-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BJrJv5e0y9x8bI6VvUtFn6Yhxj3vkm2DDZCy0daxov/CB7Qe+c1OWkylqFmIEpP7 9HhIsft9UydjMqOEJzdnpA== 0000712537-00-000007.txt : 20000331 0000712537-00-000007.hdr.sgml : 20000331 ACCESSION NUMBER: 0000712537-00-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251428528 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11138 FILM NUMBER: 584435 BUSINESS ADDRESS: STREET 1: OLD COURTHOUSE SQUARE STREET 2: 22 N SIXTH ST CITY: INDIANA STATE: PA ZIP: 15701 BUSINESS PHONE: 7243497220 MAIL ADDRESS: STREET 1: 22 NORTH SIXTH STREET STREET 2: P.O. BOX 400 CITY: INDIANA STATE: PA ZIP: 15701 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C 20549 Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 commission file number 0-11242 FIRST COMMONWEALTH FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1428528 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 22 NORTH SIXTH STREET INDIANA, PA 15701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (724) 349-7220 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No . Indicate the number of shares outstanding of each of the issuer's classes of common stock. TITLE OF CLASS OUTSTANDING AT March 22, 2000 Common Stock, $1 Par Value 58,095,060 Shares The aggregate market value of the voting common stock, par value $1 per share, held by non-affiliates of the registrant (Based upon the closing sale price on March 22, 2000), was approximately $538,660,680. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement related to the annual meeting of security holders to be held April 24, 2000 are incorporated by reference into Part III. FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES First Commonwealth Financial Corporation FORM 10-K INDEX PART I PAGE ITEM 1. Business Description of business.......................... 2 Competition...................................... 4 Supervision and regulation....................... 4 ITEM 2. Properties....................................... 7 ITEM 3. Legal Proceedings................................ 7 ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 7 PART II ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters......................... 8 ITEM 6. Selected Financial Data.......................... 9 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.............. 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 28 ITEM 8. Financial Statements and Supplementary Data...... 29 ITEM 9. Disagreements on Accounting and Financial Disclosures..................................... 64 PART III ITEM 10. Directors and Executive Officers of the Registrant..................................... 64 ITEM 11. Management Renumeration and Transactions........ 65 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................. 65 ITEM 13. Certain Relationships and Related Transactions.. 65 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 66 Signatures..................................... 68 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business Description of Business First Commonwealth Financial Corporation (the "Corporation") was incorporated as a Pennsylvania business corporation on November 15, 1982 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Corporation operates two chartered banks, First Commonwealth Bank and Southwest Bank. Personal financial planning and other financial services and insurance products are also provided through First Commonwealth Trust Company and First Commonwealth Insurance Agency. The Corporation also operates through Commonwealth Systems Corporation, a data processing subsidiary and First Commonwealth Professional Resources Inc., ("FCPRI") a subsidiary providing professional services to affiliated organizations. First Commonwealth Bank ("FCB"), a Pennsylvania-chartered banking corporation headquartered in Indiana, Pennsylvania operates through divisions doing business under the following names: NBOC Bank, Deposit Bank, Cenwest Bank, First Bank of Leechburg, Peoples Bank, Central Bank, Peoples Bank of Western Pennsylvania, Unitas Bank and Reliable Bank. On December 31, 1998 the Corporation affiliated, as a result of a statutory merger, with Southwest National Corporation ("SNC") and its wholly-owned subsidiary, Southwest Bank ("Southwest"). SNC was a Pennsylvania-chartered bank holding company headquartered in Greensburg, Pennsylvania. Southwest Bank is a Pennsylvania-chartered, federally insured commercial bank also headquartered in Greensburg, Pennsylvania which traces its origin to 1900. Upon merger, SNC was combined with the Corporation and Southwest Bank became a subsidiary of the Corporation. Through FCB, the Corporation traces its banking origins to 1866. FCB and Southwest ("Subsidiary Banks") conduct business through 92 community banking offices in the counties of Allegheny (5), Armstrong (3), Beaver (1), Bedford (4), Blair (8), Cambria (11), Centre (2), Clearfield (5), Elk (3), Franklin (2), Huntingdon (6), Indiana (9), Jefferson (4), Lawrence (6), Somerset (5), Washington (1), and Westmoreland (17). The Subsidiary Banks engage in general banking business and offer a full range of financial services including such general retail banking services as demand, savings and time deposits and mortgage, consumer installment and commercial loans. The Subsidiary Banks operate a network of 81 automated teller machines ("ATMs") which permits customers to conduct routine banking transactions 24 hours a day. Of the ATMs, 60 are located on the premises of their main or branch offices and 21 are in remote locations. All the ATMs are part of the MAC network which consists of over 23,000 ATMs owned by numerous banks, savings and loan associations and credit unions located throughout 45 states. The ATMs operated by the Subsidiary Banks are also part of the global MasterCard/Cirrus network which is comprised of more than 300,000 ATMs located in the United States, Canada and 58 other countries and territories, which services over 365 million card holders. Such networks allow the Subsidiary Banks' customers to withdraw cash and in certain cases conduct other banking transactions from ATMs of all participating financial institutions. In addition to funds access through the use of ATMs, the MAC debit card offered to the Subsidiary Banks' deposit customers may be used at 300,000 point of sale terminals on the MAC system as well as being used on the global MasterCard system for the purchase of goods and services. The MAC debit card provides customers with the almost universal acceptability of a credit card combined with the convenience of direct debit to the customers' checking account. 2 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Description of Business (Continued) First Commonwealth's corporate philosophy is to encourage its subsidiaries to operate as locally-oriented, community-based financial service affiliates, augmented by experienced, centralized support from the Corporation in selected critical areas. This local market orientation is reflected in the Subsidiary Banks' boards of directors and branch banking centers, which generally have advisory boards comprised of local business persons, professionals and other community representatives, that assist the Subsidiary Banks in responding to local banking needs. The Subsidiary Banks concentrate on customer service and business development, while relying upon the support of the Corporation in identifying operational areas that can be effectively centralized without sacrificing the benefits of a local orientation. Primary candidates for centralization are those functions which are not readily visible to customers and those which are critical to risk management. Asset quality review, financial reporting, investment activities, funds management, internal audit, data processing and loan servicing are among the functions which are managed at the holding company level, either directly or through utilization of non-bank subsidiaries as professional resources providers. Commonwealth Systems Corporation ("CSC") was incorporated as a Pennsylvania business corporation in 1984 by the Corporation to function as its data processing subsidiary and it has its principal place of business in Indiana, Pennsylvania. Before August 1984, it had operated as the data processing department of NBOC. CSC provides on-line general ledger accounting services and bookkeeping services for deposit and loan accounts to the Corporation, the Banking Subsidiaries and its other nonbank subsidiaries. CSC also acts as a centralized purchasing agent for the purchase of computer hardware and software products by the Corporation and subsidiaries as well as providing technical support for the installation and use of these products. It competes, principally with data processing subsidiaries of other, mostly larger, banks, on the basis of the price and quality of its services and the speed with which such services are delivered. First Commonwealth Trust Company ("FCTC") was incorporated on January 18, 1991 as a Pennsylvania chartered trust company to render general trust services. The trust departments of subsidiary banks were combined to form FCTC, and the corporate headquarters are located in Indiana, Pennsylvania. Upon the Corporation's merger with Southwest National, the trust department of Southwest Bank was also merged into FCTC. FCTC has eight branch offices in the service areas of the Subsidiary Banks and offers personal and corporate trust services, including administration of estates and trusts, individual and corporate investment management and custody services and employee benefit trust services. First Commonwealth Insurance Agency ("FCIA") was incorporated as a Pennsylvania business corporation with its principal place of business in Indiana, Pennsylvania. FCIA began operations in January 1998 as a wholly- owned subsidiary of FCB and provides a full range of insurance and annuity products to retail and commercial customers. The Corporation and its subsidiaries employed approximately 1,450 persons (full-time equivalents) at December 31, 1999. On June 1, 1989 Commonwealth Trust Credit Life Insurance Company ("Commonwealth Trust") began operations. The Corporation owns 50% of the voting common stock of Commonwealth Trust. Commonwealth Trust provides reinsurance for credit life and credit accident and health insurance sold by the subsidiaries of the two unrelated holding company owners under a joint venture arrangement whereby the net income derived from such reinsurance inures proportionally to the benefit of the holding company selling the underlying insurance to its banks' customers. 3 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) First Commonwealth Capital Trust I, a business trust created under the laws of the State of Delaware, is a wholly-owned subsidiary of the Corporation. The trust was formed during September 1999 for the exclusive purposes of issuing and selling trust preferred securities, using the proceeds from the sale of the trust preferred securities to acquire subordinated debentures issued by the Corporation and engaging in only those other activities necessary or incidental thereto. The Corporation does not engage in any significant business activities other than holding the stock of its subsidiaries. The Corporation does not at present have any plans to expand or modify its business or that of its subsidiaries, other than as described herein. Nevertheless, it will be receptive to and may actively seek out mergers and acquisitions in the event opportunities which management considers advantageous to the development of the Corporation's business arise, and may otherwise expand or modify its business as management deems necessary to respond to changing market conditions or the laws and regulations affecting the business of banking. Competition The Subsidiary Banks, FCTC and FCIA face intense competition, both from within and without their service areas, in all aspects of business. The Subsidiary Banks compete for deposits, in such forms as checking, savings and NOW (negotiable order of withdrawal) accounts, MMDA (money market deposit accounts) and certificates of deposit, and in making consumer loans and loans to smaller businesses, with numerous other commercial banks and savings banks doing business within their service area. With respect to loans to larger businesses the Subsidiary Banks also compete with much larger banks located outside of their service area. The Subsidiary Banks also compete, primarily in making consumer loans and for deposits, with state and federally chartered savings and loan associations and with credit unions. In recent years the Subsidiary Banks have encountered significant competition for deposits from money market funds, mutual funds and institutions that offer annuities located throughout the United States. Money market funds pay dividends to their shareholders (which are the equivalent of the interest paid by banks on deposits) and they are able to offer services and conveniences similar to those offered by the Subsidiary Banks. Annuities accumulate interest on the amounts deposited over a predetermined time period. The depositor is then entitled to withdraw his funds for a fixed period of time or until death. The effect of such competition has been to increase the costs of the rest of deposits, which provide the funds with which loans are made. In addition to savings and loan associations and credit unions, the Subsidiary Banks also compete for consumer loans with local offices of national finance companies and finance subsidiaries of automobile manufacturers and with national credit card companies such as MasterCard and VISA, whose cards, issued through financial institutions, are held by consumers throughout their service area. The Subsidiary Banks believe that the principal means by which they compete for deposits and consumer and smaller commercial loans are the number and desirability of the locations of their offices and ATMs, the sophistication and quality of their services and the prices (primarily interest rates) of their services. Additionally, the Subsidiary Banks intend to remain competitive by offering financial services that target specific customer needs. Examples of such specialized products include the "Sentry CD Watch" which provides certificate of deposit rates of competitors to members of the Subsidiary Banks' "Senior Accent" club, available to customers age 50 or better, and mortgage products available to first time home buyers. Specific customer needs are also met through an enhanced customer delivery system that includes telephone banking, which provides convenient access to financial services and hours of operation that extend past those of the Subsidiary Banks' branch offices. The Corporation will continue to enhance its customer delivery system in the future as the Internet is utilized to provide customers access to product information and on-line banking. 4 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Supervision and Regulation The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("the Bank Holding Company Act") and is registered such with the Federal Reserve Board. As a registered bank holding company ("BHC"), it is required to file with the Federal Reserve Board an annual report and other information. The Federal Reserve Board is also empowered to make examinations and inspections of the Corporation and its subsidiaries. The Bank Holding Company Act and Regulation Y of the Federal Reserve Board require every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire direct or indirect ownership or control of more than 5% of the outstanding voting shares or substantially all of the assets of a bank or merge or consolidate with another bank holding company. The Federal Reserve Board may not approve acquisitions by the Corporation of such percentage of voting shares or substantially all the assets of any bank located in any state other than Pennsylvania unless the laws of such state specifically authorize such an acquisition. The Bank Holding Company Act generally prohibits a bank holding company from engaging in a non-banking business or acquiring direct or indirect ownership or control of more that 5% of the outstanding voting shares of any non- banking corporation subject to certain exceptions, the principal exception being where the business activity in question is determined by the Federal Reserve Board to be closely related to banking or to managing or controlling banks to be a proper incident thereto. The Bank Holding Company Act does not place territorial restrictions on the activities of such banking related subsidiaries of bank holding companies. Under the Federal Reserve Act, subsidiary banks of a bank holding company are subject to certain restrictions on extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof, or acceptance of such stock or securities as collateral for loans to any one borrower. A bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or the furnishing of property or services. Under the Pennsylvania Banking Code, there is no limit on the number of Pennsylvania banks that may be owned or controlled by a Pennsylvania bank holding company. The Gramm-Leach-Bliley Act ("GBLA") of 1999 revolutionizes the regulation of financial services companies. GBLA amends the Bank Holding Company Act of 1956 to create a new type of bank holding company, a financial holding company ("FHC"), which is permitted to engage in all activities permitted by a bank holding company as well as securities, merchant banking and insurance activities that were prohibited to BHCs. GLBA also repeals Sections 20 and 32 of the Glass-Steagall Act, which prohibited affiliations between a member bank and a company principally engaged in securities activities. The activities of a BHC that does not qualify to become a FHC will be limited to those the Federal Reserve Board had, prior to enactment of GBLA, deemed closely related to banking. In order to qualify as a FHC, each depository institution subsidiary of a BHC must be well capitalized, well managed and if insured have a satisfactory or better rating under the Community Reinvestment Act of 1977 ("CRA") as its most recent examination and the BHC must file an election with the Federal Reserve Board certifying that it meets the requirements of a FHC. GBLA expands the range of business opportunities for commercial banking organizations and enables banking companies and other types of financial companies such as securities, insurance and financial technology companies to combine more readily. A FHC 5 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Supervision and Regulation (Continued) does not need to obtain prior Federal Reserve Board approval in order to engage in, or acquire a nonbank company that engages in financial activities. The FHC only needs to provide notice to the Federal Reserve Board, describing the activity commenced or conducted by the acquired company, within 30 days after commencing the activity or consummating the acquisition. Subsidiary Banks FCB and Southwest are Pennsylvania-chartered banks and are subject to the supervision of and regularly examined by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation ("FDIC"), and subject to certain regulations of the Federal Reserve Board. The areas of operation subject to regulation by Federal and Pennsylvania laws, regulations and regulatory agencies include reserves against deposits, maximum interest rates for specific classes of loans, truth-in-lending disclosures, permissible types of loans and investments, trust operations, mergers and acquisitions, issuance of securities, payment of dividends, Community Reinvestment Act evaluations, mandatory external audits, establishment of branches and other aspects of operations. Under the Pennsylvania Banking Code, a state bank located in Pennsylvania may establish branches anywhere in the state. Reciprocal Regional Interstate Banking As already noted, a bank holding company located in one state cannot acquire a bank or a bank holding company located in another state unless the law of such other state specifically permits such acquisition. On June 25, 1986, Pennsylvania passed a law (Act No. 1986-69) which provides that a bank holding company located in any state or the District of Columbia can acquire a Pennsylvania bank or bank holding company if the jurisdiction where the acquiring bank holding company is located has passed an enabling law that permits a Pennsylvania bank holding company to acquire a bank or a bank holding company in such jurisdiction. As of December 31, 1999 enabling laws have been passed so that the required reciprocity presently exists with approximately 34 states, of which the following 18 are east of the Mississippi River: Connecticut, Delaware, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Rhode Island, Tennessee, Vermont and West Virginia. A similar law is applicable to savings associations and savings and loan holding companies. It is difficult to determine the precise effects that reciprocal regional interstate banking will have on the Corporation in the future, but the law has increased, and as reciprocity becomes effective for additional states will increase further, the number of potential buyers for Pennsylvania banks and bank holding companies. The law also permits Pennsylvania bank holding companies and Pennsylvania savings and loan holding companies that desire to expand outside Pennsylvania to acquire banks, savings institutions and bank holding companies located in jurisdictions with which Pennsylvania has reciprocity. Effects of Governmental Policies The business and earnings of the Corporation are affected not only by general economic conditions, but also by the monetary and fiscal policies of the United States Government and its agencies, including the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open market operations in United States government securities, changes in 6 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Effects of Governmental Policies the discount rate on borrowings by member banks and savings institutions from the Federal Reserve System and changes in reserve requirements against bank and savings institution deposits. These instruments, together with fiscal and economic policies of various governmental entities, influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans, received on investments or paid for deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of bank holding companies and their subsidiary banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and Pennsylvania economies and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels and loan demand or the effect of such changes on the business and earnings of the Corporation or its subsidiaries. ITEM 2. PROPERTIES The Corporation's principal office is located in the old Indiana County Courthouse complex. This certified Pennsylvania and national historic landmark was built in 1870 and restored by NBOC in the early 1970s. The Corporation, NBOC, CSC and FCB occupy this grand structure, which provides 32,000 square feet of floor space, under a 25-year restoration lease agreement with Indiana County, which NBOC entered into in 1973 and renewed during 1998 for an additional 25 years. Under the lease, NBOC is obligated to pay all taxes, maintenance and insurance on the building and to restore it in conformity with historic guidelines. In order to support future expansion needs and centralization of various functional areas such as loan processing, marketing, and accounting, the Corporation also owns two additional structures, free of all liens and encumbrances. These facilities currently provide office space for the Corporation, CSC, FCTC, FCB, FCIA and FCPRI. The Subsidiary Banks have 92 banking facilities of which 26 are leased and 66 are owned in fee, free of all liens and encumbrances. All of the facilities utilized by the Corporation and its subsidiaries are used primarily for banking activities. Management believes all such facilities to be in good repair and well suited to their uses. Management presently expects that such facilities will be adequate to meet the anticipated needs of the Corporation and its subsidiaries for the immediate future. ITEM 3. LEGAL PROCEEDINGS The information appearing in NOTE 20 of the Notes to the Consolidated Financial Statements included in Item 8 of this filing is incorporated by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable 7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES Part II ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters First Commonwealth Financial Corporation (the "Corporation") is listed on the New York Stock Exchange under the symbol "FCF." The approximate number of holders of record of the Corporation's common stock is 12,500. The table below sets forth the high and low sales prices per share and cash dividends declared per share for common stock of the Corporation. Cash Dividends Period High Sale Low Sale Per Share 1999 First Quarter $12.406 $10.156 $0.115 Second Quarter $12.188 $10.375 $0.130 Third Quarter $12.750 $11.031 $0.130 Fourth Quarter $14.313 $11.625 $0.140 Cash Dividends Period High Sale Low Sale Per Share 1998 First Quarter $17.125 $13.656 $0.110 Second Quarter $14.875 $13.156 $0.110 Third Quarter $15.281 $11.500 $0.110 Fourth Quarter $13.406 $11.500 $0.115 8 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 6. Selected Financial Data (Dollar Amounts in Thousands, except per share data) The following selected financial data is not covered by the auditor's report and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the consolidated financial statements and related notes. All amounts have been restated to reflect the poolings of interests.
