Annual Report 2002
Banking
Insurance
Trust
Financial Management
Investments
Table of Contents
Message to Shareholders..................................... 2
Affi liate Management....................................... 10
Board of Directors............................................ 11
Corporate Information/Market Area .................. 12
Independent Auditors’ Report ........................... 13
Consolidated Financial Statements .................... 14
Notes to Consolidated Financial Statements ....... 18
Quarterly Summary of Financial Data ................ 38
Selected Financial Data .................................... 39
Management’s Discussion and Analysis of
Financial Condition and Results of Operations .... 40
Common Stock Information .............................. 55
Shareholder Information .................................. 56
A Message To Shareholders: The First Commonwealth Story
The year 2002 was one of substantial progress for First Commonwealth. Since 1983,
company, we have been making steady progress in building an integrated, full-
when First Commonwealth Financial Corporation was formed as a bank holding
service fi nancial services company that serves our clients and
builds shareholder value. With the recent addition of a fi nancial
planning company, we now have in place the fi ve core competen-
cies that will provide the basis for our future success. Banking,
insurance, trust, fi nancial management, and investments, fully
integrated and professionally delivered, form the business model
that will drive growth and performance.
First Commonwealth Financial Corporation reported net
income of $43.5 million for the year ended December 31, 2002,
which represents $0.75 basic earnings per share and diluted earn-
ings per share of $0.74. These results include the effects of $6.1
million of restructuring costs and $8.0 million litigation settle-
ment. Net of tax, these nonrecurring charges reduced net income
by $9.2 million.
Excluding the nonrecurring charges, core net income
increased $4.9 million to $52.3 million generating basic core
earnings per share of $0.90, compared to $0.82 basic core earn-
ings per share for 2001. Core net income increased 10.3% over
the previous year.
This paper girl was part of a video
presentation to “spread the news” and
introduce the company’s new name
and unifi ed brand at an all-employee
event last October.
Annual Report 2002
3
One name. One unifi ed organization.
F irst Commonwealth has grown over the years by merging with community banks
throughout 18 counties in central and western Pennsylvania. We had retained our
local community identities by keeping their names, personnel, and boards of direc-
tors. While this model had served our communities very well over the years, we lacked a
unifi ed brand that identifi ed us as one of the largest Pennsylvania-based fi nancial services
companies. On October 14, 2002, we changed that model by bringing all 90 of our com-
munity bank offi ces and our other affi liates under a common brand, First Commonwealth.
We unveiled a new logo, colors, and signage through an aggressive marketing strategy to
reintroduce ourselves to the marketplace.
A unifi ed brand yields important benefi ts for our
A unifi ed brand yields important benefi ts for our
clients. All of First Commonwealth Bank’s community offi ces
clients. All of First Commonwealth Bank’s community offi ces
have the same identity, products, and professional service
have the same identity, products, and professional service
that provide a consistent experience throughout the offi ce
that provide a consistent experience throughout the offi ce
network. The Insurance, Trust, and Financial Planning
network. The Insurance, Trust, and Financial Planning
affi liates are now clearly linked with First Commonwealth
affi liates are now clearly linked with First Commonwealth
Bank to provide integrated solutions to meet any client need.
Bank to provide integrated solutions to meet any client need.
The fi nancial power and product diversity of a $4.5 billion
The fi nancial power and product diversity of a $4.5 billion
fi nancial services company is now clearly evident to all current
fi nancial services company is now clearly evident to all current
and prospective clients.
The ability to market our products is greatly enhanced
with a unifi ed brand, as is our ability to more effectively reach
the total market through television and radio advertising. First
All First Commonwealth community banks,
products, and services now have a single
identity, but maintain their personal
approach to service.
Commonwealth’s brand identity was highlighted on “Champions of Industry” hosted by
Pat Summerall. This program was recently broadcast on the Discovery Channel. We also
enjoy national media recognition through the fi nancial commentaries of Rick Applegate,
President of our affi liate First Commonwealth Financial Advisors, on CNBC, CNNfn and
Bloomberg. Rick can also be heard on weekday mornings on News Talk 1020 KDKA Radio.
Annual Report 2002
5
Financial Solutions. For Life.
Unifying our brand was just one of many highlights in 2002. Early in the year we
rolled out High Performance Checking, a family of accounts serving every type of
consumer and commercial client. “WebBank,” our full internet banking solution,
was launched in March 2002 and resulted in a tripling of clients utilizing this delivery
channel by year-end. During the year we completed a two-year project
to upgrade all of our technology to a single world-class platform. A
Loan Production Offi ce was opened in downtown Pittsburgh this past
year with signifi cant new client acquisition.
We are particularly proud of First Commonwealth Bank’s
record with the Small Business Administration (SBA) Loan Program.
For the SBA’s last fi scal year, First Commonwealth ranked third in
volume in the state and Pittsburgh District and second in dollar
amount in the Pittsburgh District. The SBA also named Pat Nagle,
one of our Commercial Lending Offi cers, as the 2002 Pennsylvania
Financial Services Advocate of the Year.
In addition, First Commonwealth was ranked fi rst in Penn-
sylvania and seventh in the nation for our participation in Commu-
nity Express, a program for new markets in low-to-moderate income
communities with an emphasis on loans granted to women, veterans,
and minority-owned businesses. First Commonwealth is also the most
active community bank in the Pennsylvania Treasury Small Business
Development Program.
First Commonwealth Commercial
Lending Offi cer Pat Nagle was named
by the Small Business Administration
as the 2002 Pennsylvania Financial
Services Advocate of the Year.
Annual Report 2002
7
An unwavering commitment to our communities.
ur new brand and the many achievements of 2002 reinforce what First
Our new brand and the many achievements of 2002 reinforce what First
Commonwealth has always been committed to: building our communi-
Commonwealth has always been committed to: building our communi-
ties. We continue to encourage all First Commonwealth employees to
ties. We continue to encourage all First Commonwealth employees to
be active and involved in making their communities better places to live and
be active and involved in making their communities better places to live and
raise their families. In order to recognize extraordinary volunteer activity, we
raise their families. In order to recognize extraordinary volunteer activity, we
have established a “Golden Tower Award” that is awarded to one exceptional
have established a “Golden Tower Award” that is awarded to one exceptional
employee each month. There are also two “Spirit of Community Service Awards”
employee each month. There are also two “Spirit of Community Service Awards”
presented monthly to further inspire all of our employees to give back to their
presented monthly to further inspire all of our employees to give back to their
home communities.
A clock tower was chosen as our logo because it symbolizes
A clock tower was chosen as our logo because it symbolizes
the enduring strength of the communities in which we operate. At First
the enduring strength of the communities in which we operate. At First
Commonwealth we know that we can best build our success by building
stronger communities. We are delighted to have reached this moment in
our Corporation’s history and to be in a position to share our success
with our shareholders.
On a fi nal note, you should know that corporate integrity
has been a priority for First Commonwealth long before the on-
slaught of corporate scandals and the many laws and regulations
adopted in response. First Commonwealth will continue to operate
in full compliance with all required corporate governance practices.
The Board of Directors remains committed to protecting the inter-
ests of our shareholders.
The Golden Tower Award, created
to reinforce First Commonwealth’s
commitment to communities and
to celebrate the new brand, will be
awarded each month. It will honor
a First Commonwealth employee
who gives generously of his or her
time and talent as a volunteer.
Annual Report 2002
9
First Commonwealth Affi liate Pres i dents
Front row (L to R): Gerard M. Thomchick, Johnston A. Glass, Richard R. Applegate
Back row (L to R): John O. Campbell, William A. Mrozowski, Sue A. McMurdy
Richard R. Applegate
President and Chief Executive Offi cer, First Commonwealth
Financial Advisors Inc., 4035 William Flynn Highway,
Allison Park, PA 15101 • (412) 492-8787
Sue A. McMurdy
President & Chief Ex ec u tive Offi cer, First Com mon wealth
Systems Cor po ra tion, 22 North Sixth Street,
Indiana, PA 15701 • (724) 349-4310
John O. Campbell
William A. Mrozowski
President and Chief Executive Offi cer, First Com mon wealth
In sur ance Agency, First Com mon wealth Place, 654 Phil a -
del phia Street, Indiana, PA 15701 • (724) 349-6056
President & Chief Executive Offi cer, First
Commonwealth Trust Com pa ny, 614 Philadelphia Street,
Indiana, PA 15701 • (724) 465-3282
Johnston A. Glass
Gerard M. Thomchick
President & Chief Executive Offi cer, First Com mon wealth
Bank, Central Offi ces, Phil a del phia and Sixth Streets,
In di ana, PA 15701 • (724) 349-3400
President and Chief Executive Offi cer, First Com mon wealth
Professional Resources In c., 22 North Sixth Street,
Indiana, PA 15701 • (724) 349-7220.
President, Com mon wealth Trust Credit Life Insurance
Company, 2700 North Third Street, Suite 2000,
Phoenix, AZ 85004
First Commonwealth Financial Corporation
10
Board of Directors
Front row (L to R): James W. Newill, Laurie Stern Singer, Dale P. Latimer, E. James Trimarchi
Middle row (L to R): Joseph E. O'Dell, Ray T. Charley, Alan R. Fairman, David S. Dahlmann
Back row (L to R): David R. Tomb, Jr., Esq., Edward T. Côté, John A. Robertshaw, Jr., Johnston A. Glass
Ray T. Charley Greensburg
President, Thomi Co.
Edward T. Côté Rector
Associate, The Wakefi eld Group
David S. Dahlmann Greensburg
Adjunct Professor
Alan R. Fairman Punxsutawney
Business Manager, Fairman Drilling Company
Johnston A. Glass Indiana
Vice Chairman, First Com mon wealth Financial
Corporation, and President and Chief Executive Offi cer,
First Commonwealth Bank
Dale P. Latimer New Al ex an dria
Chairman of the Board, R & L Development Co.
James W. Newill Highland Beach, FL
Certifi ed Public Ac coun tant, Former Pres i dent,
J.W. Newill Com pa ny
Joseph E. O'Dell Indiana
President and Chief Executive Offi cer, First
Com mon wealth Financial Cor po ra tion
John A. Robertshaw, Jr. Greensburg
Former Chairman, Laurel Vending, Inc.
Laurie Stern Singer Allison Park
President, Al legh eny Valley Development Cor po ra tion
David R. Tomb, Jr., Esq. Indiana
Attorney at Law
E. James Trimarchi Indiana
Chairman of the Board, First Commonwealth
Fi nan cial Corporation
Annual Report 2002
11
Corporate Information
Corporate Description
First Commonwealth Fi nan cial Cor po ra tion
is a Penn syl va nia busi ness cor po ra tion es tab lished in
1983, reg is tered as a bank holding com pa ny by the
Board of Gov er nors of the Fed er al Reserve System.
Executive Offi ces
Old Courthouse Square,
22 North Sixth Street
Indiana, Pennsylvania
Mail Address
Post Offi ce Box 400
Indiana, Pennsylvania 15701-0400
Telephone (724)349-7220
Executive Offi cers
E. James Trimarchi
Chairman of the Board
Joseph E. O’Dell
President and Chief Ex ec u tive Offi cer
Johnston A. Glass
Vice Chairman, Growth
Gerard M. Thomchick
Senior Executive Vice President and
Chief Operating Offi cer
John J. Dolan
Executive Vice President and Chief Financial Offi cer
Sue A. McMurdy
Senior Vice President and Chief
Information Offi cer
Corporate Executive Offi ces
First Commonwealth Market Area
Elk
Jefferson
Butler
Armstrong
Clearfield
Centre
Indiana
Cambria
Blair
Westmoreland
Huntingdon
Somerset
Bedford
Franklin
Lawrence
Beaver
Allegheny
Washington
David R. Tomb, Jr.
Senior Vice President,
Secretary and Treasurer
Thaddeus J. Clements
Senior Vice President,
Human Re sourc es
William R. Jarrett
Senior Vice President,
Risk Man age ment
R. John Previte
Senior Vice Pres i dent, In vest ments
For shareholder in for ma tion see
inside back cover of this report.
Headquarters
For other information call our Convenience Banking
Center at 1-800-711-BANK (2265) or visit our website:
www.fcbanking.com
First Commonwealth has fi led for trademark protection of the clock
tower and the words First Commonwealth.
