
0.56
23.19%
Although the periodic gap analysis provides management
with a method of measuring current interest rate risk, it only
measures rate sensitivity at a specific point in time.
Therefore, to more precisely measure the impact of interest
rate changes on the Corporation’s net interest income,
management simulates the potential effects of changing
interest rates through computer modeling. The income
simulation model used by the Corporation captures all assets,
liabilities, and off-balance sheet financial instruments,
accounting for significant variables that are believed to be
affected by interest rates. These variables include
prepayment speeds on mortgage loans and mortgage backed
securities, cash flows from loans, deposits and investments
and balance sheet growth assumptions. The model also
captures embedded options, such as interest rate caps/floors
or call options, and accounts for changes in rate relationships
as various rate indices lead or lag changes in market rates.
The Corporation is then better able to implement strategies
which would include an acceleration of a deposit rate
reduction or lag in a deposit rate increase. The repricing
strategies for loans would be inversely related.
The Corporation’s asset/liability management policy
guidelines limit interest rate risk exposure for the succeeding
twenty-four month period. Simulations are prepared under
the base case where interest rates remain flat and most likely
case where interest rates are defined using projections of
economic factors. Additional simulations are produced
estimating the impact on net interest income of a 300 basis
point (3.00%) movement upward or downward from the base
case scenario. The Corporation’s current asset/liability
management policy indicates that a 300 basis point (3.00%)
change in interest rates up or down cannot result in more
than a 7.5% change in net interest income when compared to
a base case without Board approval and a strategy in place to
reduce interest rate risk below the established maximum
level. The analysis at December 31, 2001, 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.
49
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans and before
unearned income at December 31, 2001 were as follows (Dollar Amounts in Thousands):
Commercial and industrial
Financial institutions
Real estate-construction
Real estate-commercial
Other
Totals
Loans at fixed interest rates
Loans at variable interest rates
Totals
$
Within One
Year
252,739
235
11,945
408,820
49,908
723,647
$
Credit Review
Maintaining a high quality loan portfolio is of great
importance to the Corporation. The Corporation manages
the risk characteristics of the loan portfolio through the use
of prudent lending policies and procedures and monitors risk
through a periodic review process provided by internal
auditors, regulatory authorities and our loan review staff.
These reviews include the analysis of credit quality,
diversification of industry, compliance to policies and
procedures, and an analysis of current economic conditions.
In the management of its credit portfolio, the Corporation
emphasizes the importance of the collectibility of loans and
leases as well as asset and earnings diversification. The
Corporation immediately recognizes as a loss all credits
judged to be uncollectible and has established an allowance
for credit losses that may exist in the portfolio at a point in
time, but have not been specifically identified.
The Corporation’s written lending policy requires certain
underwriting standards to be met prior to funding any loan,
including requirements for credit analysis, collateral value
coverage, documentation and terms. The principal factor
used to determine potential borrowers’ creditworthiness is
business cash flows or consumer income available to service
debt payments. Secondary sources of repayment, including
collateral or guarantees, are frequently obtained.
The lending policy provides limits for individual and bank
committees lending authorities. In addition to the bank loan
approval process, requests for borrowing relationships which
will exceed one million dollars must also be approved by the
Corporation’s Credit Committee. This Committee consists
of a minimum of three members of the Corporation’s board
of directors. 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.
50
One to
5 Years
$ 62,121
-0-
440
33,083
11,149
$ 106,793
89,715
17,078
$ 106,793
After
5 Years
$ 32,204
-0-
2,342
196,673
120,944
$ 352,163
222,095
130,068
$ 352,163
Total
$ 347,064
235
14,727
638,576
182,001
$1,182,603
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.
The Corporation maintains an allowance for credit losses at a
level deemed sufficient to absorb losses which are inherent
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
in the loan and lease portfolios at each balance sheet date.
Management and the Corporation’s Board of Directors
review the adequacy of the allowance on 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, a formula allowance
based on historical trends, an additional allowance for
special circumstances and an unallocated allowance. 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, 2001.
Loans on the primary watch list may also be impaired loans,
which are defined as nonaccrual loans or troubled debt
restructurings. 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 greater of the eight most
recent quarters or the twenty most recent quarters. Historical
loss experience percentages are applied to non-classified
loans from the primary watch list as well as all other loans
and leases which are not on the watch list 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, 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.