Years Ended December 31, 1999 1998 1997 1996 1995 Interest income............................ $297,507 $283,421 $254,772 $235,188 $227,182 Interest expense........................... 152,653 148,282 124,427 109,189 103,019 Net interest income...................... 144,854 135,139 130,345 125,999 124,163 Provision for credit losses................ 9,450 15,049 10,152 6,301 5,575 Net interest income after provision for credit losses.......................... 135,404 120,090 120,193 119,698 118,588 Securities gains (losses).................. 565 1,457 6,825 1,599 (603) Other operating income..................... 30,288 24,881 18,716 17,359 15,996 Merger and related charges................. -0- 7,915 -0- -0- -0- Other operating expenses................... 93,615 92,286 88,857 85,299 83,689 Income before taxes and extra- ordinary items...................... 72,642 46,227 56,877 53,357 50,292 Applicable income taxes.................... 19,612 12,229 17,338 16,164 15,728 Net income before extraordinary items 53,030 33,998 39,539 37,193 34,564 Extraordinary items (less applicable taxes of $336)................................. -0- (624) -0- -0- -0- Net income................................. $ 53,030 $ 33,374 $ 39,539 $ 37,193 $ 34,564 Per Share Data (a) Net income before extraordinary items.... $0.88 $0.55 $0.64 $0.60 $0.55 Extraordinary items...................... 0.00 (0.01) 0.00 0.00 0.00 Net income............................... $0.88 $0.54 $0.64 $0.60 $0.55 Dividends declared....................... $0.515 $0.445 $0.41 $0.37 $0.33 Average shares outstanding............... 60,333,092 61,333,572 61,671,898 62,310,086 62,472,404 Per Share Data Assuming Dilution (a) Net income before extraordinary items.... $0.88 $0.55 $0.64 $0.60 $0.55 Extraordinary items...................... 0.00 (0.01) 0.00 0.00 0.00 Net income............................... $0.88 $0.54 $0.64 $0.60 $0.55 Dividends declared....................... $0.515 $0.445 $0.41 $0.37 $0.33 Average shares outstanding............... 60,569,322 61,666,026 61,845,674 62,381,790 62,563,920 At End of Period Total assets............................. $4,340,846 $4,096,789 $3,668,557 $3,339,996 $3,075,123 Investment securities.................... 1,592,389 1,525,332 1,015,798 901,411 960,588 Loans and leases, net of unearned income. 2,500,059 2,374,850 2,436,337 2,236,523 1,935,938 Allowance for credit losses.............. 33,539 32,304 25,932 25,234 23,803 Deposits................................. 2,948,829 2,931,131 2,884,343 2,756,111 2,586,545 Company obligated mandatorily redeemable capital securities of subsidiary trust. 35,000 -0- -0- -0- -0- Other long-term debt..................... 603,355 630,850 193,054 52,737 7,168 Shareholders' equity..................... 286,683 355,405 354,323 341,522 329,486 Key Ratios Return on average assets................. 1.25% 0.85% 1.15% 1.17% 1.14% Return on average equity................. 15.44% 9.13% 11.31% 11.07% 11.02% Net loans to deposit ratio............... 83.64% 79.92% 83.57% 80.23% 73.93% Dividends per share as a percent of net income per share....................... 58.52% 82.41% 64.06% 61.67% 60.00% Average equity to average assets ratio... 8.10% 9.28% 10.16% 10.53% 10.38% (a) Per share amounts have been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on October 19, 1999.
9 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. 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, 1999, 1998 and 1997 and are intended to supplement, and should be read in conjunction with, the consolidated financial statements and related footnotes. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. The Corporation acquired Southwest National Corporation and its subsidiary ("Southwest") effective December 31, 1998. The merger was accounted for as a pooling of interests and accordingly, all financial statements have been restated as though the merger had occurred at the beginning of the earliest period presented. During the fourth quarter of 1997 the Corporation formed First Commonwealth Insurance Agency ("FCIA") as a subsidiary of First Commonwealth Bank ("FCB"), a commercial banking subsidiary of the Corporation. FCIA began marketing a wide range of insurance and annuity products to the Corporation's retail and commercial customers beginning January 1, 1998. On October 19, 1999, the Corporation's Board of Directors approved a 2-for-1 stock split effected in the form of a 100% stock dividend. Shareholders of record at the close of business November 4, 1999 received one additional share for each share held. The additional shares were distributed on November 18, 1999. Share data for all periods presented has been restated to reflect the stock split as if it had occurred at the beginning of the earliest period presented. Results of Operations Net income in 1999 was $53.0 million, an increase of $19.7 million from the 1998 level of $33.4 million and compared to $39.5 million reported in 1997. Basic earnings per share increased $0.34 per share in 1999 to $0.88. The 1998 period was impacted negatively by a number of merger and other related charges totaling $7.9 million which resulted in a decrease of $0.13 per share on a pre-tax basis for 1998. These charges include merger expenses for the acquisition of Southwest National Corporation, early retirement and postretirement benefit accruals and premises and equipment expenses to standardize depreciation methods. Excluding merger and related charges, gains on sale of loans and branches, securities transactions and extraordinary items, basic earnings per share increased $0.22 or 36.67% for 1999 compared to 1998. Extraordinary items for 1998 resulted from a single transaction whereby the Corporation incurred a cost of $960 thousand for the prepayment of FHLB term borrowings. Increases in net interest income increased basic earnings per share by $0.20 per share in 1999 and $0.09 per share in 1998. Increases in employee costs decreased earnings per share by $0.03 in both the 1999 and 1998 periods. Return on average assets was 1.25% and return on average equity was 15.44% during 1999 compared to 0.85% and 9.13%, respectively for 1998. Return on average assets was 1.15% during 1997 while return on average equity was 11.31%. 10 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) The following is an analysis of the impact of changes in net income on earnings per share: 1999 1998 vs. vs. 1998 1997 Net income per share, prior year $0.54 $0.64 Increase (decrease) from changes in: Net interest income 0.20 0.09 Provision for credit losses 0.09 (0.08) Security transactions (0.01) (0.09) Other income 0.11 0.10 Salaries and employee benefits (0.03) (0.03) Occupancy and equipment costs 0.00 0.00 Merger and other related charges 0.13 (0.13) Other expenses (0.03) (0.03) Provision for income taxes (0.13) 0.08 Extraordinary items, net of tax 0.01 (0.01) Net income per share $0.88 $0.54 Net interest income, the most significant component of earnings, is the amount by which interest generated from earning assets exceeds interest expense on liabilities. Net interest income was $144.9 million in 1999 compared to $135.1 million in 1998 and $130.3 million in 1997. The following is an analysis of the average balance sheets and net interest income for each of the three years in the period ended December 31, 1999. 11 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis Average Balance Sheets and Net Interest Analysis (Dollar Amounts in Thousands) 1999 1998 1997 Average Income/ Yield or Average Income/ Yield or Average Income/ Yield or Balance Expense Rate(a) Balance Expense Rate(a) Balance Expense Rate(a) Assets Interest-earning assets: Time deposits with banks $ 1,844 $ 121 6.56% $ 3,692 $ 230 6.23% $ 4,663 $ 236 5.06% Investment securities 1,608,467 100,853 6.59 1,271,319 78,205 6.43 931,017 55,490 6.24 Federal funds sold 2,097 105 5.01 35,521 1,893 5.33 12,653 689 5.45 Loans (b) (c), net of unearned income 2,408,450 196,428 8.27 2,439,436 203,093 8.43 2,330,657 198,357 8.60 Total interest- earning assets 4,020,858 297,507 7.59 3,749,968 283,421 7.72 3,278,990 254,772 7.91 Noninterest-earning assets: Cash 80,716 78,999 77,259 Allowance for credit losses (33,757) (27,388) (25,510) Other assets 174,063 138,114 110,112 Total noninterest- earning assets 221,022 189,725 161,861 Total Assets $4,241,880 $3,939,693 $3,440,851 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits (d) $ 386,124 $ 8,375 2.17% $ 341,835 $ 7,579 2.22% $ 271,321 $ 5,042 1.86% Savings deposits (d) 712,637 17,769 2.49 715,814 21,379 2.99 737,725 22,752 3.08 Time deposits 1,499,857 77,187 5.15 1,530,491 85,002 5.55 1,517,972 84,806 5.59 Short-term borrowings 279,269 13,832 4.95 195,334 10,214 5.23 156,470 8,108 5.18 Long-term debt 643,746 35,490 5.51 430,677 24,108 5.60 65,820 3,719 5.65 Total interest- bearing liabilities 3,521,633 152,653 4.33 3,214,151 148,282 4.61 2,749,308 124,427 4.53 Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits (d) 345,311 328,720 311,304 Other liabilities 31,439 31,177 30,541 Shareholders' equity 343,497 365,645 349,698 Total noninterest- bearing funding sources 720,247 725,542 691,543 Total Liabilities and Shareholders' Equity $4,241,880 $3,939,693 $3,440,851 Net Interest Income and Net Yield On Interest- earning Assets $144,854 3.80% $135,139 3.77% $130,345 4.12% (a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate. (b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets. (c) Loan income includes net loan fees. (d) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits which were made for regulatory purposes.