First Commonwealth Financial Corporation
12
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS’ REPORT
INDEPENDENT AUDITORS’ REPORT
INDEPENDENT AUDITORS’ REPORT
INDEPENDENT AUDITORS’ REPORT
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, 2002 and 2001, and the related
consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2002. 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, 2002 and 2001, and
the results of their operations and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE, LLP
Pittsburgh, Pennsylvania
January 22, 2003
1313131313
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands)
ASSETS
Cash and due from banks
Interest-bearing bank deposits
Securities available for sale, at market
Securities held to maturity, at amortized cost, (Market value
$204,887 in 2002 and $298,643 in 2001)
Loans
Unearned income
Allowance for credit losses
Net loans
Premises and equipment
Other real estate owned
Goodwill
Amortizing intangibles, net
Other assets
Total assets
LIABILITIES
Deposits (all domestic):
Noninterest-bearing
Interest-bearing
Total deposits
Short-term borrowings
Other liabilities
Company obligated mandatorily redeemable
capital securities of subsidiary trust
Other long-term debt
Total long-term debt
Total liabilities
SHAREHOLDERS’ EQUITY
Preferred stock, $1 par value per share, 3,000,000 shares
authorized, none issued
Common stock $1 par value per share, 100,000,000 shared authorized;
62,525,412 shares issued in 2002 and 2001; 58,962,543 shares
outstanding in 2002 and 58,451,624 shares outstanding in 2001
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock (3,562,869 and 4,073,788 shares at
December 31, 2002 and 2001, respectively at cost)
Unearned ESOP shares
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
1414141414
December 31,
2002
2001
$
81,114
1,973
1,482,771
$
98,130
4,250
1,469,118
197,838
293,290
2,609,440
(806)
(34,496)
2,574,138
45,730
1,651
8,131
29
131,368
4,524,743
377,466
2,666,658
3,044,124
469,065
30,230
35,000
544,934
579,934
4,123,353
$
$
2,569,231
(1,297)
(34,157)
2,533,777
46,366
1,619
6,539
232
130,209
4,583,530
412,695
2,680,455
3,093,150
427,736
28,358
35,000
629,220
664,220
4,213,464
-0-
-0-
62,525
64,885
296,165
25,851
(44,981)
(3,055)
401,390
4,524,743
62,525
66,176
288,219
8,703
(51,431)
(4,126)
370,066
4,583,530
$
$
$
$
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, except per share data)
Years Ended December 31,
2002
2001
2000
$
179,901
$
202,173
$
208,548
84,137
9,520
1,973
6
31
275,568
78,572
6,029
3,325
34,747
38,072
122,673
152,895
12,223
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
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
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
140,672
130,226
127,313
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
Goodwill amortization
Intangible amortization
Litigation settlement
Restructuring charges
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
642
5,008
11,538
3,631
4,711
11,676
37,206
58,149
6,750
9,970
2,124
3,937
-0-
203
8,000
6,140
30,168
125,441
52,437
8,911
3,329
4,995
11,160
3,192
4,618
12,930
40,224
54,521
6,520
9,050
3,296
3,825
920
490
-0-
-0-
26,385
105,007
65,443
15,254
1,745
5,555
10,562
1,951
3,419
10,451
33,683
52,529
6,577
8,154
3,310
3,495
865
498
-0-
-0-
24,033
99,461
61,535
14,289
$
$
$
43,526
$
50,189
$
47,246
58,409,614
58,742,018
57,885,478
58,118,057
57,558,929
57,618,671
0.75
0.74
$
$
0.87
0.86
$
$
0.82
0.82
The accompanying notes are an integral part of these consolidated financial statements.
1515151515
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollar Amounts in Thousands)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Unearned
ESOP
Shares
Total
Shareholders’
Equity
Balance at December 31, 1999
$
62,525
$
68,330
$ 257,773
$ (40,304)
$ (55,448)
$
(6,193)
$ 286,683
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
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, 2002
-0-
-0-
47,246
-0-
-0-
-0-
47,246
-0-
-0-
-0-
33,630
-0-
-0-
33,630
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
62,525
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
62,525
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
62,525
$
$
-0-
-0-
-0-
-0-
(113)
(593)
-0-
(476)
75
67,223
-0-
-0-
-0-
-0-
-0-
-0-
31
(612)
(735)
269
66,176
-0-
-0-
-0-
-0-
-0-
-0-
86
(637)
(964)
224
64,885
-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-
-0-
-0-
-0-
288,219
(2,128)
16,511
16,511
-0-
-0-
-0-
-0-
-0-
8,703
43,526
-0-
-0-
17,542
-0-
-0-
43,526
(35,580)
-0-
(394)
17,148
17,148
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
(873)
1,655
-0-
(54,666)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
3,235
-0-
(51,431)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
$ 296,165
-0-
-0-
-0-
25,851
$
-0-
6,450
-0-
$ (44,981)
$
-0-
-0-
-0-
-0-
906
-0-
-0-
-0-
-0-
(5,287)
(1,134)
32,496
79,742
(32,850)
793
(593)
(873)
1,179
75
334,156
-0-
-0-
50,189
18,639
-0-
-0-
-0-
-0-
1,161
-0-
-0-
-0-
(4,126)
(2,128)
16,511
66,700
(34,139)
1,192
(612)
2,500
269
370,066
-0-
-0-
43,526
17,542
-0-
-0-
-0-
-0-
1,071
-0-
-0-
-0-
(3,055)
(394)
17,148
60,674
(35,580)
1,157
(637)
5,486
224
$ 401,390
The accompanying notes are an integral part of these consolidated financial statements.
1616161616
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 (decrease) in income taxes payable
Change in deferred taxes
Other-net
Net cash provided by operating activities
Investing Activities
Transactions with securities held to maturity:
Sales
Maturities and redemptions
Purchases of investment securities
Transactions with securities available for sale:
Sales
Maturities and redemptions
Purchases of investment securities
Proceeds from sales of loans and other assets
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 provided (used) by investing activities
Financing Activities
Proceeds from issuance of other long-term debt
Repayments of other long-term debt
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 (decrease) in deposits
Net cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
Years Ended December 31,
2001
2000
2002
$
43,526
$
50,189
$
47,246
12,223
7,360
(498)
(4,711)
2,860
(2,280)
(2,754)
(594)
2,408
57,540
-0-
110,769
(15,266)
15,328
545,791
(547,799)
102,225
(5,000)
2,278
(154,614)
(6,382)
47,330
18,200
(101,425)
(637)
(35,208)
(56,650)
97,980
-0-
224
-0-
4,656
(49,026)
(121,886)
(17,016)
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
(15,000)
(3,823)
(178,465)
(7,886)
(212,272)
9,500
(974)
(612)
(33,809)
91,425
64,138
(9,591)
269
-0-
2,500
39,384
162,230
(3,718)
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
(15,000)
790
(36,435)
(7,736)
(14,109)
89,900
(70,493)
(593)
(32,553)
13,875
(166,531)
-0-
75
(873)
326
115,318
(51,549)
475
Cash and cash equivalents at January 1
Cash and cash equivalents at December 31
98,130
81,114
$
101,848
98,130
$
101,373
101,848
$
The accompanying notes are an integral part of these consolidated financial statements.
1717171717
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001 and 2000
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 one commercial bank,
a nondepository trust company, insurance agency and
financial advisor, the Corporation provides a full range of
loan, deposit, trust, insurance and financial advisory services
primarily to individuals and small to middle-market
businesses in eighteen 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
2002. 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
1818181818
purpose of selling them in the near term are to be classified
as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. Debt and
equity securities not classified as either held-to-maturity
securities or trading securities are classified as securities
available-for-sale and are reported at fair value, with
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
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
right to service mortgage loans is recognized as a separate
asset and amortized in proportion to, and over the period of,
estimated net servicing income (servicing revenue in excess
of servicing cost). Mortgage servicing rights are periodically
evaluated for impairment based on fair values.
Loan Fees
Loan origination and commitment fees, net of associated
direct costs, are deferred and the net amount is amortized as
an adjustment to the related loan yield on the interest
method, generally over the contractual life of the related
loans or commitments.
Other Real Estate Owned
Real estate, other than bank premises, is recorded at the
lower of cost or fair value less selling costs at the time of
acquisition. Expenses related to holding the property, net of
rental income, are generally charged against earnings in the
current period.
Allowance for Credit Losses
The Corporation maintains an allowance for credit losses at a
level deemed sufficient to absorb losses which are inherent
in the loan and lease portfolios at each balance sheet date.
Management 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, 2002.
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 and
management or staff considerations. 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
1919191919
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 1—Statement of Accounting Policies (continued)
Allowance for Credit Losses (continued)
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.
Bank-Owned Life Insurance
The Corporation purchased insurance on the lives of certain
groups 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 $92,644 and
$84,788 at December 31, 2002 and 2001, 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 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.
assets of the business acquired are recorded at their estimated
fair value as of the date of acquisition with any excess of the
cost of the acquisition over the fair value of the net tangible
and intangible assets acquired recorded as goodwill. Results
of the acquired business are included in the income statement
from the date of the acquisition.
Goodwill and Other Intangible Assets
The Corporation adopted FASB Statement No. 142,
“Goodwill and Other Intangible Assets” (“FAS No. 142"),
effective January 1, 2001. 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 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. (For additional
information regarding the impact of the adoption of FAS No.
142 see Note 4.)
Accounting for the Impairment of Long-Lived Assets
The Corporation reviews long-lived assets, such as premises
and equipment and intangibles for impairment whenever
events or changes in circumstances, such as a significant
decrease in the market value of an asset or the extent or
manner in which an asset is used, indicate that the carrying
amount of an asset may not be recoverable. If there is an
indication that the carrying amount of an asset may not be
recoverable, future discounted cash flows expected to result
from the use of the asset are estimated. If the sum of the
expected cash flows is less than the carrying value of the
asset, a loss is recognized for the difference between the
carrying value and fair market value of the asset.
Income Taxes
The Corporation records taxes in accordance with the asset
and liability method utilized by 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.
Business Combinations
Comprehensive Income Disclosures
In July 2001, the Financial Accounting Standards Board
(“FASB”) issued Statement No. 141, “Business
Combinations” (“FAS No. 141”) which required the
purchase method of accounting for business combinations
initiated after June 30, 2001. Under the purchase method, net
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.
2020202020
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
In December 2002, the FASB issued Statement No. 148,
“Accounting for Stock-Based Compensation-Transition and
Disclosure” (“FAS No. 148”). FAS No. 148 amends FASB
Statement No. 123 “Accounting for Stock-Based
Compensation” (“FAS No. 123”) to provide alternative
methods of a voluntary transition to FAS No. 123’s fair
value method of accounting for stock-based employee
compensation. FAS No. 148 also amends the disclosure
provisions of FAS No. 148 and APB Opinion No. 28,
“Interim Financial Reporting” (“APB 28”), to require
disclosure in the summary of significant accounting policies
of the effects of an entity’s accounting policy with respect to
stock-based employee compensation on reported net income
and earnings per share in annual and interim financial
statements. FAS No. 148 does not amend FAS No. 123 to
require companies to account for employee stock options
using the fair value method, the disclosure provisions of the
statement apply to all companies with stock-based
compensation, regardless of whether they account for that
compensation using the fair value method of FAS No. 123 or
the intrinsic value method of APB Opinion No. 25
“Accounting for Stock Issued to Employees” (“APB 25”).
FAS No. 148 amendments of the transition and annual
disclosure requirements of FAS No. 123 are effective for
fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim
disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning
after December 15, 2002. Implementation of FAS No. 148
did not have a material impact on the Corporation’s financial
condition or results of operations.
FAS No. 123 defines a method of measuring stock-based
compensation, such as stock options granted, at an estimated
fair value. FAS No. 123 also permits the continued
measurement of stock based compensation under provisions
of 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.
Generally expenses are easily measured as of the date they
are incurred. At some point the Corporation must pay cash
to cover these expenses. This is not the case with the
methodology for expensing stock options. The amount
expensed for the purposes of this disclosure is equivalent to a
theoretic value calculated on the date the option was granted.
Calculating a value of the option at the grant date requires a
variety of assumptions which may have little to do with the
actual realization of value by the option holder. In fact many
of the options are forfeited or expire for a variety of reasons
without ever being exercised.
Additionally, valuation models operate under the assumption
that the options are similar to those that are actively traded.
In reality they are not marketable. Also there exists times
where executives are unable to exercise their options due to
trading restrictions. This limits the ability of certain option
holders to benefit from some periods of volatility. Changes
in the assumptions used could affect the estimated impact of
the stock options and this disclosure.
The variety of methodologies and assumptions permitted to
be used by each reporting company gives rise to a high
degree of subjectivity in estimating the impact of the options.
Management is concerned that due to the lack of uniformity
and variations in assumptions, there may not be reasonable
comparability between institutions.
2121212121
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 1—Statement of Accounting Policies (continued)
Employee Stock Option Plan (continued)
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 FAS
No. 123, the Corporation’s net income would have been
reduced on a pro forma basis by $2,278, $1,978 and $116 for
2002, 2001 and 2000, respectively. Basic earnings per share
on a pro forma basis would have declined $0.04 per share for
2002 and 2001 and $0.00 per share for 2000 while diluted
earnings per share would have declined over the same periods
by $0.04 per share, $0.03 per share and $0.00 per share. See
Note 22 for additional information. Pro forma amounts are
shown below:
2002
2001
2000
As
Pro
As
Pro
As
Pro
Reported Forma Reported Forma Reported Forma
$ 43,526 $41,248 $ 50,189 $ 48,211 $47,246 $ 47,130
$
$
0.75 $
0.71 $
0.87 $
0.83 $
0.82 $
0.82
0.74 $
0.70 $
0.86 $
0.83 $
0.82 $
0.82
Net Income
Basic earnings
per share
Diluted earnings
per share
Derivative Instruments and Hedging Activities
FASB Statement No. 133 “Accounting for Derivative
Instruments and Hedging Activities” (“FASB No. 133”), as
amended, established accounting and reporting standards for
derivative instruments and for hedging activities which
requires that an entity recognize all derivatives as either
assets or liabilities on the 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.
The Corporation currently has no freestanding derivative or
hedging instruments. Management reviews contracts from
various functional areas of the Corporation to identify
potential derivatives embedded within selected contracts.
Management has identified potential embedded derivatives
in certain loan commitments for residential mortgages where
the Corporation has intent to sell to an outside investor. Due
to the short-term nature of these loan commitments (30 days
or less) and the minimal historical dollar amount of
commitments outstanding, the corresponding impact on the
Corporation’s financial condition and results of operation has
not been material.
Earnings Per Common Share
Basic earnings per share excludes dilution and is computed
by dividing income available to common shareholders less
2222222222
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 June 2001, the FASB issued Statement No. 143,
“Accounting for Asset Retirement Obligations” (“FAS No.
143”). 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. The standard is effective for fiscal years
beginning after June 15, 2002 and implementation is not
expected to have a material impact on the Corporation’s
financial condition or results of operations.
Effective January 1, 2002, the Corporation adopted FASB
Statement No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“FAS No. 144”) which
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
did not have a material impact on the Corporation’s financial
condition or results of operations.
In April 2002, the FASB issued Statement No. 145,
“Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections” (“FAS No. 145”). FAS No. 145 rescinds
Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effect. As a result, the criteria in Opinion 30 will now be
used to classify those gains and losses. This statement also
amends FASB Statement No. 13 to require that certain lease
modifications that have economic effects similar to sale-
leaseback transactions be accounted for in the same manner
as sale-leaseback transactions. This statement also makes
technical corrections to existing pronouncements, which are
not substantive but in some cases may change accounting
practice. FAS No.145 was effective for transactions
occurring after May 15, 2002. Implementation of FAS No.