51
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
2001
$ 6,315
432
9,808
7,379
3,845
401
5,977
$34,157
1.34%
Allocation of the Allowance for Credit Losses
(Dollar Amounts in Thousands)
1999
1998
2000
$ 6,263
643
9,064
10,211
4,938
638
1,844
$33,601
1.34%
$ 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%
1997
$ 3,726
415
4,912
8,595
4,583
393
3,308
$ 25,932
1.11%
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)
1999
2000
1998
Loans on nonaccrual basis
Past due loans
Renegotiated loans
Total nonperforming loans
2001
$22,899
17,781
832
$41,512
Nonperforming loans as a percentage of total loans
1.62%
Allowance as percentage of nonperforming loans
82.28%
$10,698
22,086
2,263
$35,047
1.41%
95.87%
$12,765
15,815
62
$28,642
$ 9,677
15,780
64
$25,521
1997
$ 11,387
13,955
67
$ 25,409
1.15%
1.07%
1.04%
117.10%
126.58%
102.06%
Other real estate owned
$ 1,619
$ 1,661
$ 1,707
$ 2,370
$ 1,950
Gross income that would have been
recorded at original rates
Interest that was reflected in income
$ 1,422
750
Net reduction to interest income due to nonaccrual
$ 672
$ 750
333
$
417
$
724
458
$ 266
$ 961
$ 1,017
286
146
$ 675
$ 871
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 2001 increased
by $6.5 million over 2000 levels as increases in nonaccrual
loans were only partially offset by decreases in past due loans
and renegotiated loans. The increase in nonaccrual loans since
year-end 2000 is primarily related to two loans. One is a $6.7
million credit that is not past due and carries an 80% guaranty
of a U.S. government agency but is experiencing cash flow
difficulties and has therefore been placed in nonaccrual status.
A resolution of this credit is expected by the end of the second
quarter 2002. The second credit is in the amount of $5.9
million and the Corporation is in the process of liquidating the
collateral. The Corporation anticipates a final resolution of
this credit in the first quarter of 2002 without a significant
loss.
52
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Past due loans for the 2001 period decreased $4.3 million
compared to the corresponding period of 2000 and included
decreases of $3.1 million for commercial loans secured by
real estate and $1.7 million for commercial and industrial
loans. Past due loans secured by residential real estate and
loans to individuals increased $622 thousand and $110
thousand, respectively over the same time period.
Nonperforming loans as a percentage of total loans was
1.62% at December 31, 2001 compared to 1.41% at
December 31, 2000.
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.
During 2001 the Corporation established a “Watchlist
Committee” which includes credit workout officers of the
bank and meets bi-weekly to review watchlist credits for
workout progress or deterioration. Loan loss adequacy and
the status of significant nonperforming credits are monitored
on a quarterly basis by a committee made up of senior
officers of the bank and parent company. These committees
were established to provide additional internal monitoring
and analysis in addition to that provided by the credit
committees of the banks and parent company. Credit risk is
mitigated during the loan origination process through the use
of sound underwriting policies and collateral requirements.
The Corporation has also 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. Management also 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 $35.9 million in 2001 to $370.1
million. Dividends declared decreased equity by $34.1
million during 2001, an increase over dividends for the 2000
period. The retained net income of $16.1 million remained
in permanent capital to fund future growth and expansion.
Long-term debt payments and fair value adjustments to
unearned ESOP shares increased equity capital by $1.2
million. The market value adjustment to securities available
for sale increased equity by $16.5 million during 2001.
Amounts paid to fund the discount on reinvested dividends
reduced equity by $612 thousand. Proceeds from the
reissuance of treasury shares to provide for stock options
exercised increased equity by $2.5 million during 2001,
while the tax benefit related to the stock options, increased
equity by $269 thousand.
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 to the
Consolidated Financial Statements 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 analyzing and
monitoring 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.
53
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 13,000. 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.
High Sale
Low Sale
$ 11.45
$ 15.00
$ 14.35
$ 13.00
$
9.50
$ 10.30
$ 10.80
$ 11.10
High Sale
Low Sale
$ 12.000
$ 11.625
$ 10.188
$ 10.875
$ 8.625
$ 9.063
$ 8.750
$ 8.875
Cash
Dividends
Per Share
$ 0.145
$ 0.145
$ 0.145
$ 0.150
Cash
Dividends
Per Share
$ 0.140
$ 0.140
$ 0.140
$ 0.145
Period
2001
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Period
2000
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
54
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
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 22, 2002 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
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
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