12 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Both interest income and interest expense increased over 1998 levels as volume increases for 1999 were only partially offset by rate decreases. Average interest-earning assets increased $270.9 million while average interest-bearing liabilities increased $307.5 million in 1999. Asset yields, on a tax-equivalent basis, decreased 13 basis points (0.13%) during 1999 to 7.59%, from 7.72% reported in 1998 and compared to 7.91% reported in 1997. The cost of funds for 1999 decreased 28 basis points (0.28%) from 1998 costs of 4.61% and compared to costs of 4.53% for 1997. Interest and fees on loans decreased $6.7 million for 1999 over 1998 levels and included decreases in interest on mortgage loans of $6.4 million and decreases in interest on credit card loans of $1.4 million which were primarily the result of loan sales. Average mortgage loans for the 1999 period decreased $88.7 million compared to 1998 averages, as a result of the sale of $52.5 million and $42.2 million of 1-4 family residential mortgage loans in the fourth quarter of 1998 and the first quarter of 1999, respectively. Average credit card loans for the 1999 period decreased $9.8 million as $20.4 million of consumer credit card loans were sold in the second quarter of 1999. The decreased income from mortgage and credit card loans in 1999 was partially offset by increased income from commercial loans as enhanced marketing strategies enabled the Corporation to capitalize on lending opportunities with small to mid-sized commercial customers. The loan portfolio also reflected decreases due to rate of $4.9 million during 1999 as the decline in loan yields which began in the fourth quarter of 1995 has continued throughout 1998 and 1999. Loan yields declined 16 basis points (0.16%) during 1999 to 8.27% from 8.43% reported for 1998 and compared to 8.60% during 1997. The loan portfolio continued to be impacted by loan refinancings and loans maturing at higher interest rates than current market rates. Loan refinancings and prepayments slowed throughout 1999 as market interest rates rose. Mortgage portfolio yields rose 4 basis points (0.04%) for 1999 compared to 1998 as yields on innovative loan products introduced in previous years began to approach the average yield of the mortgage portfolio as these products aged and introductory interest rates were no longer offered on aged loans. Interest income on investments increased $22.6 million for 1999 compared to 1998 as average balances of U.S. government agency securities and asset backed securities for 1999 increased $183.6 million and $66.9 million, respectively over 1998 averages. These securities purchases were part of a capital management leveraging strategy whereby borrowings from the Federal Home Loan Bank classified as long-term debt were invested in U.S. government agency securities and mortgage backed securities. Interest income for 1999 was also impacted by volume increases from corporate securities, primarily investments in trust preferred securities. Yields on investments for 1999 were 6.59% compared to 6.43% for 1998 and 6.24% for 1997. Yields on investments for the 1999 period reflected an increase in yields on U.S. government agency securities of 11 basis points (0.11%) and an increase in yields on corporate securities of 119 basis points (1.19%) for the 1999 period compared to 1998. Prepayment speeds of mortgage backed securities ("MBS") which had accelerated during 1998 began to slow during the 1999 period as interest rates rose. The primary risk of owning MBS relates to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact on prepayment speeds. As interest rates increase, prepayment speeds generally decline, resulting in a longer average life of a MBS. Conversely as interest rates decline, prepayment speeds increase, resulting in a shorter average life of a MBS. Using computer simulation models, the Corporation tests the average life and yield volatility of all MBSs under various interest rate scenarios on a continuing basis to insure that volatility falls within acceptable limits. The Corporation holds no "high risk" securities nor does the Corporation own any securities of a single issuer exceeding 10% of shareholders' equity other than U.S. government and agency securities. 13 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Interest on deposits decreased $10.6 million for 1999 compared to 1998 as rate decreases were only partially offset by volume increases. Interest on total savings deposits decreased $4.2 million and interest on time deposits decreased $7.9 million for 1999 due to rate decreases and a decline in the interest rate environment, particularly early in the year. Deposit costs for total savings deposits reflected a decrease of 36 basis points (0.36%) for 1999 while the cost of time deposits reflected a decrease of 41 basis points (0.41%) over 1998 costs, primarily as a result of active interest rate management. Volume increases for deposits in 1999 occurred primarily in products offering higher interest rates than traditional products such as the Corporation's "American Dream" savings product utilized by consumers and the secured cash manager product utilized by municipalities. The secured cash manager product allows the municipality to sweep excess balances from noninterest-bearing accounts into an interest-bearing account which offers higher interest rates than traditional N.O.W. accounts. Average balances of noninterest-bearing demand deposits for 1999 reflected an increase of $16.6 million compared to 1998 averages. Interest expense on short-term borrowings increased $3.6 million during 1999 primarily as a result of increases in average borrowings of $83.9 million over 1998 averages. Increases in interest expense on short-term borrowings as a result of volume increases during 1999 were partially offset by rate decreases as the cost of short-term borrowings decreased 28 basis points (0.28%) over 1998 costs. Interest expense on long-term debt increased $11.4 million for the 1999 period compared to 1998 primarily as a result of increases in average borrowings of $213.1 million over 1998 averages. The long-term debt increase for 1999 included borrowings from the Federal Home Loan Bank with maturities of up to 10 years to be utilized as part of the above mentioned capital management leveraging strategy. The average spread of this leverage strategy was approximately 1.17% during the 1999 period and 1.05% during the 1998 period. During 1999 and 1998 interest income before taxes on these investments exceeded the funding costs by $8.0 million and $4.6 million, respectively. Total long-term debt for 1999 also included increases resulting from the funding of the repurchase of 3.8 million shares of the Corporation's common stock through a "modified Dutch Auction" tender offer. The aggregate amount of $49.7 million paid by the Corporation in connection with the repurchase of common shares was funded through the issuance of capital securities and the issuance of a bank loan from an unrelated financial institution. Capital securities in the amount of $35 million were issued during 1999 bearing an interest rate of 9.50% and maturing in thirty years. Interest expense on capital securities for 1999 was $1.0 million. The parent company incurred a $16 million bank loan during 1999 primarily to fund the remaining cost of the stock repurchase. (SEE NOTE 13 to the financial statements for a description of the Company obligated mandatorily redeemable capital securities of subsidiary trust and NOTE 14 to the financial statements for a description of the bank loan outstanding). Net interest margin (net interest income, on a tax-equivalent basis as a percentage of average earning assets), was 3.80% during 1999 compared to 3.77% in 1998 and 4.12% in 1997. The Corporation's use of computer modeling to manage interest rate risk is described in the "Interest Sensitivity" section of this discussion herein. 14 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) 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) 1999 Change from 1998 1998 Change from 1997 Total Change Due Change Due Total Change Due Change Due Change to Volume to Rate Change to Volume to Rate Interest-earning assets: Time deposits with banks $ (109) $ (115) $ 6 $ (6) $ (49) $ 43 Securities 22,648 21,682 966 22,715 21,241 1,474 Federal funds sold (1,788) (1,781) (7) 1,204 1,246 (42) Loans (6,665) (2,613) (4,052) 4,736 9,351 (4,615) Total interest income 14,086 17,173 (3,087) 28,649 31,789 (3,140) Interest-bearing liabilities: Deposits (10,629) (815) (9,814) 1,360 1,334 26 Short-term borrowings 3,618 4,389 (771) 2,106 2,014 92 Long-term debt 11,382 11,927 (545) 20,389 20,613 (224) Total interest expense 4,371 15,501 (11,130) 23,855 23,961 (106) Net interest income $ 9,715 $ 1,672 $ 8,043 $ 4,794 $ 7,828 $ (3,034)
The provision for credit losses is an amount added to the allowance against which credit losses are charged. The amount of the provision is determined by management based upon its assessment of the size and quality of the loan portfolio and the adequacy of the allowance in relation to the risks inherent within the loan portfolio. The provision for credit losses was $9.5 million in 1999 compared to $15.0 million in 1998 and $10.2 million in 1997. The 1998 period contains an additional provision of $4.2 million recorded in the fourth quarter of 1998 to reflect changing economic conditions. The allowance for credit losses was $33.5 million at December 31, 1999, for a ratio of 1.34% of actual loans outstanding. The ratio of the allowance for credit losses to total loans outstanding as of December 31, 1999 has decreased slightly from the 1.36% reported as of December 31, 1998, but this ratio remains above historic levels. Net charge-offs for 1999 reflected decreases in consumer installment and revolving credit loans of $896 thousand and commercial loans secured by real estate of $315 thousand which were partially offset by increases in net charge-offs of 1-4 family residential mortgages and commercial loans not secured by real estate. Net charge-offs against the allowance for credit losses were $8.2 million, or 0.34% of average total loans in 1999. This compared to net charge-offs of $8.7 million in 1998 and $9.5 million in 1997. Net charge-offs were 0.36% and 0.41% of average total loans during 1998 and 1997, respectively. For an analysis of credit quality, see the "Credit Review" section of this discussion. 15 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis The following table presents an analysis of the consolidated allowance for credit losses for the five years ended December 31, 1999 (dollars in thousands):
Summary of Loan Loss Experience 1999 1998 1997 1996 1995 Loans outstanding at end of year $2,500,059 $2,374,850 $2,436,337 $2,236,523 $1,935,938 Average loans outstanding $2,408,450 $2,439,436 $2,330,657 $2,060,196 $1,846,507 Allowance for credit losses: Balance, beginning of year $ 32,304 $ 25,932 $ 25,234 $ 23,803 $ 22,375 Loans charged off: Commercial, financial and agricultural 1,821 1,513 1,473 633 1,188 Loans to individuals 6,126 7,293 8,022 5,069 3,717 Real estate-construction -0- -0- -0- -0- -0- Real estate-commercial 427 812 664 440 218 Real estate-residential 1,035 690 819 195 481 Lease financing receivables 187 319 -0- 26 52 Total loans charged off 9,596 10,627 10,978 6,363 5,656 Recoveries of loans previously charged off: Commercial, financial and agricultural 290 462 223 263 159 Loans to individuals 1,057 1,328 1,218 1,033 1,067 Real estate-construction -0- -0- -0- -0- -0- Real estate-commercial -0- 70 13 83 56 Real estate-residential 33 87 57 109 128 Lease financing receivables 1 3 13 5 99 Total recoveries 1,381 1,950 1,524 1,493 1,509 Net loans charged off 8,215 8,677 9,454 4,870 4,147 Provision charged to expense 9,450 15,049 10,152 6,301 5,575 Balance, end of year $ 33,539 $ 32,304 $ 25,932 $ 25,234 $ 23,803 Ratios: Net charge-offs as a percentage of average loans outstanding 0.34% 0.36% 0.41% 0.24% 0.22% Allowance for credit losses as a percentage of average loans outstanding 1.39% 1.32% 1.11% 1.22% 1.29%
Net securities gains decreased $892 thousand during 1999 from $1.5 million reported in 1998 and compared to $6.8 million in 1997. The securities gains during 1999 resulted in part from the sales of fixed rate U.S. government agency securities and U.S. treasury securities classified as securities "available for sale" having book values of $15.0 million and $21.9 million, respectively, which resulted in securities gains of $167 thousand and $317 thousand, respectively. Proceeds from the sale of U.S. treasury securities in 1999 were the primary funding source for the acquisition of $20 million of bank owned life insurance during the first quarter. The security gains during 1998 resulted in part from the third and fourth quarter sales of floating collateralized mortgage obligations classified as securities "available for sale" having book values of $87.9 million and $16.1 million respectively, which resulted in security gains of $1.7 million during the third quarter and security losses of $803 thousand during the fourth quarter. These securities were sold to reduce the exposure to accelerated prepayments in a declining interest rate environment. The $89.6 million proceeds from the sale of securities in the third quarter of 1998 were used to reduce outstanding Federal funds purchased while the $15.3 million proceeds in the fourth quarter of 1998 were reinvested in higher yielding municipal securities. The 1998 securities gains also included the first quarter sale of U.S. Treasury securities classified as securities "available for sale" having a book value of $45.8 million with the proceeds being reinvested in mortgage backed and other U.S. government agency securities with similar average expected maturities. Securities losses of $586 thousand were incurred during the fourth quarter of 1998 primarily as a result of the sale of mutual funds classified as equity securities having a book value of $5.8 million. Additional security gains were incurred during the fourth quarter of 1998 as a result of the sale of Pennsylvania bank stocks having a book value of $5.2 million. The securities gains during 16 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis 1997 resulted primarily from the sale of investments in Pennsylvania bank stocks having a book value of $17.4 million which were sold for gains of $6.7 million. Trust