145 did not have a material impact on the Corporation’s
financial condition or results of operations.
In July 2002, the FASB issued Statement No. 146,
“Accounting for Costs Associated with Exit or Disposal
Activities” (“FAS No. 146”). FAS No. 146 replaced EITF
Issue No. 94-3, “Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)”. The
standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at
the date of a commitment to an exit or disposal plan. FAS No.
146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. Upon adoption, FAS No.
146 is not expected to have a material impact on the
Corporation’s financial condition or results of operations.
In October 2002, the FASB issued Statement No. 147,
“Acquisitions of Certain Financial Institutions, an
amendment of FASB Statements No. 72 and 144 and FASB
No. 9” (“FAS No. 147”). FAS No. 147 removes acquisitions
of financial institutions, except for transactions between two
or more mutual enterprises, from the scope of both FASB
Statement No. 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with FASB
Statements No. 141 and No. 142. As a result, the requirement
in FASB Statement No. 72 to recognize, and subsequently
amortize, any excess of the fair value of liabilities assumed
over the fair value of tangible and identifiable assets
acquired as an unidentifiable asset no longer applies to
acquisitions within the scope of this statement. In addition,
this statement amends FASB Statement No. 144 to include in
its scope long-term customer relationship intangible assets of
financial institutions such as depositor and borrower-
relationship intangible assets and credit cardholder assets.
Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment
loss recognition and measurement provisions that FASB
Statement No. 144 requires for other long-lived assets that
are held and used. The provisions of FAS No. 147 were
effective October 1, 2002. Implementation of FAS No. 147
did not have any impact on the Corporation’s financial
condition or results of operations.
In November 2002, the FASB issued FASB Interpretation
No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure
Requirements for Guarantees of Indebtedness of Others.”
The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after
December 15, 2002, and requires disclosure of the nature of
the guarantee, the maximum potential of future payments the
guarantor could be required to make under the guarantee, and
the current amount of the liability, if any, for the guarantor’s
obligation under the guarantee. The recognition requirements
of FIN 45 are to be applied prospectively to guarantees issued
or modified after December 31, 2002. This interpretation
expands the disclosures to be made by a guarantor in its
financial statements about its obligations under certain
guarantees and requires the guarantor to recognize a liability
for the fair value of an obligation assumed under a guarantee.
FIN 45 clarifies the requirements of FASB Statement No. 5
(“FAS No. 5”), “Accounting for Contingencies,” relating to
guarantees. In general, FIN 45 applies to contracts or
indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on
changes in an underlying that is related to an asset, liability, or
equity security of the guaranteed party. Certain guarantee
contracts are excluded from both the disclosure and
recognition requirements of this interpretation, including, but
not limited to, guarantees related to employee compensation,
residual value guarantees under capital lease arrangements,
commercial letters of credit, loan commitments, subordinated
interests in Special Purpose Entities and guarantees of a
company’s own future performance. Other guarantees are
subject to the disclosure requirements of FIN 45 but not the
recognition provisions and include, among others, a guarantee
accounted for as a derivative instrument under FAS No. 133, a
parent’s guarantee of debt owed to a third party by its
subsidiary or vice versa and a guarantee which is based on
performance not price. Guarantees that have been entered into
by the Corporation are disclosed in Note 11. The Corporation
does not expect the requirements of FIN 45 to have a material
impact on its financial condition or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46
(“FIN 46”), “Consolidation of Variable Interest Entities,” the
provisions of which became effective upon issuance. This
interpretation provides guidance on identification of variable
interest entities (“VIE”) and the determination of when the
assets, liabilities, noncontrolling interest and results of
operations of a VIE should be included in a company’s
consolidated financial statements. Companies that hold variable
interests in an entity will need to consolidate that entity if the
company’s interest in the VIE is such that the company will
absorb a majority of the entity’s expected residual returns,
should they occur. The Corporation is currently assessing the
impact, if any, the interpretation will have on the Corporation’s
financial condition or results of operations.
2323232323
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 2—Supplemental Comprehensive Income Disclosures
The following table identifies the related tax effects allocated to each component of other comprehensive income in the
Statements of Changes in Shareholders’ Equity:
December 31, 2002
Tax
Pre-tax (Expense)
Amount Benefit
Net of
Tax
Amount
December 31, 2001
Tax Net of
Pre-tax (Expense) Tax
Amount
Benefit Amount
December 31, 2000
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
$ 26,987
$ (9,445) $ 17,542
$ 28,676
$(10,037) $ 18,639
$ 51,739 $(18,109) $ 33,630
(606)
26,381
$ 26,381
212
(9,233)
(394)
17,148
$ (9,233) $ 17,148
(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
NOTE 3—Supplemental Cash Flow Disclosures
Cash paid during the year for:
Interest
Income taxes
2002
2001
2000
$ 124,953
$ 12,010
$ 186,558
$ 11,890
$ 166,919
$ 12,842
expense by $920 in 2002. Goodwill amortization expense
was $920 and $865 for 2001 and 2000, respectively.
Goodwill represented basic and diluted earnings per share of
$0.016 and $0.015 for 2001 and 2000, respectively. Upon
implementation of the standard, the Corporation determined
no impairment of its outstanding goodwill existed.
Noncash investing and financing activities:
ESOP loan reductions
$
1,071
$
1,161
$
906
NOTE 5—Business Combination
Loans transferred to
other real estate owned
and repossessed assets
Gross increase in market
value adjustment to
securities available for sale
Treasury stock reissued for
insurance agency interest
acquired
Treasury stock reissued
for business combination
$
5,029
$
5,246
$
6,405
$ 26,381
$ 25,402
$ 49,994
$
$
-0-
$
-0-
$
852
830
$
-0-
$
-0-
NOTE 4—Goodwill and Other Intangible Assets
On January 1, 2002, the Corporation adopted FASB
Statement No. 142, “Goodwill and Other Intangible Assets”
(“FAS No. 142”), which addresses the accounting and
reporting for acquired goodwill and other intangible assets
which supersedes APB Opinion No. 17, “Intangible Assets.”
FAS No. 142 includes requirements to test goodwill and
indefinite-lived intangible assets for impairment rather than
amortize them. As of January 1, 2002, the Corporation had
goodwill, net of accumulated amortization, of approximately
$5,800 subject to the transitional testing provisions of FAS
No. 142. Also, management reclassified an intangible asset
previously recorded by an insurance subsidiary when
acquiring the expiring list of policy holders from their
joint-venture partner to goodwill with a net carrying amount
of $718.
As of January 1, 2002, the Corporation discontinued the
amortization of goodwill which reduced other operating
2424242424
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 headquartered 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. Goodwill in the amount of $1,656 was
recorded as a result of the transaction. As prescribed under
the purchase method of accounting, the results of operations
of SCC and SFA from the date of acquisition are included in
the Corporation’s financial statements for 2002.
In October 2002, SFA was merged into SCC and the name
was changed to First Commonwealth Financial Advisors,
Inc. This acquisition should expand the Corporation’s
product offerings and positively impact fee based revenue,
which is a continuing priority.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 6—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 bank
maintained with the Federal Reserve Bank average balances
of $1,896 during 2002 and $4,269 during 2001.
NOTE 7—Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of securities available for sale at December 31, 2002
and 2001:
2002
2001
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
$
3,509
$
87
$
-0-
$
3,596
$
13,084
$
137
$
-0- $
13,221
Obligations of U.S. Government
Corporation and Agencies:
Mortgage Backed Securities
870,777
24,623
Other
101,464
1,324
(39)
-0-
895,361
102,788
840,639
113,464
8,140
2,181
(954)
847,825
(5)
115,640
Obligations of States and
Political Subdivisions
Debt Securities Issued
by Foreign Governments
115,936
2,800
(107)
118,629
103,492
749
(1,599)
102,642
75
-0-
-0-
75
175
-0-
-0-
175
Corporate Securities
235,460
9,000
(472)
243,988
229,259
5,382
(3,657)
230,984
Other Mortgage Backed
Securities
Total Debt Securities
Equities
Total Securities Available
for Sale
51,388
1,378,609
958
38,792
-0-
(618)
52,346
1,416,783
110,512
1,410,625
2,438
19,027
(32)
(6,247)
112,918
1,423,405
64,392
2,978
(1,382)
65,988
45,091
622
-0-
45,713
$ 1,443,001
$ 41,770
$ (2,000)
$ 1,482,771
$ 1,455,716
$19,649
$ (6,247) $ 1,469,118
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 18 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, 2002 and 2001, 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, 2002, 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
$
72,216
162,273
8,977
212,978
456,444
922,165
$ 1,378,609
$
74,165
166,077
9,329
219,505
469,076
947,707
$ 1,416,783
Proceeds from the sales of securities available for sale were
$15,328, $85,737, and $22,391 during 2002, 2001, and 2000,
respectively. Gross gains of $609, $3,419, and $1,752 and
gross losses of $-0-, $224, and $18 were realized on those
sales during 2002, 2001, and 2000, respectively.
Securities available for sale with an approximate fair value
of $712,827 and $637,915 were pledged at December 31,
2002 and 2001, respectively, to secure public deposits and
for other purposes required or permitted by law.
2525252525
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 8—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,
2002 and 2001:
2002
2001
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
$ 63,535
$ 1,713
$
Other
15,000
934
-0-
-0-
$ 65,248
$ 133,687
$ 2,594
$
(166)
$ 136,115
15,934
29,998
1,360
-0-
31,358
Obligations of States and
Political Subdivisions
Debt Securities Issued
by Foreign Governments
Corporate Securities
Total Securities Held to
Maturity
96,869
3,685
-0-
100,554
107,130
1,545
(788)
107,887
408
22,026
-0-
725
-0-
(8)
408
22,743
383
22,092
-0-
808
-0-
-0-
383
22,900
$ 197,838
$ 7,057
$
(8)
$ 204,887
$ 293,290
$ 6,307
$
(954)
$ 298,643
The amortized cost and estimated market value of debt
securities at December 31, 2002, 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
$
$
22,047
30,186
34,298
47,772
134,303
63,535
197,838
$
$
22,273
32,157
36,092
49,117
139,639
65,248
204,887
There were no sales of securities held to maturity in 2002,
2001 or 2000.
Securities held to maturity with an amortized cost of
$149,119 and $205,150 were pledged at December 31, 2002
and 2001, respectively, to secure public deposits and for
other purposes required or permitted by law.
NOTE 9—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,
2002
2001
$
633,955
$
529,300
20,998
739,018
663,220
14,727
849,787
638,576
505,139
47,110
2,609,440
(806)
$ 2,608,634
473,515
63,326
2,569,231
(1,297)
$ 2,567,934
Most of the Corporation’s business activity was with
customers located within Pennsylvania. The portfolio is well
diversified, and as of December 31, 2002 and 2001, there
were no significant concentrations of credit.
2626262626
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 10—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
2002
2001
2000
$ 34,157
$ 33,601
$ 33,539
2,048
1,281
1,299
12,223
11,495
10,030
13,932
$ 34,496
12,220
$ 34,157
11,267
$ 33,601
2002
2001
$
$
$
$
$
$
23,657
24,740
5,204
15,065
8,592
286
$
$
$
$
$
$
23,731
16,133
3,835
16,266
7,465
750
NOTE 11—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, 2002 and 2001, the Corporation did not
own or trade any other financial instruments with significant
off-balance-sheet risk including derivatives such as futures,
forwards, interest rate swaps, option contracts and the like,
although such instruments may be appropriate to use in the
future to manage interest rate risk.
The Corporation’s exposure to credit loss in the event of
nonperformance by the other party of the financial
instrument for commitments to extend credit, standby letters
of credit and commercial letters of credit written is
represented by the contract or notional amount of those
instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does
for on-balance-sheet instruments. The following table
identifies the notional amount of those instruments at
December 31, 2002 and 2001:
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit
Standby letters of credit
Commercial letters of credit
2002
2001
$
$
$
535,692
32,301
385
$
$
$
517,587
48,739
390
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 12—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
3-10 years
3-7 years
$
2002
6,023
46,995
9,112
52,732
15,777
130,639
$
2001
5,338
45,910
9,960
50,771
14,231
126,210
84,909
79,844
$ 45,730
$ 46,366
Depreciation and amortization related to premises and
equipment was $6,840 in 2002, $6,153 and $5,996 in 2001
and 2000, respectively.
2727272727
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 12—Premises and Equipment (continued)
NOTE 14—Short-term Borrowings
The Corporation leases various premises and assorted
equipment under noncancellable agreements. Total future
minimal rental commitments at December 31, 2002 were
as follows:
2003
2004
2005
2006
2007
Thereafter
Total
Premises
$
$
1,586
789
719
749
667
1,946
6,456
Equipment
963
$
39
-0-
-0-
-0-
-0-
1,002
$
Under the terms of various lease agreements, increases
in utilities and taxes may be passed on to the lessee.
Such adjustments are not reflected in the above table.
Additionally, various lease renewal options are available
and are not included in the minimum lease commitments
until such options are exercised. Total lease expense
amounted to $1,699 in 2002, $2,105 in 2001 and $1,935
in 2000.
NOTE 13—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
2002
71,649
1,100,889
1,494,120
2,666,658
$
$
2001
$
61,791
1,028,368
1,590,296
$ 2,680,455
Interest-bearing deposits at December 31, 2002 and 2001,
include reallocations from NOW and Super NOW accounts
of $374,695 and $323,490, 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, 2002 and 2001,
were certificates of deposit in denominations of $100 or
more of $489,702 and $497,318, respectively.
Interest expense related to $100 or greater certificates of
deposit amounted to $21,685 in 2002, $27,922 in 2001, and
$22,639 in 2000.