income of $5.5 million for 1999 reflected an increase of $274 thousand over 1998 levels and compared to $4.4 million reported in 1997. Enhanced referral programs and integrated growth plans for financial affiliates have been initiated to help improve sales in various areas including trust assets managed. The 1998 increase in trust income occurred primarily in fees from employee benefit accounts, agency/custodial accounts and retail mutual fund commissions and trailer fees. Service charges on deposits increased $981 thousand during 1999 as fee schedules for the Corporation's subsidiary banks were evaluated and modified. Additional noninterest income analysis is planned for 2000 through the use of recently implemented customer and product profitability systems which will be augmented with the use of outside consultants. Gains on sale of loans increased $3.4 million for 1999 to $5.0 million from $1.6 million reported in 1998 and compared to $207 thousand for 1997. Gains on sale of loans for the 1999 period resulted primarily from the sale of $42.2 million of residential mortgage loans during the first quarter of 1999 and the sale of its $20.4 million retail credit card loans during the second quarter of 1999 which generated gains of $890 thousand and $4.0 million, respectively. Gains on sale of loans for 1998 resulted primarily from the sale of $52.5 million of 1-4 family residential mortgage loans during the fourth quarter of 1998 which resulted in a gain of $1.3 million. The Corporation mitigated prepayment risk through the sale of mortgage loans bearing higher interest rates than current market rates and reduced interest rate risk through the sale of mortgage loans bearing interest rates which were lower than current market rates. Other income was $10.5 million in 1999 compared to $9.7 million in 1998 and $5.7 million in 1997. Other revenue for 1999 reflected increases in the cash surrender value of bank owned life insurance of $761 thousand and increases in merchant discount of $411 thousand over 1998 levels. Insurance commissions, primarily those generated from FCIA, increased $662 thousand during 1999 compared to 1998. As a result of branch analysis including the evaluation of the potential sale or consolidation of branches competing in the same market area, the Corporation sold two of its branches located in State College, Pennsylvania during 1998. The premium on sale of $10.1 million of deposits from the State College branches resulted in a gain of $950 thousand in the fourth quarter of 1998. Other income for 1998 reflected increases in cash surrender value of bank owned life insurance of $1.2 million and insurance commissions of $288 thousand compared to 1997 revenues. Charges for non-customer use of the Corporation's ATMs also increased other revenue for 1998 by $607 thousand over 1997 levels. Total other operating expenses decreased $6.6 million to $93.6 million in 1999 compared to $100.2 million and $88.9 million in 1998 and 1997, respectively. Employee costs were $49.8 million in 1999, representing 1.17% of average assets compared to $48.7 million and 1.24% of average assets for 1998. Employee costs for 1997 were $47.1 million or 1.37% of average assets. Salary and benefit costs increased only 2.3% for 1999 compared to 1998 and were favorably impacted by the early retirement plan offered to employees during the fourth quarter of 1998. The success of the early retirement plan accelerated the process of right-sizing the Corporation beyond normal attrition management by adjusting employment levels quickly while continuing the Corporation's tradition of not laying off employees due to merger activity. The number of full time equivalent employees at December 31, 1999 was 1,453 compared to 1,500 at December 31, 1998. Increases in employee benefit expenses are anticipated in 2000 due to rate increases for health insurance of approximately 23% compared to 1999 rates. Net occupancy and furniture and equipment costs decreased for all periods presented. The 1999 period reflected decreases in occupancy and furniture and equipment expenses as a result of the sale of two branches in 1998 and the closing or consolidation of several branches in 1999. All categories of 17 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis occupancy expense reflected decreases during 1998 while furniture and equipment expense included decreases in maintenance and repairs which were partially offset by an increase in depreciation during 1998. Outside data processing expenses were $3.2 million for 1999 compared to $3.1 million and $3.0 million for 1998 and 1997 respectively. Outside data processing expenses are managed by the Corporation's data processing subsidiary along with management of internal data processing costs. Outsourced data processing needs are evaluated based on technology, efficiency and cost considerations. Pennsylvania shares tax expense increased $325 thousand during 1999 and $201 thousand in 1998. Included in the 1998 period were merger and related charges of $7.9 million. Merger expenses incurred during the acquisition of Southwest National Corporation for legal, accounting, printing, filing and other professional services totaled $1.6 million and were expensed during the fourth quarter of 1998. As part of the evaluation of appropriate staffing levels for the Corporation after inclusion of Southwest, an early retirement plan was offered to employees during the fourth quarter of 1998. Salary and benefit costs of the early retirement plan in the amount of $4.7 million are included in merger and other related charges for 1998, as approximately 5% of employees took advantage of this opportunity. In anticipation of the merger of Southwest benefit plans into those of the Corporation in the near future, Southwest curtailed their postretirement benefit plan during the fourth quarter of 1998. An additional accrual adjustment of $1.1 million related to this curtailment is included in merger and other related charges for 1998. Additional merger and other related charges of $462 thousand were incurred during 1998 to standardize depreciation for Southwest to that of the Corporation and to write-off signs and supplies that become obsolete as a result of the merger. Other operating expenses remained stable during 1999 at $24.6 million, compared to $24.5 million reported in 1998 and $22.6 million reported in 1997. Other operating expenses for the 1999 period included an increase in the write-down of mortgage servicing rights in the amount of $336 thousand related to the disposition of BSI. The disposition of BSI in 1999 also resulted in a loss on sale of $202 thousand. Advertising, software maintenance and charge card interchange expense reflected increases for the 1999 period of $265 thousand, $247 thousand, and $335 thousand, respectively compared to the 1998 period. Increases in telephone expense of $265 thousand during 1999 are being analyzed during 2000 for potential cost control in future periods. Other professional fees decreased $757 thousand during 1999 as outside professionals contracted during 1998 under limited engagements to review the Corporation's asset/liability management model, provide consulting services for marketing, customer profitability analysis and branch automation initiatives were not extended to the 1999 period. The 1999 period also reflected decreases in audit and accounting fees and legal fees compared to 1998. Lease residual insurance costs, operational losses and charge-offs and software depreciation and maintenance expenses for 1998 reflected increases of $192 thousand, $403 thousand and $325 thousand respectively over 1997 levels. Loan processing expenses increased $353 thousand for 1998 compared to 1997, while accelerated prepayment speeds for loans in the fourth quarter of 1998 resulted in an increase in the amortization of purchased mortgage servicing rights of $336 thousand over 1997 amortization. Other professional fees for 1998 increased $753 thousand over amounts recorded for 1997. Income tax expense was $19.6 million during 1999 representing an increase of $7.4 million over the 1998 amount of $12.2 million and compared to $17.3 million in 1997. The Corporation's effective tax rate was 27.0% for 1999 compared to 26.5% for 1998 and 30.5% for 1997. Extraordinary items for 1998 resulted from a single transaction whereby the Corporation incurred a cost of $960 thousand for the prepayment of FHLB term borrowings. This transaction was executed as part of the Corporation's repositioning of its balance sheet to reduce exposure to declining interest rates. 18 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Liquidity Liquidity is a measure of the Corporation's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from deposits (primary source) and the maturity or repayment of earning assets, such as securities and loans. As an additional secondary source, short-term liquidity needs may be provided through the use of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements, and borrowings from the Federal Reserve Bank. Additionally, the banking subsidiaries are members of the Federal Home Loan Bank and may borrow under overnight and term borrowing arrangements. The sale of earning assets may also provide an additional source of liquidity. Increased competition from nonbanking sources such as mutual funds, insurance companies and brokerage and investment banking firms have required banks to rely more heavily on alternative funding from other borrowings. Many of our competitors have significantly greater resources (financial and other) than us and may offer certain services that our banks do not provide at this time. In addition certain of our banks' competitors are not subject to the regulation and supervision to which we and our banks are subject, and therefore may have competitive advantages over our banks and us. The impact of increased competition for deposits could become more consequential in the future. The Corporation monitors liquidity through regular computations of prescribed liquidity ratios. The Corporation actively manages liquidity within a defined range and has developed liquidity contingency plans, including ensuring availability of alternate funding sources to maintain liquidity under a variety of business conditions. In addition to the previously described funding sources the Corporation's ability to access the capital markets was demonstrated during 1999 through the issuance of $35 million of capital securities and a $16 million bank loan to provide funding for stock buy-back. The Corporation's long-term liquidity source is a large core deposit base and a strong capital position. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. Core deposits decreased $41.2 million in 1999 while total deposits increased $17.7 million for 1999. Non-core deposits, which are time deposits in denominations of $100 thousand or more represented 12.15% of total deposits at December 31, 1999, up from 10.21% of total deposits at December 31, 1998. Non-core deposits increased by $58.8 million in 1999 primarily as a result of an increase in public funds. Time deposits of $100 thousand or more at December 31, 1999, 1998 and 1997 had remaining maturities as follows:
Maturity Distribution of Large Certificates of Deposit (Dollar Amounts in Thousands) 1999 1998 1997 Amount Percent Amount Percent Amount Percent Remaining Maturity: 3 months or less $273,376 76% $151,121 50% $ 92,481 28% Over 3 months through 6 months 13,372 4 40,363 14 64,874 20 Over 6 months through 12 months 14,503 4 27,546 9 53,428 16 Over 12 months 57,010 16 80,382 27 118,524 36 Total $358,261 100% $299,412 100% $329,307 100%
Net loans increased $124.0 million during 1999 as commercial loans secured by real estate and commercial loans not secured by real estate increased by $108.6 million and $16.3 million respectively, compared to year-end 1998. Increases during 1999 for commercial loans were partially offset by decreases in loans secured by residential real estate and decreases in loans to individuals. The reduction in residential mortgage loans was primarily the result of the sale of $42.2 million of residential mortgages in March of 1999. The mortgage loans were sold to reduce the Corporation's prepayment 19 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis risk and to shorten the average life of the fixed rate loan portfolio. The reduction in loans to individuals was primarily the result of the sale of $20.4 million of consumer credit card loans in June of 1999. Below is a schedule of loans by classification for the five years ended December 31, 1999.
Loans by Classification (Dollar Amounts in Thousands) 1999 1998 1997 1996 1995 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Commercial, financial, agricultural and other $ 417,300 16% $ 377,733 16% $ 363,699 15% $ 316,550 14% $ 254,311 13% Real estate-construction 41,734 2 33,097 1 35,308 1 39,120 2 32,914 2 Real estate-commercial 495,789 20 387,166 16 384,794 16 356,106 16 347,543 18 Real estate-residential 980,506 39 1,009,903 42 1,048,405 43 941,147 41 801,306 40 Loans to individuals 502,465 20 517,907 22 569,742 23 578,204 25 519,949 26 Net leases 65,893 3 56,423 3 51,245 2 36,329 2 24,190 1 Gross loans and leases 2,503,687 100% 2,382,229 100% 2,453,193 100% 2,267,456 100% 1,980,213 100% Unearned income (3,628) (7,379) (16,856) (30,933) (44,275) Total loans, and leases net of unearned income $2,500,059 $2,374,850 $2,436,337 $2,236,523 $1,935,938
An additional source of liquidity is marketable securities that the Corporation holds in its investment portfolio. These securities are classified as "securities available for sale". While the Corporation does not have specific intentions to sell these securities, they have been designated as "available for sale" because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of December 31, 1999, securities available for sale had an amortized cost of $1,206 million and an approximate fair value of $1,144 million. Gross unrealized gains were $328 thousand and gross unrealized losses were $62.3 million. Based upon the Corporation's historical ability to fund liquidity needs from other sources, the current available for sale portfolio is deemed to be more than adequate, as the Corporation does not anticipate a need to liquidate the investments until maturity. Below is a schedule of the contractual maturity distribution of securities held to maturity and securities available for sale at December 31, 1999.