Included in time deposits at December 31, 2002, were
certificates of deposit with the following scheduled maturities:
Short-term borrowings at December 31 were as follows:
2002
2001
Ending Average Average Ending Average Average
Balance Balance Rate
Balance Balance Rate
$ 51,600 $ 63,169 1.86% $ 108,250 $ 46,608 3.28%
Federal funds
purchased
Borrowings
from FHLB
146,395
30,044 1.76% 40,000
9,918 2.45%
Securities
sold under
agreements
to repurchase
Treasury, tax
and loan
note option
222,577
225,793 1.78% 216,486
214,900 3.95%
48,493
20,902 1.47% 63,000
28,747 3.39%
Total
$ 469,065 $339,908 1.77% $ 427,736 $ 300,173 3.74%
Maximum
total at any
month-end
$ 469,065
$ 427,736
Interest expense on short-term borrowings for the years
ended December 31 is detailed below:
Federal funds purchased
Borrowings from FHLB
Securities sold under
agreements to repurchase
Treasury, tax and loan note option
Total interest on
short-term borrowings
$
2002
1,176
530
4,015
308
$
2001
2000
1,527
243
8,483
974
$
3,138
1,256
16,335
1,489
$
6,029
$ 11,227
$ 22,218
NOTE 15—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.
2003
2004
2005
2006
2007 and thereafter
$ 636,476
335,887
226,121
148,820
146,598
$ 1,493,902
2828282828
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.
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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 16—Other Long-term Debt
Other Long-term debt at December 31, follows:
2002
2001
Amount
Rate
Amount
Rate
3,055
Libor +1% $
4,126 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
February 2014
March 2016
December 2017
June 2019
April 2020
March 2022
-0-
-0-
5,000
100,000
100,000
100,000
50,000
65,000
25,000
55,000
6,525
10,000
1,844
6,542
8,091
842
8,035
$ 544,934
50,000
50,000
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%
7,121
5.68%
-0-
5.40%
1,935
5.65%
6.17%
6,798
8,375
5.72%
865
7.37%
-0-
5.90%
$ 629,220
5.82%
5.71%
6.94%
5.45%
5.48%
5.67%
5.03%
4.96%
6.12%
4.70%
5.68%
5.65%
6.17%
5.72%
7.37%
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
above advances, have been pledged as collateral with the
Federal Home Loan Bank of Pittsburgh.
Capital securities included in total long-term debt on the
Consolidated Balance Sheets are excluded from Note 16, but
are described in Note 15.
Scheduled loan payments for other long-term debt are
summarized below:
2003
2004
2005
2006
2007 Thereafter
Loan payments
$3,185
$3,222
$3,640 $2,650 $7,805 $524,432
NOTE 17—Common Share Commitments
At December 31, 2002 and 2001, the Corporation had
100,000,000 common shares authorized and 62,525,412
shares outstanding. Outstanding shares were reduced by
3,562,869 shares of treasury stock at December 31, 2002 and
4,073,788 shares at December 31, 2001. The Corporation
may be required to issue additional shares to satisfy common
share purchases related to the employee stock ownership
plan described in NOTE 20. The dilutive effect of stock
options outstanding on average shares outstanding in the
diluted earnings per share reported on the income statement
were 332,404, 232,579 and 59,742 shares at December 31,
2002, 2001 and 2000, respectively.
2929292929
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 17—Common Share Commitments (continued)
During 2000, 78,380 shares of treasury stock were acquired
at an average price of $11.14. Treasury shares consisting of
447,001 and 256,174 were reissued during 2002 and 2001
upon exercise of stock options.
During 2002, 67,484 shares of treasury stock were reissued
to fund the business combination described in Note 5.
NOTE 18—Restructuring Charges
The Corporation incurred restructuring charges of $6,140
during 2002. These restructuring charges were comprised of
the following: $4,652 of employee separation costs
consisting of severance packages for 95 employees from
various affiliates of the Corporation including all levels of
staff from the executive management level to back office
support staff, $1,068 related to realignment of the various
Boards of Directors and Board committees and $420
primarily related to the write off of obsolete signage and
supplies. These amounts are included as restructuring
charges, as a component of Other Expenses on the
Consolidated Statements of Income.
These restructuring charges resulted from the merger of the
charters of the Corporation’s two commercial banks (First
Commonwealth Bank and Southwest Bank) and the
adoption of a new common brand and identity for all
financial services subsidiaries.
The actual termination benefits paid and charged against the
total restructuring liability for 2002 were $1,263.
NOTE 19—Income Taxes
The income tax provision consists of:
2002
2001
2000
Current tax provision for income
exclusive of securities transactions:
Federal
State
Securities transactions
Total current tax provision
Deferred tax provision (benefit)
Total tax provision
$ 9,279
1
225
9,505
(594)
$ 8,911
$ 14,865
55
1,165
16,085
(831)
$ 15,254
$
$
12,155
(10)
611
12,756
1,533
14,289
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, 2002 and 2001 were as follows:
3030303030
Deferred tax assets:
Allowance for credit losses
Postretirement benefits other
than pensions
Accumulated depreciation
Severence expense
Other
Total deferred tax assets
Deferred tax liabilities:
Accumulated accretion of bond discount
Unrealized gain on securities available
for sale
Lease financing deduction
Loan origination fees and costs
Basis difference in assets acquired
Pension expense
Accumulated depreciation
Other
Total deferred tax liabilities
2002
2001
$
12,074
$
11,965
1,036
-0-
1,186
948
15,244
1,005
237
-0-
1,060
14,267
(327)
(295)
(13,920)
(9,272)
(1,774)
(337)
(399)
(578)
(574)
(27,181)
(4,686)
(10,535)
(999)
(453)
(281)
-0-
(315)
(17,564)
Net deferred tax liability
$
(11,937)
$
(3,297)
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:
2002
2001
2000
% of
Pretax
Amount Income Amount Income Amount Income
% of
Pretax
% of
Pretax
Tax at statutory rate $ 18,353 35.0
Increase (decrease)
resulting from:
Effect of
nontaxable
income
State income
taxes
Other
Total tax
provision $ 8,911 17.0
1
(1,578)
(7,865) (15.0)
0.0
(3.0)
$ 22,905 35.0 $ 21,537 35.0
(7,137) (10.9)
(6,595) (10.7)
55
(569)
0.1
(0.9)
(10)
(643)
(0.0)
(1.1)
$ 15,254 23.3 $ 14,289 23.2
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
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
the plan were $940 in 2002, $1,173 in 2001 and $1,005 in
2000 (See Note 22).
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 8% of compensation to the plan of
which up to 4% is matched 100% by the employer’s
contribution. The 401(k) plan expense was $2,616 in 2002,
$2,583 in 2001, and $2,444 in 2000. Prior to the plan
amendment effective February 1, 2002, the Corporation’s
401(k) plan permitted each participating employee to
contribute 10% of compensation to the plan of which up to
4% was 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
$133 in 2002, $150 in 2001, and $182 in 2000.
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.
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)
2002
2001
2000
$
$
-0- $
-0-
-0- $
343
346
-0-
(542)
(438)
-0-
-0-
93
(33)
-0- $ (125) $ (106)
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 $0
2002
2001
-0- $ 1,271
-0-
-0-
1,271
-0-
-0-
-0-
-0-
-0-
(1,271)
-0-
-0- $
-0-
-0- $
-0-
$
$
$
The following table sets forth the change in benefit
obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefit payment
Actuarial loss
Settlement loss
Benefit obligation at end of year
2002
2001
-0- $ 5,822
-0-
-0-
346
-0-
(6,496)
-0-
-0-
-0-
328
-0-
-0-
-0- $
$
$
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
2002
2001
-0- $ 6,785
982
-0-
-0-
-0-
-0-
(6,496)
-0- $ 1,271
$
$
Assumptions used in determining the actuarial present value
of the projected benefit obligation were as follows at
December 31:
Discount rates
Rates of increase in compensation levels
Expected long-term rates of return on assets
2002
N/A
N/A
N/A
2001
6.0%
N/A
6.5%
3131313131
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 20—Retirement Plans (continued)
Postretirement Benefits other than Pensions for
Acquired Subsidiary
Employees of Southwest were also covered by a post
retirement benefit plan.
Net periodic benefit cost of this plan was as follows:
2002
2001
2000
Service cost
Interest cost on projected benefit obligation
Amortization of transition obligation
Loss amortization
Net periodic benefit cost
$
-0- $
273
2
60
$ 335
6 $
7
190
2
-0-
$ 305 $ 199
232
2
65
The following table sets forth the plan’s funded status and
the amounts recognized on the Corporation Consolidated
Balance Sheet as of December 31:
Accumulated post retirement benefit obligation:
Retirees
Actives
Total accumulated postretirement benefit obligation
Plan assets at fair value
2002
2001
$ 5,142
-0-
5,142
-0-
$ 3,941
210
4,151
-0-
Accumulated postretirement benefit obligation
5,142
in excess of plan assets
(16)
Unrecognized transition obligation
Unrecognized net loss
(2,165)
Accrued benefit liability recognized on the balance sheet $ 2,961
4,151
(18)
(1,262)
$ 2,871
The following table sets forth the change in benefit
obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Benefit payments
Actuarial loss
Benefit obligation at end of year
2002
$ 4,151
-0-
273
(245)
963
2001
$3,590
6
232
(276)
599
$ 5,142
$4,151
The discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation
was 6.75% for 2002 and 2001. The health care cost trend
rates used for 2002 were projected at an initial rate of 9.00%
decreasing over time to an annual rate of 4.25% for
indemnity plan participants and for non-indemnity plan
participants. For 2001, rates used 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.
3232323232
The health care cost trend rate assumption can have a
significant impact on the amounts reported for this plan. A
one-percentage-point change in assumed health care cost
trend rates would have the following effects:
Effect on total of service and interest
cost components
Effect on postretirement benefit
obligation
1-Percentage-
1-Percentage-
Point Increase Point Decrease
$
20
$
(19)
$ 301
$ (275)
NOTE 21—Unearned ESOP Shares
The Corporation had borrowed amounts which were
concurrently loaned to the First Commonwealth Financial
Corporation Employee Stock Ownership Plan Trust
(“ESOP”) on the same terms. The combined balances of the
ESOP related loans were $3,055 at December 31, 2002, and
$4,126 at December 31, 2001.
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, represent
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 is 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, 2000
Shares allocated during 2001
Shares in suspense
December 31, 2001
Shares allocated during 2002
Shares in suspense
December 31, 2002
Total
Old
Shares
New
Shares
493,521
(120,961)
120,830
(29,616)
372,691
(91,345)
372,560
(100,894)
91,214
(24,702)
281,346
(76,192)
271,666
66,512
205,154
The fair market value of the new shares remaining in
suspense was approximately $2,359 and $3,241 at
December 31, 2002 and 2001, respectively.
Interest on ESOP loans was $109 in 2002, $263 in 2001, and
$446 in 2000. During 2002, 2001, and 2000, dividends on
unallocated shares in the amount of $242, $301, and $354,
respectively, were used for debt service while all dividends
on allocated shares were allocated or paid to the participants.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
NOTE 22—Stock Option Plan
At December 31, 2002, the Corporation had a stock-based
compensation plan, which is described below. 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 from 1997 through 2002 were exercisable
by December 31 of the grant year respectively, and expire
ten years from the grant date.
Equity Compensation Plan Information as of December 31,
2002:
Number of Weighted Average
Shares
Options
Exercise Price of Available for
Outstanding Options Outstanding Future Grant
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
2,841,772
$ 11.33
685,121
-0-
2,841,772
-0-
$ 11.33
-0-
685,121
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
FAS No. 123, the Corporation’s net income and earnings per
share would have been reduced to the pro forma amounts
shown below:
2002
2001
2000
As
Pro
As
Pro
As
Pro
Reported Forma Reported Forma Reported Forma
$ 43,526 $41,248 $ 50,189 $ 48,211 $47,246 $ 47,130
$
$
0.75 $
0.71 $
0.87 $
0.83 $
0.82 $
0.82
0.74 $
0.70 $
0.86 $
0.83 $
0.82 $
0.82
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
2002
2001
5.13% per annum 5.59% per annum 5.65% per annum
2000
54.0%
5.0%
55.1%
5.1%
61.7%
5.3%
7.0 years
10.0 years
9.1 years
A summary of the status of the Corporation’s outstanding
stock options as of December 31, 2002, 2001, and 2000
and changes for the years ending on those dates is
presented below:
2002
Weighted
Average
Exercise
Price
2001
Weighted
Average
Exercise
Price
2000
Weighted
Average
Exercise
Price
Shares
Shares
Shares
Outstanding at
beginning
of year
Granted
Exercised
Forfeited
Outstanding at
end of year
Exercisable at
end of year
2,687,887 $ 11.13 2,210,651 $11.12 1,680,178 $11.07
820,775 $ 11.70 796,743 $10.75 705,429 $11.06
(41,240) $ 7.93
(447,001) $ 10.51 (256,174) $ 9.76
(63,333) $11.89 (133,716) $11.63
(219,889) $ 11.90
2,841,772 $ 11.33 2,687,887 $11.13 2,210,651 $11.12
2,841,772 $ 11.33 2,687,887 $11.13 2,210,651 $11.12
The following table summarizes information about the stock
options outstanding at December 31, 2002:
Options Outstanding
Options Exercisable
Range of
Exercise
Prices
$9.19-$9.25
$ 10.75
$ 11.06
$ 11.56
$ 11.70
$ 14.69
Total
Weighted-
Average Weighted-
Weighted-
Number Remaining Average Number Average
Outstanding Contract Exercise Exercisable Exercise
at 12/31/02
at 12/31/02
Price
Price
Life
412,908
569,115
473,014
408,966
688,131
289,638
2,841,772
3.9
8.1
7.0
6.0
9.1
5.2
6.9
$ 9.23
$ 10.75
$ 11.06
$ 11.56
$ 11.70
$ 14.69
$ 11.33
412,908
569,115
473,014
408,966
688,131
289,638
2,841,772
$ 9.23
$ 10.75
$ 11.06
$ 11.56
$ 11.70
$ 14.69
$ 11.33
NOTE 23—Commitments and Contingent Liabilities
In May, 2002, the Corporation reached final settlement with
the plaintiffs in a lender liability action filed in 1994 against
one of its subsidiary banks relating to lending activities
occurring prior to the Corporation’s acquisition of that
subsidiary. The decision to settle followed an adverse pre-
trial judgment by the trial judge on procedural grounds.
Under the settlement agreement, the Corporation paid the
plaintiffs $8,000 in cash. The settlement resulted in a one-
time charge of $8,000 ($5,200, net of tax effect) or $0.09 per
share, after tax to the company’s earnings for 2002.
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.
3333333333
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
NOTE 24—Related Party Transactions
Some of the Corporation’s or its subsidiaries’ directors,
executive officers, principal shareholders and their related
interests, had transactions with the subsidiary banks in the
ordinary course of business. All loans and commitments to
loans in such transactions were made on substantially the
same terms, including collateral and interest rates, as those
prevailing at the time for comparable transactions. In the
opinion of management, these transactions do not involve
more than the normal risk of collectibility nor do they
present other unfavorable features. It is anticipated that
further such extensions of credit will be made in the future.
The following is an analysis of loans to those parties whose
aggregate loan balances exceeded $60 during 2002:
Balances December 31, 2001
Advances
Repayments
Other
Balances December 31, 2002
$
$
7,887
6,070
(5,469)
(3,885)
4,603
“Other” primarily reflects the change in those classified
as a “related party” as a result of mergers, resignations,
and retirements.
This category for 2002 includes amounts related to
separating directors and officers as a result of the
Corporation’s restructuring plan.
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,
2002, dividends from subsidiary banks were restricted not to
exceed $59,702. 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 judgments 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, 2002, the Corporation and its banking
subsidiaries meet all capital adequacy requirements to which
they are subject.
As of December 31, 2002, the most recent notifications from
the Federal Reserve Board and Federal Deposit Insurance
Corporation categorized First Commonwealth Bank as well
capitalized under the regulatory framework for prompt
corrective action. To be considered as well capitalized, the
bank 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.
3434343434
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$ 436,850
$ 402,319
14.0%
13.0%
$ 249,240
$ 246,779
$ 402,354
$ 367,823
12.9%
11.9%
$ 124,620
$ 123,389
$ 402,354
$ 367,823
8.9%
8.2%
$ 135,282
$ 133,944
$ 423,649
$ 394,139
14.0%
13.2%
$ 241,615
$ 239,218
$ 389,492
$ 359,982
12.9%
12.0%
$ 120,807
$ 119,609
$ 389,492
$ 359,982
8.5%
7.9%
$ 138,144
$ 137,318
8.0%
8.0%
4.0%
4.0%
3.0%
3.0%
8.0%
8.0%
4.0%
4.0%
3.0%
3.0%
N/A
$ 308,474
N/A
$ 185,084
N/A
$ 223,239
N/A
$ 299,023
N/A
$ 179,414
N/A
$ 228,863
N/A
10.0%
N/A
6.0%
N/A
5.0%
N/A
10.0%
N/A
6.0%
N/A
5.0%
As of December 31, 2002
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation
First Commonwealth Bank
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation
First Commonwealth Bank
Tier I Capital to Average Assets
First Commonwealth Financial Corporation
First Commonwealth Bank
As of December 31, 2001
Total Capital to Risk Weighted Assets
First Commonwealth Financial Corporation
First Commonwealth Bank (a)
Tier I Capital to Risk Weighted Assets
First Commonwealth Financial Corporation
First Commonwealth Bank (a)
Tier I Capital to Average Assets
First Commonwealth Financial Corporation
First Commonwealth Bank (a)
(a) Restated to reflect the merger of the Corporation’s two subsidiary banks, First Commonwealth Bank and Southwest Bank on October 15,2002.
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,
2002
2001
$ 13,844
1,407
498
413,542
5,081
6,095
3,394
7,625
1,936
$ 453,422
$
3,755
9,139
3,055
36,083
401,390
$
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
$ 453,422
$ 421,475
Interest and dividends
Dividends from subsidiaries
Interest expense
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,
$
2002
48
43,609
(3,570)
-0-
(9,161)
$
2001
42
40,442
(3,724)
16
(7,033)
$
2000
41
61,664
(5,335)
31
(7,451)
30,926
5,304
29,743
3,495
48,950
4,340
36,230
33,238
53,290
7,296
16,951
(6,044)
Net income
$ 43,526
$ 50,189
$ 47,246
3535353535
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2002
2001
2000
$ 43,526
537
(397)
(7,296)
1,270
37,640
Operating Activities
Net income
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization
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
Changes in receivable from and net
investment in subsidiary
Net cash used by
investing activities
Financing Activities
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
(498)
-0-
-0-
(637)
-0-
4,655
(35,208)
225
(30,965)
6,177
7,667
$ 13,844
(943)
-0-
42
(33)
436
$50,189
$47,246
1,140
1,263
431
212
(16,951)
(592)
6,044
97
34,217
54,862
(123)
-0-
(61)
(90)
-0-
-0-
1
(337)
(792)
(3,861)
(1,066)
(4,197)
-0-
-0-
4,000
(20,000)
(612)
-0-
2,499
(33,809)
269
(593)
(873)
326
(32,553)
75
(31,653)
1,498
6,169
$ 7,667
(49,618)
1,047
5,122
$ 6,169
NOTE 27—Fair Values of Financial Instruments
Below are various estimated fair values at December 31,
2002 and 2001, as required by Statement of Financial
Accounting Standards No. 107 (“FAS No. 107”). Such
information, which pertains to the Corporation’s financial
instruments, is based on the requirements set forth in FAS
No. 107 and does not purport to represent the aggregate net
fair value of the Corporation. It is the Corporation’s general
practice and intent to hold its financial instruments to
maturity, except for certain securities designated as securities
available for sale, and not to engage in trading activities.
Many of the financial instruments lack an available trading
market, as characterized by a willing buyer and seller
engaging in an exchange transaction. Therefore, the
3636363636
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: For 2002 and 2001
the balance sheet carrying amounts for cash and short-
term instruments approximate the estimated fair values
of such assets.
Securities: For 2002 and 2001 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: For 2002 the estimated fair values of all
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. For 2001 fair values of
variable rate loans subject to frequent repricing and which
entail no significant credit risk are based on 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. For both years 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 for both periods.
Deposit liabilities: For 2002, management estimates that the
carrying value of noninterest-bearing demand deposits is a
reasonable estimate of fair value. For interest-bearing
deposits which are payable on demand, fair value is based on
a market valuation of similar deposits. For 2001 for all
deposits which are payable on demand at the reporting date
other than time deposits, management estimates the carrying
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
value of such deposits is a reasonable estimate of fair value.
For both years the carrying value of variable rate time
deposit accounts and certificates of deposit approximate their
fair values at the report date. Also, fair values of fixed rate
time deposits for both periods 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 for both years
approximates fair value.
Short-term borrowings: For 2002 the estimated fair values of
borrowings from the Federal Home Loan Bank were
estimated based on the estimated incremental borrowing rate
for similar types of borrowings. For 2001 the carrying value
of Federal Home Loan Bank borrowings was used to
approximate fair values. For both the 2002 and 2001 periods
the carrying amounts of other short-term borrowings such as
Federal funds purchased, securities sold under agreements to
repurchase and treasury, tax and loan notes were used to
approximate fair value.
Long-term debt: For 2002 and 2001 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, 2002 and 2001:
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
2002
2001
Estimated
Fair
Value
81,114
$
1,973
$
$
-0-
$ 1,482,771
$ 204,887
$ 2,631,557
$ 3,011,354
$ 469,381
$ 642,127
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
81,114
$
1,973
$
$
-0-
$ 1,482,771
$
197,838
$ 2,574,138
$ 3,044,124
469,065
$
579,934
$
3737373737
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
QUARTERLY SUMMARY OF FINANCIAL DATA - UNAUDITED
QUARTERLY SUMMARY OF FINANCIAL DATA - UNAUDITED
QUARTERLY SUMMARY OF FINANCIAL DATA - UNAUDITED
QUARTERLY SUMMARY OF FINANCIAL DATA - UNAUDITED
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, 2002 and 2001 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
Litigation settlement
Restructuring charges
Other operating expenses
Income before income taxes
Applicable income taxes
Net income
2002
First
Quarter
$ 70,523
32,481
38,042
2,917
Second
Quarter
$ 69,878
31,945
37,933
3,008
Third
Quarter
$ 68,784
30,457
38,327
3,103
Fourth
Quarter
$66,383
27,790
38,593
3,195
35,125
34,925
35,224
35,398
39
8,350
8,000
-0-
27,443
8,071
433
$ 7,638
576
9,361
-0-
3,116
28,499
13,247
2,290
$ 10,957
26
9,375
-0-
2,473
27,018
15,134
2,947
$ 12,187
1
9,478
-0-
551
28,341
15,985
3,241
$12,744
Basic earnings per share
Diluted earnings per share
Average shares outstanding
Average shares outstanding assuming dilution
$
$
0.13
0.13
58,142,359
58,484,806
$
$
0.19
0.19
58,359,322
58,851,264
$
$
0.21
0.21
58,521,562
58,862,215
$
$
0.22
0.22
58,608,857
58,765,383
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
2001
First
Quarter
$ 79,080
44,848
34,232
2,407
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
3838383838
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
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 pooling of interests.
Financial statement amounts for prior periods have also been reclassified to conform to the presentation format used in 2002.
The reclassifications had no effect on the Corporation’s financial condition or results of operations.
$
$
$
$
$
$
$
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision
for credit losses
Securities gains
Other operating income
Litigation settlement
Restructuring charges
Merger and related charges
Other operating expenses
Income before taxes and extraordinary items
Applicable income taxes
Net income before extraordinary items
Extraordinary items (less applicable income 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 average assets
Return on average equity
Net loans to deposits ratio
Dividends per share as a percent of
net income per share
Average equity to average assets ratio
Years Ended December 31,
2002
275,568
122,673
152,895
12,223
$
2001
308,891
167,170
141,721
11,495
$
2000
311,882
174,539
137,343
10,030
$
1999
296,089
152,653
143,436
9,450
$
1998
282,067
148,282
133,785
15,049
140,672
130,226
127,313
133,986
118,736
642
36,564
8,000
6,140
-0-
111,301
52,437
8,911
43,526
-0-
43,526
0.75
0.00
0.75
0.605
58,409,614
0.74
0.00
0.74
0.605
58,742,018
4,524,743
1,680,609
2,608,634
34,496
3,044,124
35,000
544,934
401,390
0.96%
11.09%
84.56%
80.67%
8.64%
$
$
$
$
$
$
3,329
36,895
-0-
-0-
-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%
$
$
$
$
$
$
1,745
31,938
-0-
-0-
-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%
$
$
$
$
$
$
565
33,660
-0-
-0-
-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%
$
$
$
$
$
$
1,457
27,929
-0-
-0-
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%
(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.
3939393939
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2002, 2001 and 2000 and are intended to
supplement, and should be read in conjunction with, the
consolidated financial statements and related footnotes.
Sections of this financial review, as well as the notes to the
consolidated financial statements, contain forward-looking
statements (as defined in the Private Securities Litigation
Reform Act of 1995), which reflect management’s beliefs
and expectations based on information currently available
and may contain the words “expect,” “estimate,” “project,”
“anticipate,” “should,” “intend,” “probability,” “risk,”
“target,” “objective,” and similar expressions or variations
on such expressions. These forward-looking statements are
inherently subject to significant risks and uncertainties,
including but not limited to: changes in general economic
and financial market conditions, the Corporation’s ability to
effectively carry out its business plans, changes in regulatory
or legislative requirements, changes in competitive
conditions and continuing consolidation of the financial
services industry. Although management believes the
expectations reflected in such forward-looking statements are
reasonable, actual results could differ materially. 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 all of the outstanding shares of
Strategic Capital Concepts, Inc. (“SCC”) and Strategic
Financial Advisors, Inc. (“SFA”), effective March 1, 2002.
As required under the purchase method of accounting, the
results of SCC and SFA from the date of acquisition were
included in the Corporation’s financial statements for 2002.
As a registered investment advisor, Strategic Capital
Concepts provided financial planning, asset management and
consulting services to individuals, businesses, retirement
plans, trusts and estates. Strategic Financial Advisors offered
investment and insurance products as well as employee
benefit services. In October 2002, SFA was merged into
SCC and the name was changed to First Commonwealth
Financial Advisors, Inc., which also offers insurance
products through First Commonwealth Insurance Agency, an
affiliate. This acquisition will expand the Corporation’s
product offerings and positively impact fee based revenue,
which continues to be a priority.
Financial statement amounts in prior periods have been
reclassified to conform to the presentation format used in
2002. The reclassifications had no effect on the
Corporation’s financial condition or results of operations.
Results of Operations
Net income was $43.5 million in 2002, a decline of $6.7
million from 2001 results of $50.2 million and compared to
$47.2 million registered in 2000.
Net income for 2002 was negatively impacted by the effects
of $6.1 million of restructuring costs and an $8.0 million
litigation settlement. The restructuring charges consisted
principally of severance amounts paid to employees as part
of the plan to consolidate the multiple bank charters and
develop the First Commonwealth brand and identity for all
of the financial services subsidiaries. Payments to retiring
directors as part of the realignment for the Corporation’s new
vision on corporate governance also were included in
restructuring charges. The litigation settlement related to a
lender liability action filed in 1994 against one of the
Corporation’s subsidiary banks and followed an adverse pre-
trial judgment by the trial judge on procedural grounds. Net
of tax, these nonrecurring charges reduced net income by
$9.2 million in 2002. Also impacting 2002 results were
expenses of $1.8 million ($1.2 million after tax) related to
development of the First Commonwealth brand. The merger
of banking operations as well as the establishment of the
First Commonwealth branding will help provide our clients
with greater flexibility, efficiency and seamless service
throughout our market footprint.