Maturity Distribution of Securities Held to Maturity (Dollar Amounts in Thousands) States and Total Weighted U.S. Government Agencies Political Other Amortized Average and Corporations Subdivisions Securities Cost Yield* Within 1 year $ 1,355 $ 3,941 $ -0- $ 5,296 5.57% After 1 but within 5 years 98,306 21,600 24,506 144,412 6.40 After 5 but within 10 years 78,523 31,536 355 110,414 6.25 After 10 years 110,532 77,693 -0- 188,225 6.51 Total $288,716 $134,770 $24,861 $448,347 6.40%
Maturity Distribution of Securities Available for Sale At Amortized Cost (Dollar Amounts in Thousands) U.S. Treasury, and other States and Total Weighted U.S. Government Agencies Political Other Amortized Average and Corporations Subdivisions Securities Cost Yield* Within 1 year $ 3,002 $ 1,615 $ 5 $ 4,622 6.86% After 1 but within 5 years 123,130 9,605 19,830 152,565 6.32 After 5 but within 10 years 51,940 12,592 499 65,031 6.27 After 10 years 732,024 51,536 200,199 983,759 6.67 Total $910,096 $75,348 $220,533 $1,205,977 6.55% *Yields are calculated on a tax-equivalent basis.
20 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Interest Sensitivity The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances. While no single number can accurately describe the impact of changes in interest rates on net interest income, interest rate sensitivity positions, or "gaps" when measured over a variety of time periods may be helpful. An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period. If interest-sensitive assets ("ISA") exceeds interest-sensitive liabilities ("ISL") during a prescribed time period, a positive gap results. Conversely, when ISL exceeds ISA during a time period, a negative gap results. A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively when interest rates fall during the time period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes. In other words, as interest rates fall, a negative gap should tend to produce a positive effect on earnings and when interest rates rise, a negative gap should tend to affect earnings negatively. The primary components of ISA include adjustable rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and short-term borrowings. The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated as of December 31, 1999 and 1998 (Dollar Amounts in Thousands):
1999 Cumulative 0-90 Days 91-180 Days 181-365 Days 0-365 Days Loans $ 697,645 $113,547 $204,090 $1,015,282 Investments 44,666 39,497 66,465 150,628 Other interest-earning assets 18,799 2,759 4,532 26,090 Total interest-sensitive assets 761,110 155,803 275,087 1,192,000 Certificates of deposit 325,985 231,804 277,769 835,558 Other deposits 1,074,451 -0- -0- 1,074,451 Borrowings 467,255 961 127,108 595,324 Total interest-sensitive liabilities 1,867,691 232,765 404,877 2,505,333 Gap $(1,106,581) $(76,962) $(129,790) $(1,313,333) ISA/ISL 0.41 0.67 0.68 0.48 Gap/Total assets 25.49% 1.77% 2.99% 30.26%
1998 Cumulative 0-90 Days 91-180 Days 181-365 Days 0-365 Days Loans $ 765,948 $168,297 $293,082 $1,227,327 Investments 59,942 87,042 149,497 296,481 Other interest-earning assets 38,048 4,120 6,207 48,375 Total interest-sensitive assets 863,938 259,459 448,786 1,572,183 Certificates of deposit 359,487 323,760 318,282 1,001,529 Other deposits 1,094,125 -0- -0- 1,094,125 Borrowings 142,509 1,085 2,413 146,007 Total interest-sensitive liabilities 1,596,121 324,845 320,695 2,241,661 Gap $ (732,183) $(65,386) $128,091 $ (669,478) ISA/ISL 0.54 0.80 1.40 0.70 Gap/Total assets 17.87% 1.60% 3.13% 16.34%
21 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Although the periodic gap analysis provides management with a method of measuring current interest rate risk, it only measures rate sensitivity at a specific point in time. Therefore, to more precisely measure the impact of interest rate changes on the Corporation's net interest income, management simulates the potential effects of changing interest rates through computer modeling. The income simulation model used by the Corporation captures all assets, liabilities, and off-balance sheet financial instruments, accounting for significant variables that are believed to be affected by interest rates. These variables include prepayment speeds on mortgage loans and mortgage backed securities, cash flows from loans, deposits and investments and balance sheet growth assumptions. The model also captures embedded options, such as interest rate caps/floors or call options, and accounts for changes in rate relationships as various rate indices lead or lag changes in market rates. The Corporation is then better able to implement strategies which would include an acceleration of a deposit rate reduction or lag in a deposit rate increase. The repricing strategies for loans would be inversely related. The Corporation's asset/liability management policy guidelines limit interest rate risk exposure for the succeeding twenty-four month period. Simulations are prepared under the base case where interest rates remain flat and most likely case where interest rates are defined using projections of economic factors. Additional simulations are produced estimating the impact on net interest income of a 300 basis point (3.00%) movement upward or downward from the base case scenario. The Corporation's current asset/liability management policy indicates that a 300 basis point (3.00%) change in interest rates up or down cannot result in more than a 7.5% change in net interest income when compared to a base case without Board approval and a strategy in place to reduce interest rate risk below the established maximum level. The analysis at December 31, 1999, indicated that a 300 basis point (3.00%) movement in interest rates in either direction over the next twelve months would not have a significant impact on the Corporation's anticipated net interest income over that time nor over the next twenty-four months and the Corporation's position would remain well within current policy guidelines. The Corporation's "Asset/Liability Management Committee" ("ALCO") is responsible for the identification, assessment and management of interest rate risk exposure, liquidity, capital adequacy and investment portfolio position. The primary objective of the ALCO process is to ensure that the Corporation's balance sheet structure maintains prudent levels of risk within the context of currently known and forecasted economic conditions and to establish strategies which provide the Corporation with appropriate compensation for the assumption of those risks. The ALCO attempts to mitigate interest rate risk through the use of strategies such as asset disposition, asset and liability pricing and matched maturity funding. The ALCO strategies are established by the Corporation's senior management and are approved by the Corporation's board of directors. Final loan maturities and rate sensitivity of the loan portfolio excluding consumer installment and mortgage loans and before unearned income at December 31, 1999 were as follows (Dollar Amounts in Thousands): Within One One to After Year 5 Years 5 Years Total Commercial and industrial $157,993 $ 72,231 $ 66,269 $296,493 Financial institutions -0- 93 -0- 93 Real estate-construction 18,460 7,246 16,028 41,734 Real estate-commercial 78,823 73,323 343,643 495,789 Other 25,365 12,953 82,396 120,714 Totals $280,641 $165,846 $508,336 $954,823 Loans at fixed interest rates 147,617 367,732 Loans at variable interest rates 18,229 140,604 Totals $165,846 $508,336 22 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Credit Review Maintaining a high quality loan portfolio is of great importance to the Corporation. The Corporation manages the risk characteristics of the loan portfolio through the use of prudent lending policies and procedures and monitors risk through a periodic review process provided by internal auditors, regulatory authorities and our loan review staff. These reviews include the analysis of credit quality, diversification of industry, compliance to policies and procedures, and an analysis of current economic conditions. In the management of its credit portfolio, the Corporation emphasizes the importance of the collectibility of loans and leases as well as asset and earnings diversification. The Corporation immediately recognizes as a loss all credits judged to be uncollectible and has established an allowance for credit losses that may exist in the portfolio at a point in time, but have not been specifically identified. The Corporation's written lending policy requires certain underwriting standards to be met prior to funding any loan, including requirements for credit analysis, collateral value coverage, documentation, and terms. The principal factor used to determine potential borrowers' creditworthiness is business cash flows or consumer income available to service debt payments. Secondary sources of repayment, including collateral or guarantees, are frequently obtained. The lending policy provides limits for individual and bank committees lending authorities. In addition to the bank loan approval process, requests for borrowing relationships which will exceed one million dollars must also be approved by the Corporation's Credit Committee. This Committee consists of a minimum of three members of the Corporation's board of directors. Commercial and industrial loans are generally granted to small and middle market customers for operating, expansion or asset acquisition purposes. Operating cash flows of the business enterprise are identified as the principal source of repayment, with business assets held as collateral. Collateral margins and loan terms are based upon the purpose and structure of the transaction as set forth in loan policy. Commercial real estate loans are granted for the acquisition or improvement of real property. Generally, commercial real estate loans do not exceed 75% of the appraised value of property pledged to secure the transaction. Repayment of such loans are expected from the operations of the subject real estate and are carefully analyzed prior to approval. Real estate construction loans are granted for the purposes of constructing improvements to real property, both commercial and residential. On-site inspections are conducted by qualified individuals prior to periodic permanent project financing, which is generally committed prior to the commencement of construction financing. 23 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Real estate loans secured by 1-4 family residential housing properties are granted subject to statutory limits in effect for each bank regarding the maximum percentage of appraised value of the mortgaged property. Residential loan terms are normally established in compliance with secondary market requirements. Residential mortgage portfolio interest rate risk is controlled by secondary market sales, variable interest rate loans and balloon maturities. Loans to individuals represent financing extended to consumers for personal or household purposes, including automobile financing, education, home improvement, and personal expenditures. These loans are granted in the form of installment, credit card, or revolving credit transactions. Consumer creditworthiness is evaluated on the basis of ability to repay, stability of income sources, and past credit history. The Corporation maintains an allowance for credit losses at a level deemed sufficient to absorb losses which are inherent in the loan and lease portfolios at each balance sheet date. Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for credit losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management's assessment of probable estimated losses. The Corporation's methodology for assessing the appropriateness of the allowance for credit losses consists of several key elements. These elements include a specific allowance for primary watch list classified loans, an allowance based on historical trends, an additional allowance for special circumstances, and an unallocated portion. The Corporation consistently applies the following comprehensive methodology and procedure at the subsidiary bank level. The allowance for primary watch list classified loans addresses those loans maintained on the Corporation's primary watch list which are assigned a rating of substandard, doubtful, or loss. Substandard loans are those with a well-defined weakness or a weakness which jeopardizes the repayment of the debt. A loan may be classified as substandard as a result of impairment of the borrower's financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect the Corporation may also be classified as substandard. Doubtful loans have the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable. Although the possibility of loss is extremely high for doubtful loans, the classification of loss is deferred until pending factors, which might improve the loan, have been determined. Loans rated as doubtful in whole or in part are placed in nonaccrual status. Loans which are classified as loss are considered uncollectible and are charged to the allowance for credit losses at the next meeting of the Corporation's credit committee after placement in this category. There were no loans classified as loss on the primary watch list as of December 31, 1999. Loans on the primary watch list may also be impaired loans, which are defined as nonaccrual loans or troubled debt restructurings which are not in compliance with their restructured terms. Each of the classified loans on the primary watch list are individually analyzed to determine the level of the potential loss in the credit under the current circumstances. The specific reserve established for these criticized and impaired loans is based on careful analysis of the loan's performance, the related collateral value, cash flow considerations and the financial capability of any guarantor. The allowance for primary watch list classified loans is equal to the total amount of potential unconfirmed losses for the individual classified loans on the watch list. Primary watch list loans are managed and monitored by assigned account officers within the Corporation in conjunction with Senior Management. The allowance based on historical trends uses charge-off experience of the Corporation to estimate potential unconfirmed losses in the balances of the loan and lease portfolios. The historical loss experience percentage is 24 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis based on the charge-off history for the twenty most recent quarters. Historical loss experience percentages are applied to all non-classified loans to obtain the portion of the allowance for credit losses which is based on historical trends. Before applying the historical loss experience percentages, loan balances are reduced by the portion of the loan balances which are subject to guarantee by a government agency. Loan balances are also adjusted for unearned discount on installment loans. The additional allowance for special circumstances provides management with the opportunity to estimate additional potential allowance amounts which may be needed to cover specific factors. The specific factors that management currently evaluates consist of portfolio risk or concentrations of credit, off balance sheet risk, economic conditions, management or staff considerations, and comparative peer analysis variances. Portfolio risks include unusual changes or recent trends in specific portfolios such as unexpected changes in the trends or levels of delinquency or charge-offs, unusual repossession activities or large levels of unsecured loans in a portfolio. The Corporation also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions which may cause a potential credit loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential credit losses is performed these estimates by definition lack precision. Management must make estimates using assumptions and information which is often subjective and changing rapidly. Since all identified losses are immediately charged off, no portion of the allowance for credit losses is restricted to any individual credit or groups of credits, and the entire allowance is available to absorb any and all credit losses. However, for analytical purposes, the following table sets forth an allocation of the allowance for credit losses at December 31 according to the categories indicated:
Allocation of the Allowance for Credit Losses (Dollar Amounts in Thousands) 1999 1998 1997 1996 1995 Commercial, industrial, financial, agricultural and other $ 6,321 $ 4,375 $ 3,726 $ 3,628 $ 2,482 Real estate-construction 831 414 415 461 330 Real estate-commercial 7,675 5,119 4,912 4,731 4,170 Real estate-residential 9,928 10,319 8,595 8,145 6,420 Loans to individuals 5,131 5,223 4,583 4,933 3,892 Lease financing receivables 586 512 393 285 162 Unallocated 3,067 6,342 3,308 3,051 6,347 Total $33,539 $32,304 $25,932 $25,234 $23,803 Allowance as percentage of average total loans 1.39% 1.32% 1.11% 1.22% 1.29%
Other than those described below, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. The following table identifies nonperforming loans at December 31. A loan is placed in a nonaccrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt. Past due loans are those loans which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower. 25 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis
Nonperforming and Impaired Assets and Effect on Interest Income Due to Nonaccrual (Dollar Amounts in Thousands) 1999 1998 1997 1996 1995 Loans on nonaccrual basis $12,765 $ 9,677 $11,387 $ 9,536 $ 8,782 Past due loans 15,815 15,780 13,955 14,046 9,410 Renegotiated loans 62 64 67 280 803 Total nonperforming loans $28,642 $25,521 $25,409 $23,862 $18,995 Nonperforming loans as a percentage of total loans 1.15% 1.07% 1.04% 1.07% 0.98% Allowance as percentage of nonperforming loans 117,10% 126.58% 102.06% 105.75% 125.31% Other real estate owned $ 1,707 $ 2,370 $ 1,950 $ 1,732 $ 1,467 Gross income that would have been recorded at original rates $ 724 $ 961 $ 1,017 $ 799 $ 946 Interest that was reflected in income 458 286 146 223 241 Net reduction to interest income due to nonaccrual $ 266 $ 675 $ 871 $ 576 $ 705
The reduction of income due to renegotiated loans was less than $50 thousand in any year presented. The level of nonperforming loans at year-end 1999 increased $3.1 million over 1998 levels as a result of increases in nonaccrual loans. Increases for nonaccrual commercial loans secured by real estate, commercial loans not secured by real estate and construction loans of $2.2 million, $1.4 million and $1.1 million, respectively were partially offset by decreases of $1.6 million for nonaccrual loans secured by residential real estate. Nonperforming loans as a percentage of total loans for 1999 also increased over 1998 levels. Although the allowance for credit losses as a percentage of nonperforming loans of 117.10% at December 31, 1999 has decreased over 1998 levels, this ratio has not decreased below historic levels. Management believes that the allowance for credit losses and nonperforming loans remained safely within acceptable levels. Capital Resources Equity capital decreased $68.7 million in 1999 to $286.7 million. On July 13, 1999, the Corporation announced that the Board of Directors authorized a repurchase of up to 4 million shares (post split) of its outstanding common stock. The Corporation purchased 3,819,420 shares in a "modified Dutch Auction" which reduced equity by $50.1 million for the cost of the shares. The Corporation also purchased an additional 102,248 treasury shares in open market transactions which reduced equity by $1.3 million. Proceeds from the reissuance of treasury shares to provide for stock options exercised increased equity capital by $1.5 million. Dividends declared decreased equity by $30.9 million during 1999, an increase over dividends for the 1998 period as the dividend rate was increased. The retained net income of $22.2 million remained in permanent capital to fund future growth and expansion. Long-term debt payments and fair value adjustments to unearned ESOP shares increased equity capital by $1.9 million. The market value adjustment to securities available for sale decreased equity by $42.5 million. Amounts paid to fund the discount on reinvested dividends reduced equity by $358 thousand. 26 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Capital Resources (Continued) A capital base can be considered adequate when it enables the Corporation to intermediate funds responsibly and provide related services while protecting against future uncertainties. The evaluation of capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings history and prospects, internal controls and management caliber. In consideration of these factors, management's primary emphasis with respect to the Corporation's capital position is to maintain an adequate and stable ratio of equity to assets. See NOTE 22 for an analysis of regulatory capital guidelines and the Corporation's capital ratios relative to these measurement standards. Year 2000 Analysis The Corporation began evaluating the size and complexity of the year 2000 issue during 1995. Project teams were established to identify and prioritize critical systems and processes affected by the year 2000 date change. By fully dedicating numerous technical staff from Commonwealth Systems Corporation, the Corporation's data processing subsidiary and utilizing additional staff from various functional areas, multiple computer systems were addressed concurrently. All mission critical systems operated as expected when the date changed to January 1, 2000. The Corporation's greatest asset in successfully dealing with the year 2000 issue was its dedicated staff. The Corporation utilized internal resources to evaluate, reprogram and test software and hardware for year 2000 issues to the extent possible. Salary and benefit costs related to year 2000 activities were expensed as incurred. External year 2000 expenditures included amounts for capitalized hardware and software which will be amortized over three years for software and five years for hardware. In most cases, the new software and hardware offer additional benefits in processing capability or efficiencies gained from modernization in addition to achieving year 2000 compliance. Mainframe software and hardware replaced will result in enhancements or features of potential benefit in serving banking customers or processing financial transactions. Year 2000 expenditures which were expensed as incurred during the past three years included the cost of leased off-site testing of mainframe systems, outside professionals utilized for independent verification, travel and lodging during off-site testing and vendor testing. Cash outlays were funded through operating cash flows. 27 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Year 2000 Analysis (Continued) The following table summarizes year 2000 expenditures during 1999, 1998 and 1997. (Dollar Amounts in Thousands) 12 Months 12 Months 12 Months Ended Ended Ended 12/31/99 12/31/98 12/31/97 Capitalized hardware and software $ 152 $ 250 $106 Non-employee expenses including testing 87 152 20 Employee related costs 793 1,003 163 Subtotal 1,032 1,405 289 Capitalized hardware and software replaced without acceleration due to year 2000 723 2,043 70 Total expenditures $1,755 $3,448 $359 Inflation and Changing Prices Management is aware of the impact inflation has on interest rates and therefore the impact it can have on a bank's performance. The ability of a financial institution to cope with inflation can only be determined by analysis and monitoring of its asset and liability structure. The Corporation monitors its asset and liability position with particular emphasis on the mix of interest-sensitive assets and liabilities in order to reduce the effect of inflation upon its performance. However, it must be remembered that the asset and liability structure of a financial institution is substantially different from an industrial corporation in that virtually all assets and liabilities are monetary in nature, meaning that they have been or will be converted into a fixed number of dollars regardless of changes in general price levels. Examples of monetary items include cash, loans and deposits. Nonmonetary items are those assets and liabilities which do not gain or lose purchasing power solely as a result of general price level changes. Examples of nonmonetary items are premises and equipment. Inflation can have a more direct impact on categories of noninterest expenses such as salaries and wages, supplies and employee benefit costs. These expenses are very closely monitored by management for both the effects of inflation and increases relating to such items as staffing levels, usage of supplies and occupancy costs. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk Information appearing in Item 7 of this report under the caption "Interest Sensitivity" is incorporated herein by reference in response to this item. 28 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Balance Sheets (Dollar Amounts in Thousands) December 31, 1999 1998 Assets Cash and due from banks.....................$ 92,673 $ 96,615 Interest-bearing bank deposits.............. 