4040404040
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Gains on sale of assets included
securities gains of $3.3 million and $1.7 million in 2001 and
2000, respectively as well as a $999 thousand gain on the
sale of a branch and block of mortgages in 2001.
Diluted earnings per share was $0.74 for 2002 compared to
$0.86 and $0.82 for 2001 and 2000 respectively. Return on
average assets was 0.96% and return on equity was 11.09%
during 2002 compared to 1.11% and 13.85%, respectively
for 2001. Return on average assets was 1.10% during 2000
as return on average equity reached 15.65%.
The following is an analysis of the impact of changes in net
income on diluted 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
Data processing expense
Pennsylvania shares tax expense
Goodwill amortization
Litigation settlement
Restructuring charges
Rebranding costs
Other operating expenses
Applicable income taxes
2002
vs.
2001
0.86
$
2001
vs.
2000
$ 0.82
0.16
(0.01)
(0.05)
0.01
0.00
(0.02)
(0.05)
(0.01)
0.02
0.00
0.02
(0.14)
(0.10)
(0.03)
(0.03)
0.11
0.05
(0.02)
0.03
0.02
0.02
0.04
(0.03)
(0.01)
0.00
(0.01)
0.00
0.00
0.00
0.00
(0.04)
(0.01)
Net income per share
$
0.74
$ 0.86
Core net income excluding nonrecurring charges as well as
securities gains and any nonrecurring gains for 2002 was
$52.3 million, an increase of $4.9 million or 10.4% over core
net income of $47.4 million for 2001. Core diluted earnings
per share was $0.89 per share, a rise of $0.07 or 8.5%
compared to the $0.82 achieved in 2001. Core return on
average assets for 2002 advanced to 1.15% compared to
1.05% for 2001 as core return on shareholders’ equity for
2002 also improved on a year to year basis.
Reconciliation of Core Earnings
(Dollar Amounts in Thousands, except per share data)
Net income as reported
Non-core items (net of tax):
Gains on sale of assets
Restructuring charges
Litigation settlement
Core net income
Core basic earnings per share
Core diluted earnings per share
Core return on average assets
Core return on average equity
For the Year Ended
December 31,
2002
$ 43,526
2001
$ 50,189
(417)
3,991
5,200
$ 52,300
(2,807)
0
0
$ 47,382
$
$
$
$
0.90
0.89
1.15%
0.82
0.82
1.05%
13.33% 13.07%
Net interest income, the engine that powers revenue growth
for the Corporation, is defined as the difference between
income on earning assets and the cost of funds supporting
those assets. Net interest income rose to $152.9 million in
2002 compared to $141.7 million in 2001 and $137.3 million
in 2000. 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, 2002.
4141414141
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2002
Average Balance Sheets and Net Interest Analysis
(Dollar Amounts in Thousands)
2001
2000
Average
Balance
Income/ Yield or
Rate(a)
Expense
Average
Balance
Income/ Yield or
Rate(a)
Expense
Average
Balance
Income/ Yield or
Rate(a)
Expense
$
1,785
1,694,511
359
$
31
95,630
6
1.74% $
5.95
1.72
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
2,597,862
179,901
7.13
2,548,596
202,173
8.11
2,503,036
208,548
8.50
4,294,517
275,568
6.66
4,284,684
308,891
7.43
4,080,367
311,882
7.87
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
69,735
(34,813)
211,302
246,224
$ 4,540,741
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
72,806
(34,078)
198,051
236,779
$ 4,521,463
74,178
(34,296)
191,534
231,416
$ 4,311,783
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
$
416,184
727,996
1,592,585
339,908
670,258
$
3,410
9,375
65,787
6,029
38,072
0.82% $
1.29
4.13
1.77
5.68
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
3,746,931
122,673
3.27
3,764,085
167,170
4.44
3,628,613
174,539
4.81
380,878
20,493
392,439
793,810
368,983
26,008
362,387
757,378
349,259
31,971
301,940
683,170
Shareholders’ Equity
$ 4,540,741
$ 4,521,463
$ 4,311,783
Net Interest Income and
Net Yield on Interest-
Earning Assets
$ 152,895
3.80%
$ 141,721
3.53%
$ 137,343
3.59%
(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.
4242424242
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Both interest income and interest expense fell compared to
2001 levels primarily as the result of the dramatic decrease
in interest rates that began in 2001 and continued into 2002.
Earning asset yields, on a tax-equivalent basis, declined 77
basis points (0.77%) during 2002 to 6.66% from 7.43%
registered in 2001, after decreasing from 7.87% in 2000.
The cost of funds for 2002 dropped 117 basis points (1.17%)
below 2001 costs of 4.44%, after decreasing 37 basis points
(0.37%) from 2000 costs of 4.81%. Average earning assets
were $4,294.5 million and average interest-bearing liabilities
were $3,746.9 million for 2002, basically flat when
compared to 2001 averages in both components.
Interest and fees on loans declined $22.3 million for 2002
compared to 2001 levels primarily as yields declined in the
lower interest rate environment. Loan yields fell 98 basis
points (0.98%) during 2002 to 7.13% from 8.11% for 2001
after a decline of 39 basis points (0.39%) from the 2000
level. Time and demand loan yields fell 149 basis points
(1.49%) and the yields on home equity and personal lines of
credit declined 163 basis points (1.63%) and 234 basis points
(2.34%), respectively compared to the prior year.
The increase in average loan volumes was not enough to
offset the reduced interest income caused by declining
yields. During 2002, the Corporation took advantage of the
lower interest rate cycle and continued to change the mix of
the loan portfolio. Average mortgage loans declined as
consumers refinanced their loans at near record levels. The
Corporation continued to offer competitive mortgage loans
but generally sold them immediately after origination along
with the related servicing rights. Average commercial and
municipal loans offset the decline in 1-4 family mortgage
loans and grew $159.7 million, primarily in shorter term and
variable rate lending. The Corporation has continued to
capitalize on lending opportunities with small to mid-sized
commercial borrowers, including loans generated through its
preferred Small Business Administration (“SBA”) lender
status. The Corporation was one of the top small business
lenders in Pennsylvania during 2002 and 2001.
Interest income on investments declined $10.5 million for
2002 compared to 2001, primarily due to interest rate
decreases. Yields on investments for 2002 continued to
decline, falling to 5.95% compared to 6.45% for 2001 and
6.88% for 2000. All categories of interest income on
investments were negatively impacted by interest rate
changes with the largest decline registered in the U.S.
Government Agency category, declining $8.3 million or 54
basis points (0.54%) for 2002 compared to 2001. Prepayment
speeds of mortgage backed securities (“MBS”) continued to
accelerate in 2002 as interest rates continued to decline.
Interest rate changes have a direct impact on prepayment
speeds. As interest rates increase, prepayments tend to
decline and average lives of MBS increase. As interest rates
decrease, prepayment speeds tend to increase and average
lives of MBS decline and accelerates the amount of premium
amortization that is realized, further reducing the yields in
current periods. Using computer simulation modeling, 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
10% of shareholders’ equity other than U.S. government and
agency securities.
Interest on deposits dropped $39.6 million for 2002 compared
to 2001 primarily due to decreases due to interest rates of
$33.7 million. The rate on savings deposits fell 106 basis
points (1.06%) resulting in a decrease to interest expense of
$7.7 million for 2002 compared to 2001, while the rate on
time deposits for 2002 also declined, down 137 basis points
(1.37%), compared to 2001 resulting in a decrease to interest
expense of $21.8 million. Although average deposits declined
compared to 2001, the deposit mix changed as clients
registered a preference for savings products which jumped
$43.7 million or 6.4% while time deposits dropped $135.5
million or 7.8% due to the continuing economic uncertainties.
Average demand deposit balances for 2002 also advanced, up
$11.9 million over 2001 balances and represents the highest
level in the Corporation’s history. This rise is due principally
to the success of the Corporation’s “High Performance
Checking” product which was rolled out in 2002 and focuses
on growing low cost deposits.
Interest expense on short-term borrowings decreased $5.2
million during 2002 primarily as a result of rate decreases of
$6.7 million offset in part by volume increases of $1.5
million. Average short-term borrowings rose by $39.7
million for 2002 compared to 2001 while the cost of short-
term borrowings fell by 197 basis points (1.97%) compared
to the prior year. All categories of short-term borrowing
costs declined year to year.
Interest expense on long-term debt increased $294 thousand
for 2002 compared to the 2001 period as increases due to
volume of $410 thousand were partially offset by decreases
due to rate of $116 thousand. Average long-term debt for
2002 rose by $7.2 million compared to 2001 as maturities
were extended for short-term borrowings from the Federal
Home Loan Bank to take advantage of the lower interest rate
environment. Long-term debt includes capital securities
borrowings in the amount of $35 million, which were issued
during 1999, bearing an interest rate of 9.50% and maturing
in thirty years. The proceeds were used by the Corporation in
connection with the repurchase of common shares. (See Note
15 to the financial statements for a description of the
company obligated mandatorily redeemable capital securities
of subsidiary trust.)
4343434343
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest margin (net interest income, on a tax-
equivalent basis as a percentage of average earning assets)
improved to 3.80% for 2002, a rise of 27 basis points
(0.27%) compared to 2001. The year to year increase in the
margin was due to the cost of funds declining more quickly
than asset yields as interest rates fell to historic lows.
Continued pressure on net interest income is anticipated by
the Corporation despite active management of interest rate
risk. The Corporation’s use of computer simulation to
manage interest rate risk is described in the “Interest
Sensitivity” section of this discussion.
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)
2002 Change from 2001
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
$
(39)
(10,526)
(486)
(22,272)
(33,323)
(39,593)
(5,198)
294
(44,497)
$ 11,174
$
(2)
(1,950)
(473)
3,995
1,570
(5,925)
1,486
410
(4,029)
$ 5,599
$
(37)
(8,576)
(13)
(26,267)
(34,893)
(33,668)
(6,684)
(116)
(40,468)
$ 5,575
Total
Change
$
(12)
3,138
258
(6,375)
(2,991)
2,658
(10,991)
964
(7,369)
$ 4,378
2001 Change from 2000
Change Due
to Volume
Change Due
to Rate
$
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)
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 $12.2 million in 2002 compared to $11.5
million in 2001 and $10.0 million in 2000. The allowance for
credit losses was $34.5 million at December 31, 2002, which
represents a ratio of 1.33% of average loans outstanding,
down slightly from the 1.34% reported at December 31,
2001. Net charge-offs for 2002 rose $945 thousand over
2001 levels. The most significant components of this year to
year change were increases in the following categories:
commercial loans not secured by real estate (up $1.0
million), secured by 1-4 family real estate (up $661
thousand) and other loans (up $925 thousand). These
increases were partially offset by decreases in commercial
real estate loans of $985 thousand and revolving credit loans
secured by 1-4 family real estate of $411 thousand. Net
charge-offs as a percent of average loans outstanding at
December 31, 2002 were 0.46% compared to 0.43% and
0.40% at December 31, 2001 and 2000, respectively. For an
analysis of credit quality, see the “Credit Review” section of
this discussion.
4444444444
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
The following table presents an analysis of the consolidated allowance for credit losses for the five years ended December 31,
2002 (Dollar Amounts in Thousands):
Loans outstanding at end of year
$ 2,608,634
$ 2,567,934
$ 2,490,827
$ 2,500,059
$ 2,374,850
Average loans outstanding
$ 2,597,862
$ 2,548,596
$ 2,503,036
$ 2,408,450
$ 2,439,436
2002
Summary of Loan Loss Experience
2000
1999
2001
1998
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
$
34,157
$
33,601
$
33,539
$
32,304
$
25,932
6,085
4,040
3
1,315
2,065
424
13,932
1,287
710
-0-
-0-
46
5
2,048
11,884
12,223
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
Balance, end of year
$
34,496
$
34,157
$
33,601
$
33,539
$
32,304
Ratios:
Net charge-offs as a percentage of
average loans outstanding
Allowance for credit losses
as a percentage of average loans
outstanding
0.46%
0.43%
0.40%
0.34%
0.36%
1.33%
1.34%
1.34%
1.39%
1.32%
Net securities gains declined $2.7 million during 2002 from
the $3.3 million reported in 2001 and compared to $1.7
million in 2000. The securities gains during 2002 resulted
primarily from the sales of Pennsylvania bank stocks, U.S.
Treasury securities and fixed rate corporate bonds classified
as securities “available for sale” with book values of $1.1
million, $1.5 million and $3.0 million, respectively. The
securities gains during 2001 resulted primarily from the sale
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 recognized during 2000 were principally related to
the sale of Pennsylvania bank stocks with a book value of
$19.9 million.
Trust income of $5.0 million for 2002 was flat compared to
2001 following a $560 thousand decline from 2000.
Although fee revenue continues to be negatively impacted
due to low market values, the enhanced referral programs
and integrated growth plans for financial affiliates that have
been initiated have helped to offset this trend. The
Corporation’s continued success in building relationships
with commercial clients provides fee based affiliates with
additional sales opportunities through the Total Solutions
Financial Management (“TSFM”) process. This strategy
combines products, services and professional staff from the
Corporation’s trust, insurance, financial advisory and
banking affiliates and partners them in providing
comprehensive financial services offerings.
Service charges on deposits are the most significant
component of non-interest income and increased $378
thousand for 2002 compared to 2001. Increases in
insufficient funds fees “NSF”, bank club and account
analysis fees helped pace the year to year rise.
Standardization of service fee routines accomplished during
conversion of the Corporation’s deposit system during 2001,
and added emphasis on collection of fees had a positive
effect on fee revenue for 2002. Service charges on deposits
increased $598 thousand for 2001 compared to 2000
4545454545
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
primarily as the result of increases in NSF and bank club
fees. Management strives to implement reasonable fees for
services and closely monitors collection of those fees.
Insurance commissions grew $439 thousand for 2002 after
increasing $1.2 million for 2001 from 2000 commissions of
$2.0 million. Insurance commissions for 2002 included
increases in personal lines, annuities and employee benefit
plans compared to 2001. As part of the previously discussed
TSFM process the Corporation’s insurance subsidiary will
continue to have expanded opportunities to meet the insurance
needs of commercial clients. In addition, the Corporation has
developed “FOCUS,” a financial planning tool designed to
help clients prioritize and assess their financial needs. The
“FOCUS” concept results in a systematic approach covering a
wide range of personal financial goals including appropriate
insurance coverage. This category should also be favorably
impacted by the integration of First Commonwealth Financial
Advisors into these advisory models.
Income from bank owned life insurance was $4.7 million for
2002 compared to $4.6 million for 2001 which compared to
$3.4 million for 2000. The 2002 period included an
additional investment in bank owned life insurance of $5.0
million compared to 2001 levels. The 2001 period included
an increase in income from bank owned life insurance of
$1.2 million compared to 2000, resulting primarily from
claim income and the impact of an additional $15.0 million
investment during 2001.
Other income for 2002 was $11.7 million, representing a $1.2
million decrease compared to 2001 which followed a $2.4
million rise over the $10.5 million achieved in 2000. The
decline in other income for 2002 resulted from the sale of one
of the Corporation’s branches during 2001 which generated a
gain of $767 thousand based on the premium on the sale of
$10.4 million of deposits. The 2001 period included $1.3
million of gains related to the sale of a branch and a block of
30 year mortgages as well as a gain from the termination of a
subsidiary’s defined benefit pension plan. Other income for
2002 also included increases in merchant discount of $119
thousand and interchange income of $164 thousand. Other
income for the 2000 period included a gain on the sale of fixed
assets of $515 thousand and increases in merchant discount of
$401 thousand as well as a rise in MAC interchange fees of
$628 thousand.
Total other operating expense for 2002 grew $20.4 million or
19.5% to $125.4 million compared to $105.0 million and
$99.5 million for 2001 and 2000 respectively. The increase
in other operating expense for 2002 was primarily the result
of nonrecurring charges for the previously described
litigation settlement and corporate restructuring of $8.0
million and $6.1 million, respectively. These restructuring
charges resulted from the merger of the Corporation’s
banking subsidiaries, Southwest Bank and First
4646464646
Commonwealth Bank, which occurred in October, 2002.
Because of this merger, there was a consolidation of support
functions with some staff positions being eliminated. The
personnel within the branches and relationship managers in
corporate services continued to serve in the same capacity in
order to ensure a smooth transition. Employees whose
positions were being eliminated were notified and continued
to work in their positions for at least 60 days. Notified
employees had the opportunity to seek other positions within
the Corporation or to receive a separation package based on
years of service. Also, related to the merger, the structure of
all of the Boards of Directors and Board committees for the
Corporation was realigned. As a result of these activities,
restructuring charges of $6.1 million are reported on the
income statement for the 2002 period. Ongoing savings from
the restructuring are anticipated to be $4.1 million per year.
Other charges included during 2002 as a part of the
restructuring related principally to writing off obsolete signs
and supplies due to the name change under one charter and
amounted to $420 thousand. Also impacting other operating
expense for the period were $1.8 million of costs incurred
principally in the fourth quarter of 2002 associated with
development of the First Commonwealth brand. Total
noninterest expense as a percent of average assets was 2.76%
for 2002 compared to 2.32% for 2001. Excluding the
nonrecurring items (legal settlement and restructuring
charges) as well as rebranding costs, this ratio would be
2.41% for 2002.
Employee costs were $58.1 million in 2002, representing
1.28% of average assets compared to $54.5 million and
1.21% of average assets for 2001. Employee costs for 2000
were $52.5 million and 1.22% of average assets. Salary costs
for the 2002 period increased $2.2 million or 5.1% compared
to 2001 levels of $43.1 million. Employee benefit costs rose
$1.4 million or 12.4% for 2002 compared to 2001, with the
largest increase being hospitalization costs (up $943
thousand or 24.7%). 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 of hospitalization costs. The Corporation strives
to provide quality employee benefits while effectively
managing costs.
Net occupancy expense increased $230 thousand or 3.5% to
$6.8 million during 2002 compared to $6.5 million for 2001
and $6.6 million for 2000. Increases in building insurance,
building rental costs and building repairs and maintenance in
2002 were only partially offset by declines in most other
building expense categories. Furniture and equipment
expenses of $10.0 million for 2002 reflected increases of
$920 thousand over 2001 levels resulting primarily from
increases in depreciation on computer software and software
maintenance offset in part by reduced equipment lease
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
expense. The 2001 period also included increases in
depreciation on computer software and software maintenance
compared to 2000. Computer software depreciation and
maintenance increases were principally related to the
replacement of software utilized by the Corporation’s data
processing subsidiary to process loan and deposit accounts.
The 2002 period was also impacted as a full year of
depreciation, as well as maintenance was incurred for
systems placed in service during the later part of 2001.
The new application software has enabled the Corporation’s
banking subsidiary to provide enhanced products and
services, including internet banking. Technology advances
continue to drive the ability of financial services companies
to provide expanded services through traditional channels as
well as non traditional and emerging delivery systems to
meet the changing needs of our clients.
Outside data processing expense fell $1.2 million for the
2002 period to $2.1 million compared to $3.3 million for
2001 and 2000. This category was positively impacted by the
conversion of Southwest Bank from outsourced processing
to that provided by a subsidiary of the Corporation. Outside
data processing costs are managed by the Corporation’s
data processing subsidiary along with management of
internal data processing costs. Outsourced data processing
needs are evaluated based on technology, efficiency and
cost considerations.
Adoption of FAS No. 142 resulted in no goodwill
amortization for 2002 compared to $920 thousand for 2001
and $865 thousand for 2000. Under the new pronouncement,
goodwill amortization was discontinued January 1, 2002.
Goodwill is now subject to evaluation for impairment on an
annual basis.
Other operating expenses for 2002 increased $3.8 million or
14.3% to $30.2 million for 2002 compared to $26.4 million
for 2001 and the $24.0 million reported for 2000. The 2002
period includes increased loss on sale of assets of $472
thousand, due primarily to the loss on sale of vehicles
previously leased, compared to 2001. Other professional fees
rose by $822 thousand over 2001 and included consulting
fees related to implementation of the Corporation’s
“Balanced Scorecard” performance measurement system,
enhancements to product and customer profitability systems,
corporate restructuring and common branding and identity.
Consultants are also being utilized to assist in the ongoing
efforts to develop a world class sales culture and to generate
new deposit dollars and relationships. Corporate
restructuring and movement towards a sales culture also
impacted the decision to have employee benefit plans
reviewed by outside specialists during 2002. Advertising and
promotions expenses rose a combined $2.3 million for the
2002 period due partially to expenditures related to the $1.8
million launch of the new Corporate brand and identity. This
exciting campaign is designed to educate and build
enthusiasm among current as well as potential clients and the
communities we serve. Also impacting these categories were
expenses incurred in the successful marketing campaign for
free checking products introduced during 2002. These
products are expected to have a favorable impact on deposit
growth, interest expense and service charge revenue in future
periods as well as providing potential add-on sales of other
financial products and services. Expenditures for the
branding efforts and marketing campaigns are expected to
continue in 2003.
Included in other operating expense increases for 2001
compared to 2000 were increases in filing and recording
fees, legal fees, other professional fees and telephone
expense of $165 thousand, $216 thousand, $666 thousand
and $352 thousand, respectively. The 2001 period also
included increases in losses on sale of leased vehicles and
increased postage and printing costs related to privacy
legislation and changes due to standardization during 2001
system conversions. The 2001 period included decreases in
insurance expense, Pennsylvania use tax, promotions and
deferred loan origination costs compared to 2000 levels.
Other operating expense for the 2000 period included
increases in collection and repossession expenses. FDIC
expense rose $180 thousand during 2000 due to
standardization of insurance fund rates. 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.
Income tax expense was $8.9 million during 2002
representing a decrease of $6.4 million below the 2001
amount of $15.3 million and compared to $14.3 million in
2000. The Corporation’s effective tax rate was 17.0% for
2002 compared to 23.3% for 2001 and 23.2% for 2000.
Excluding the nonrecurring charges (litigation settlement and
corporate restructuring) and rebranding costs, the
Corporation’s effective tax rate would have been 21.2% in
2002. The Corporation’s effective tax rate continues to be
favorably impacted by tax-free income from securities and
bank owned life insurance.
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 Corporation’s
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
banking subsidiary is a member 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. In addition to the previously
described funding sources, the Corporation also has the
ability to access the capital markets.
Liquidity risk stems from the possibility that the Corporation
may not be able to meet current or future financial
obligations, or the Corporation may become overly reliant on
alternative funding sources. The Corporation maintains a
liquidity risk management policy to manage this risk. This
policy identifies the primary sources of liquidity, establishes
procedures for monitoring and measuring liquidity and
quantifies minimum liquidity requirements which comply
with regulatory requirements. The policy also includes a
liquidity contingency plan to address funding needs to
maintain liquidity under a variety of business conditions.
The Corporation’s liquidity position is monitored by the
Asset/Liability Management Committee (“ALCO”).
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
decreased $49.0 million in 2002 and included decreases in
noninterest-bearing deposits and time deposits which were
partially offset by increases in savings deposits. Non-core
deposits which are time deposits in denominations of $100
thousand or more represented 16.1% of total deposits at
December 31, 2002. Non-core deposits decreased by $7.6
million in 2002 and rose $41.9 million in 2001 due in part to
changes in public funds balances. The increase in non-core
deposits during 2001 also included the issuance of brokered
time deposits in the amount of $5.0 million.
Although the Corporation’s primary source of funds remains
traditional deposits from within the communities served by
its banking subsidiary, 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, 2002,
2001 and 2000 had remaining maturities as follows:
Maturity Distribution of Large Certificates of Deposit
(Dollar Amounts in Thousands)
2001
2002
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
$ 97,862
54,758
114,596
222,486
$ 489,702
20%
11
24
45
100%
$ 133,017
57,222
89,436
217,643
$ 497,318
27%
11
18
44
100%
2000
Amount
Percent
$ 358,112
36,941
19,241
41,088
$ 455,382
79%
8
4
9
100%
Net loans increased $40.4 million during 2002 as commercial
loans increased by $74.9 million and loans to individuals
increased by $31.6 million compared to year-end 2001. The
2002 period reflected decreases of $110.8 million in
residential real estate loans, due in part to the continued runoff
of the existing portfolio and sale of new loan production as
the Corporation continued to change the mix of its loans.
Below is a schedule of loans by classification for the five
years ended December 31, 2002:
2002
Amount Percent
Loans by Classification
(Dollar Amounts in Thousands)
2000
2001
1999
1998
Amount
Percent Amount
Percent Amount
Percent Amount
Percent
$
633,955
20,998
663,220
739,018
505,139
47,110
2,609,440
(806)
24% $ 529,300
14,727
1
638,576
26
849,787
28
473,515
19
2
63,326
100% 2,569,231
(1,297)
21% $ 443,618
37,146
1
560,066
25
932,915
33
450,154
18
2
68,975
100% 2,492,874
(2,047)
18% $ 417,300
41,734
2
495,789
22
980,506
37
502,465
18
65,893
3
100% 2,503,687
(3,628)
16% $ 377,733
2
33,097
387,166
20
1,009,903
39
517,907
20
3
56,423
100% 2,382,229
(7,379)
16%
1
16
42
22
3
100%
$ 2,608,634
$2,567,934
$ 2,490,827
$2,500,059
$2,374,850
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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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, 2002, securities available for
sale had an amortized cost of $1,443 million and an
approximate fair value of $1,483 million. Gross unrealized
gains were $41.8 million and gross unrealized losses were
$2.0 million.
Based upon the Corporation’s historical ability to fund
liquidity needs from other sources, the current available for
sale portfolio is deemed 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, 2002:
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
$
$
5,056
15,031
17,231
41,217
78,535
Maturity Distribution of Securities Held to Maturity
(Dollar Amounts in Thousands)
States and
Political
Subdivisions
$
3,991
10,809
34,298
47,771
$ 96,869
Other
Securities
$ 13,057
9,377
-0-
-0-
$ 22,434
Total
Amortized
Cost
$
22,104
35,217
51,529
88,988
$ 197,838
Maturity Distribution of Securities Available for Sale
At Amortized Cost
(Dollar Amounts in Thousands)
Within 1 year
After 1 but within 5 years
After 5 but within 10 years
Over 10 years
Total
U.S. Treasury, and other
U.S. Government Agencies
and Corporations
States and
Political
Subdivisions
$
499
177,755
133,075
664,421
$ 975,750
$
2,527
5,971
8,977
98,461
$115,936
Other
Securities
$ 69,190
59,517
13,411
209,197
$351,315
Total
Amortized
Cost
$
72,216
243,243
155,463
972,079
$ 1,443,001
*Yields are calculated on a tax-equivalent basis.
Interest Sensitivity
Weighted
Average
Yield*
6.11%
6.76
6.92
5.32
6.08%
Weighted
Average
Yield*
6.31%
4.82
5.21
5.63
5.48%
Market risk is the risk of loss arising from adverse changes
in the fair value of financial instruments due to changes in
interest rates, currency exchange rates or equity prices. The
Corporation’s market risk is composed primarily of interest
rate risk. Interest rate risk results principally from timing
differences in the repricing of assets and liabilities, changes
in the relationship of rate indices and the potential exercise
of free standing or embedded options.
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, can be informative.
An asset or liability is considered to be interest-sensitive
if the rate it yields or bears is subject to change within a
predetermined time period. If interest-sensitive assets (“ISA”)
exceed interest-sensitive liabilities (“ISL”) during a prescribed
time period, a positive gap results. Conversely, when ISL
exceeds ISA during a time period, a negative gap results.
The cumulative gap at the 365 day repricing period was
negative in the amount of $300 million or 6.63% of total
assets at December 31, 2002. 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.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The primary components of ISA include adjustable rate
loans and investments, loan repayments, investment
maturities and money market investments. The primary
components of ISL include maturing certificates of deposit,
money market deposits, savings deposits, NOW accounts
and short-term borrowings.
The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods
indicated as of December 31, 2002 and 2001 (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
0-90 Days
$
962,398
292,206
1,973
1,256,577
354,625
1,172,538
469,735
1,996,898
$ (740,321)
2002
91-180 Days
181-365 Days
$
157,172
162,578
-0-
319,750
170,687
-0-
905
171,592
$ 148,158
$
295,273
262,287
-0-
557,560
263,882
-0-
1,483
265,365
292,195
$
Cumulative
0-365 Days
$ 1,414,843
717,071
1,973
2,133,887
789,194
1,172,538
472,123
2,433,855
$ (299,968)
ISA/ISL
Gap/Total assets
0.63
(16.36%)
1.86
3.27%
2.10
6.46%
0.88
(6.63%)
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)
$
ISA/ISL
Gap/Total assets
0.54
(18.60%)
0.86
(0.84%)
1.12
1.07%
0.67
(18.37%)
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, and as a
result may not accurately predict the impact of changes in
general levels of interest rates or net interest income. This is
exemplified as the gap analysis shows the Corporation’s
earnings to be negatively impacted by rising rates, but
computer modeling indicates that rising rates would have a
favorable impact on earnings. Therefore, to more precisely
measure the impact of interest rate changes on the
Corporation’s net interest income, management simulates the
potential effects of changing interest rates through computer
modeling. The income simulation model used by the
Corporation captures all assets, liabilities, and off-balance
sheet financial instruments, accounting for significant
variables that are believed to be affected by interest rates.
These variables include prepayment speeds on mortgage
loans and mortgage backed securities, cash flows from loans,
deposits and investments and balance sheet growth
assumptions. The model also captures embedded options,
such as interest rate caps/floors or call options, and accounts
for changes in rate relationships as various rate indices lead
or lag changes in market rates. The Corporation is then better
able to implement strategies which would include an
acceleration of a deposit rate reduction or lag in a deposit
rate increase. The repricing strategies for loans would be
inversely related.
The Corporation’s asset/liability management policy
guidelines limit interest rate risk exposure for the succeeding
twelve month period. Simulations are prepared under the
base case where interest rates remain flat and most likely
case where interest rates are defined using projections of
economic factors. Additional simulations are produced
estimating the impact on net interest income of a 300 basis
point (3.00%) movement upward or a 100 basis point
movement downward which cannot result in more than a
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
7.5% change or 5.0% change, respectively, in net interest
income when compared to the base case, without Board
approval and a strategy in place to reduce interest rate risk
below the established maximum level. These policy
guidelines were changed from simulating a 300 basis point
(3.00%) rise and a 300 basis point (3.00%) decline from the
base case which could not result in more than a 7.5% change
in net interest income, either up or down because the
probability of interest rates declining by 300 basis points
over the next 12 months is not likely. The analysis at
December 31, 2002 indicated that a 300 basis point (3.00%)
increase in interest rates would increase net interest income
208 basis points (2.08%) above the base case scenario and a
100 basis point (1.00%) decline in interest rates would
decrease net interest income by 276 basis points (2.76%)
below the base case scenario, over the next twelve months,
both within policy limits.
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 sales, asset and liability pricing and
matched maturity funding. The ALCO strategies are
established by the Corporation’s senior management. The
ALCO continues to evaluate the use of derivative
instruments to protect against the risk of adverse price or
interest rate movements on the values of certain assets and
liabilities, although none are being utilized currently.
Final loan maturities and rate sensitivities of the loan
portfolio excluding consumer installment and mortgage loans
and before unearned income at December 31, 2002, were as
follows (Dollar Amounts in Thousands):
Commercial and industrial
Financial institutions
Real estate-construction
Real estate-commercial
Other
Totals
Loans at fixed interest rates
Loans at variable interest rates
Totals
Credit Review
$
Within One
Year
198,444
-0-
7,309
44,317
22,222
272,292
$
$
One to
5 Years
98,978
175
3,495
114,224
29,069
$ 245,941
$ 116,744
129,197
$ 245,941
After
5 Years
$ 99,897
300
10,194
504,679
184,870
$ 799,940
$ 205,679
594,261
$ 799,940
Total
$ 397,319
475
20,998
663,220
236,161
$1,318,173
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. The Corporation has an additional level of approval
for credit relationships between $500 thousand and $1.0
million. This procedure requires approval of those credits by a
committee consisting of senior lenders of the Corporation.
Commercial and industrial loans are generally granted to
small and middle market customers for operating, expansion
or asset acquisition purposes. Operating cash flows of the
business enterprise are identified as the principal source of
repayment, with business assets held as collateral. Collateral
margins and loan terms are based upon the purpose and
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
in the loan and lease portfolios at each balance sheet date.
Management reviews 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.
While the Corporation consistently applies the following
comprehensive methodology and procedure described in
Note 1 “Accounting Policies,” allowance for credit loss
methodologies incorporate management’s current
judgments about the credit quality of the loan portfolio as
well as collection probabilities for problem credits.
Although management considers the allowance for credit
losses to be adequate based on information currently
available, additional allowance for credit loss provisions
may be necessary due to changes in management estimates
and assumptions about asset impairment, information about
borrowers that indicate changes in the expected future cash
flows or changes in economic conditions. The allowance
for credit losses and the provision for credit losses are
significant elements of the Corporation’s financial
statements, therefore management periodically reviews the
processes and procedures utilized in determining the
allowance for credit losses to identify potential
enhancements to these processes including development of
additional management information systems to ensure that
all relevant factors are appropriately considered in the
allowance analysis. In addition, the Corporation maintains
a system of internal controls which are independently
monitored and tested by internal audit and loan review staff
to ensure that the loss estimation model is maintained in
accordance with internal policies and procedures as well as
generally accepted accounting principals.
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. For analytical
purposes, the following table sets forth an allocation of the
allowance for credit losses at December 31 according to the
categories indicated. Management feels the unallocated
portion of the reserve is necessary due to the uncertain
economic and geo-political environment and its impact on a
variety of sectors such as health care, lodging and energy.
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
2002
$ 7,856
600
7,201
5,294
3,035
259
10,251
$34,496
1.33%
5252525252
Allocation of the Allowance for Credit Losses
(Dollar Amounts in Thousands)
2000
1999
2001
$ 6,315
432
9,808
7,379
3,845
401
5,977
$34,157
1.34%
$ 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%
1998
$ 4,375
414
5,119
10,319
5,223
512
6,342
$ 32,304
1.32%
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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)
2000
2001
1999
Loans on nonaccrual basis
Past due loans
Renegotiated loans
Total nonperforming loans
2002
$23,450
14,774
207
$38,431
$22,899
17,781
832
$41,512
Nonperforming loans as a percentage of total loans
1.47%
1.62%
Allowance as percentage of nonperforming loans
89.76%
82.28%
$10,698
22,086
2,263
$35,047
1.41%
95.87%
$12,765
15,815
62
$28,642
1998
$ 9,677
15,780
64
$ 25,521
1.15%
1.07%
117.10%
126.58%
Other real estate owned
$ 1,651
$ 1,619
$ 1,661
$ 1,707
$ 2,370
Gross income that would have been
recorded at original rates
$ 1,542
$ 1,422
$
750
$
724
$
961
Interest that was reflected in income
286
750
333
458
286
Net reduction to interest income due to nonaccrual
$ 1,256
$
672
$
417
$
266
$
675
The reduction of income due to renegotiated loans was less
than $50 thousand in any year presented.
Nonperforming loan levels at December 31, 2002 decreased
$3.1 million compared to 2001 levels as decreases in past
due loans and renegotiated loans were slightly offset by an
increase in nonaccrual loans. Nonaccrual loans include two
significant credits in both periods. The largest credit ($6.2
million) carries an 80% guaranty of U.S. government
agency. While approximately $2.9 million is expected to be
collected in the second quarter of 2003 as a sale of the
underlying assets is pending, the remaining balance should
be resolved early in the third quarter of 2003. The second
credit, which was $5.9 million at year-end 2001, continues to
be resolved through the liquidation of collateral and
exercising other remedies. The balance outstanding at
December 31, 2002 for this credit was $3.2 million. While
the final resolution of this credit is uncertain, management’s
estimate of the potential loss on this credit is reserved.
Past due loans for the 2002 period decreased $3.0 million
compared to the corresponding period of 2001 and included
decreases in all major categories including loans secured by
residential real estate (down $814 thousand), commercial
real estate (down $999 thousand) and other loans (down
$865 thousand). Renegotiated loans also fell, decreasing by
$625 thousand for the 2002 period. Nonperforming loans as
a percentage of total loans was 1.47% at December 31, 2002,
down from the 1.62% reported at December 31, 2001.
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.
The Corporation has 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 bank and parent company. Credit risk is
mitigated during the loan origination process through the
use of sound underwriting policies and collateral
requirements and its previously described committee
structure. 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 stood at $401.4 million at December 31,
2002, a $31.3 million rise compared to December 31, 2001.
Dividends declared reduced equity by $35.6 million during
5353535353
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2002 as dividends were increased over 2001 levels. The
retained net income of $7.9 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 by $1.2 million. The market value
adjustment to securities available for sale increased equity by
$17.1 million in 2002. Amounts paid to fund the discount on
reinvested dividends reduced equity by $637 thousand.
Proceeds from the issuance of treasury shares to provide for
stock options exercised increased equity by $5.5 million
during 2002, while the tax benefit related to the stock
options, increased equity by $224 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.
Risk Management
In the normal course of business the Corporation assumes
various types of risk. The Corporation has identified twenty-
six standard risks which have been summarized into seven
major risk categories. The seven major risk categories
include credit risk, market risk, liquidity risk, compliance/
legal risk, operational risk, reputation risk and strategic risk.
Credit risk, market risk and liquidity risk are discussed in
this Management’s Discussion and Analysis of Financial
Condition and Results of Operations section. The remaining
major risk categories are defined as follows: compliance/
legal risk – arises from violations of, or non-compliance with
laws, rules, regulations, prescribed practices, or ethical
standards; operational risk – threat created by inadequate
information systems, operational problems, weak internal
control systems, fraud, or any other unforeseen catastrophes;
reputation risk – the risk to earnings or capital arising from
negative public opinion; and strategic risk – this risk arises
from adverse business decisions or improper implementation
of those decisions. These factors and others could impact
the Corporation’s business, financial condition and results
of operation.
Corporate management has taken strong and wide-ranging
actions to enhance the awareness of and proactively manage
risk within the Corporation. In addition to establishing a
comprehensive policy and procedure manual that is updated
and regularly communicated throughout the Corporation, the
5454545454
Senior Vice President, Risk Management, an executive
officer level position, oversees all aspects of the risk process.
Our committee structure embraces a risk management
culture, which begins with the Risk Committee that provides
oversight and monitoring of key risk areas. The Risk
Committee, which is chaired by the Senior Vice President,
Risk Management, and has representation from all of the
disciplines across the organization, meets to discuss and
assess current risks and emerging risks as well as to identify
solutions and mitigants. Credit quality and loan loss
adequacy issues are addressed by the Credit Quality, Watch
List and Loan Loss Reserve committees. Additional
committees include Security which is responsible for
coordinating the security program, Privacy which focuses on
safeguarding client information, ALCO which monitors
interest rate and liquidity risks and Disclosure which
evaluates internal controls regarding information utilized in
certain regulatory reports as well as reviewing those reports
and the disclosure process to ensure that disclosures are
timely, complete and accurate.
The Risk Department has specific procedures to analyze and
quantify risks in the seven major risk categories. Gaps
between inherent risks and mitigants are quantified and
reviewed by the Risk Committee, while management
continually reviews the mitigants and controls to ensure their
continuity with internal audit validating their existence and
effectiveness. Risk gaps are compiled to develop a risk rating,
which is incorporated into the balanced scorecard measure and
is reported to the Board of Directors. An analytical review of
key indicators, both monetary and non-monetary, as well as
other current information that may become available through
discussions with management serves as an early warning
system to detect potential deteriorating internal controls. All
new initiatives and products are subject to a risk assessment
prior to being presented for implementation. An annual
assessment of risk is also performed to identify potential threat
areas to our computer systems. Our Internal Audit staff
performs routine and consistent information technology
reviews of identified risk areas, security measures, and control
processes. In addition, the Corporation annually retains
outside experts to test potential high-risk areas such as Internet
based processes.
With these processes in place the Corporation believes that its
objective of establishing a risk culture that identifies,
measures, controls and monitors events or actions that may
adversely affect our organization has been achieved. Our goal
is not to eliminate risk but to understand fully the risk the
Corporation is assuming and appropriately manage those risks.
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
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
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.
COMMON STOCK INFORMATION
COMMON STOCK INFORMATION
COMMON STOCK INFORMATION
COMMON STOCK INFORMATION
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 13,500. The table below sets forth
the high and low sales prices per share and cash dividends declared per share for common stock of the Corporation.
Period
2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Period
2001
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Sale
Low Sale
$ 14.00
$ 14.12
$ 13.37
$ 12.35
$ 11.51
$ 12.53
$ 11.62
$ 10.84
High Sale
Low Sale
$ 11.45
$ 15.00
$ 14.35
$ 13.00
$
9.50
$ 10.30
$ 10.80
$ 11.10
Cash
Dividends
Per Share
$ 0.150
$ 0.150
$ 0.150
$ 0.155
Cash
Dividends
Per Share
$ 0.145
$ 0.145
$ 0.145
$ 0.150
5555555555
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 21, 2003 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.fcbanking.com