1,218 1,914 Federal funds sold.......................... 8,700 1,000 Securities available for sale, at market.... 1,144,042 1,042,636 Securities held to maturity, at cost, (market value $435,000 in 1999 and $486,185 in 1998) 448,347 482,696 Loans....................................... 2,503,687 2,382,229 Unearned income........................... (3,628) (7,379) Allowance for credit losses............... (33,539) (32,304) Net loans............................ 2,466,520 2,342,546 Property and equipment...................... 40,917 41,929 Other real estate owned..................... 1,707 2,370 Other assets................................ 136,722 85,083 Total assets.........................$4,340,846 $4,096,789 Liabilities Deposits (All Domestic): Noninterest-bearing.......................$ 251,404 $ 264,082 Interest-bearing.......................... 2,697,425 2,667,049 Total deposits....................... 2,948,829 2,931,131 Short-term borrowings....................... 424,827 140,547 Other liabilities........................... 42,152 38,856 Company obligated mandatorily redeemable capital securities of subsidiary trust.... 35,000 -0- Other long-term debt........................ 603,355 630,850 Total long-term debt................ 638,355 630,850 Total liabilities.................... 4,054,163 3,741,384 Shareholders' Equity Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued............................... -0- -0- Common stock, $1 par value per share, 100,000,000 shares authorized, 62,525,412 shares issued and 58,142,848 shares outstanding in 1999; 62,525,412 shares issued and 61,875,946 shares outstanding in 1998................................... 62,525 62,525 Additional paid-in capital.................. 68,330 68,978 Retained earnings........................... 257,773 235,623 Accumulated other comprehensive income...... (40,304) 2,199 Treasury stock (4,382,564 and 649,466 shares at December 31, 1999 and 1998, respectively at cost).................................. (55,448) (5,913) Unearned ESOP shares........................ (6,193) (8,007) Total shareholders' equity........... 286,683 355,405 Total liabilities and shareholders' equity..........$4,340,846 $4,096,789 The accompanying notes are an integral part of these consolidated financial statements. 29 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Statements of Income (Dollar Amounts in Thousands, except per share data)
Years Ended December 31, 1999 1998 1997 Interest Income Interest and fees on loans................... $196,428 $203,093 $198,357 Interest and dividends on investments: Taxable interest........................... 88,266 69,467 49,246 Interest exempt from Federal income taxes.. 9,479 6,600 4,869 Dividends.................................. 3,108 2,138 1,375 Interest on Federal funds sold............... 105 1,893 689 Interest on bank deposits.................... 121 230 236 Total interest income.................... 297,507 283,421 254,772 Interest Expense Interest on deposits......................... 103,331 113,960 112,600 Interest on short-term borrowings............ 13,832 10,214 8,108 Interest on mandatorily redeemable capital securities of subsidiary trust............. 1,007 -0- -0- Interest on other long-term debt............. 34,483 24,108 3,719 Total interest on long-term debt......... 35,490 24,108 3,719 Total interest expense................... 152,653 148,282 124,427 Net interest income............................ 144,854 135,139 130,345 Provision for credit losses.................... 9,450 15,049 10,152 Net interest income after provision for credit losses................................ 135,404 120,090 120,193 Other Income Securities gains............................. 565 1,457 6,825 Trust income................................. 5,525 5,251 4,421 Service charges on deposits.................. 9,255 8,274 8,432 Gain on sale of loans........................ 4,996 1,630 207 Other income................................. 10,512 9,726 5,656 Total other income....................... 30,853 26,338 25,541 Other Expenses Salaries and employee benefits............... 49,806 48,710 47,074 Net occupancy expense........................ 6,537 6,750 7,063 Furniture and equipment expense.............. 5,991 6,105 6,165 Data processing expense...................... 3,213 3,101 3,049 Pennsylvania shares tax expense.............. 3,477 3,152 2,951 Merger and related charges................... -0- 7,915 -0- Other operating expenses..................... 24,591 24,468 22,555 Total other expenses..................... 93,615 100,201 88,857 Income before income taxes and extra- ordinary items................................ 72,642 46,227 56,877 Applicable income taxes........................ 19,612 12,229 17,338 Net income before extraordinary items.......... 53,030 33,998 39,539 Extraordinary items (less applicable income taxes of $336)............................... -0- (624) -0- Net Income..................................... $53,030 $33,374 $39,539 Average Shares Outstanding (a)................. 60,333,092 61,333,572 61,671,898 Average Shares Outstanding Assuming Dilution (a) 60,569,322 61,666,026 61,845,674 Earnings per common share: (a) Net income before extraordinary items........ $0.88 $ 0.55 $0.64 Extraordinary items.......................... $0.00 $(0.01) $0.00 Net income................................... $0.88 $ 0.54 $0.64 Earnings per common share assuming dilution: (a) Net income before extraordinary items........ $0.88 $ 0.55 $0.64 Extraordinary items.......................... $0.00 $(0.01) $0.00 Net income................................... $0.88 $ 0.54 $0.64 (a) Share amounts have been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on October 19, 1999.
The accompanying notes are an integral part of these consolidated financial statements. 30 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Statements of Changes in Shareholders' Equity (Dollar Amounts in Thousands)
Accumulated Additional Other Unearned Total Common Paid-in Retained Comprehensive Treasury ESOP Shareholders' Stock Capital Earnings Income Stock Shares Equity Balance at December 31, 1996............. $63,322 $75,491 $210,843 $1,429 $(6,089) $(3,474) $341,522 Comprehensive income Net income............................. -0- -0- 39,539 -0- -0- -0- 39,539 Other comprehensive income, net of tax: Unrealized holding gains on securities arising during the period............ -0- -0- -0- 5,159 -0- -0- 5,159 Less: reclassification adjustment for gains on securities included in net income...................... -0- -0- -0- (4,432) -0- -0- (4,432) Total other comprehensive income....... -0- -0- -0- 727 -0- -0- 727 Total comprehensive income.............. -0- -0- 39,539 727 -0- -0- 40,266 Cash dividends declared.................. -0- -0- (22,152) -0- -0- -0- (22,152) Decrease in unearned ESOP shares......... -0- 171 -0- -0- -0- 1,038 1,209 Discount on dividend reinvestment plan purchases............................... -0- (630) -0- -0- -0- -0- (630) Treasury stock acquired.................. -0- -0- -0- -0- (5,908) -0- (5,908) Treasury stock reissued.................. -0- (34) -0- -0- 50 -0- 16 Balance at December 31, 1997............. 63,322 74,998 228,230 2,156 (11,947) (2,436) 354,323 Comprehensive income Net income............................. -0- -0- 33,374 -0- -0- -0- 33,374 Other comprehensive income, net of tax: Unrealized holding gains on securities arising during the period............. -0- -0- -0- 971 -0- -0- 971 Less: reclassification adjustment for gains on securities included in net income......................... -0- -0- -0- (928) -0- -0- (928) Total other comprehensive income....... -0- -0- -0- 43 -0- -0- 43 Total comprehensive income.............. -0- -0- 33,374 43 -0- -0- 33,417 Cash dividends declared.................. -0- -0- (25,981) -0- -0- -0- (25,981) Net increase in unearned ESOP shares..... -0- 158 -0- -0- -0- (5,571) (5,413) Discount on dividend reinvestment plan purchases............................... -0- (1,016) -0- -0- -0- -0- (1,016) Treasury stock acquired.................. -0- -0- -0- -0- (2,123) -0- (2,123) Treasury stock reissued.................. -0- (38) -0- -0- 2,255 -0- 2,217 Treasury stock cancelled in merger....... (795) (5,107) -0- -0- 5,902 -0- -0- Cash issued for partial shares in merger. (2) (17) -0- -0- -0- -0- (19) Balance at December 31, 1998............. 62,525 68,978 235,623 2,199 (5,913) (8,007) 355,405 Comprehensive income Net income............................. -0- -0- 53,030 -0- -0- -0- 53,030 Other comprehensive income, net of tax: Unrealized holding losses on securities arising during the period.. -0- -0- -0- (42,137) -0- -0- (42,137) Less: reclassification adjustment for gains on securities included in net income......................... -0- -0- -0- (366) -0- -0- (366) Total other comprehensive income....... -0- -0- -0- (42,503) -0- -0- (42,503) Total comprehensive income.............. -0- -0- 53,030 (42,503) -0- -0- 10,527 Cash dividends declared.................. -0- -0- (30,880) -0- -0- -0- (30,880) Decrease in unearned ESOP shares......... -0- 53 -0- -0- -0- 1,814 1,867 Discount on dividend reinvestment plan purchases............................... -0- (358) -0- -0- -0- -0- (358) Treasury stock acquired.................. -0- -0- -0- -0- (51,331) -0- (51,331) Treasury stock reissued.................. -0- (343) -0- -0- 1,796 -0- 1,453 Balance at December 31, 1999............. $62,525 $68,330 $257,773 $(40,304) $(55,448) $(6,193) $286,683 The accompanying notes are an integral part of these consolidated financial statements.
31 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Statements of Cash Flows (Dollar Amounts in Thousands)
Years Ended December 31, 1999 1998 1997 Operating Activities Net income............................................ $ 53,030 $ 33,374 $ 39,539 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses........................ 9,450 15,049 10,152 Depreciation and amortization...................... 7,735 7,914 7,033 Net gains on sales of assets....................... (5,192) (3,829) (7,148) Income from increase in cash surrender value of bank owned life insurance........................ (2,126) (1,365) (204) Increase in interest receivable.................... (773) (4,011) (8,241) Increase in interest payable....................... 1,815 1,159 2,842 Increase (decrease) in income taxes payable........ 445 (584) (451) Change in deferred taxes........................... 287 (1,404) 1,327 Other - net........................................ (11,922) 6,567 3,621 Net cash provided by operating activities....... 52,749 52,870 48,470 Investing Activities Transactions with securities held to maturity: Sales.............................................. -0- -0- -0- Maturities and redemptions......................... 127,566 211,948 137,124 Purchases of investment securities................. (93,151) (184,668) (125,078) Transactions with securities available for sale: Sales.............................................. 39,282 171,891 50,049 Maturities and redemptions......................... 193,605 184,508 87,936 Purchases of investment securities................. (398,933) (891,718) (256,444) Proceeds from sales of loans and other assets......... 99,692 104,609 22,772 Sale of subsidiary.................................... (2,431) -0- -0- Investment in bank owned life insurance............... (20,000) -0- (25,000) Net decrease (increase) in time deposits with banks... 689 3,127 (759) Net increase in loans................................. (227,347) (50,580) (232,881) Purchases of premises and equipment................... (5,197) (7,702) (6,141) Net cash used by investing activities........... (286,225) (458,585) (348,422) Financing Activities Proceeds from issuance of other long-term debt........ 25,000 469,800 204,842 Repayments of other long-term debt.................... (50,319) (37,576) (63,487) Proceeds from issuance of company obligated mandatorily redeemable capital securities of subsidiary trust.................................... 35,000 -0- -0- Discount on dividend reinvestment plan purchases...... (358) (1,016) (630) Dividends paid........................................ (27,825) (25,746) (21,739) Net increase (decrease) in Federal funds purchased.... (45,025) (60,675) 53,675 Net increase (decrease) in other short-term borrowings 329,306 (2,228) (7,417) Sale of branch and deposits, net of cash received..... -0- (8,612) -0- Acquisition of treasury stock......................... (51,331) (2,123) (5,908) Reissuance of treasury stock.......................... 1,453 2,217 16 Net increase in deposits.............................. 21,333 56,909 128,253 Net cash provided by financing activities....... 237,234 390,950 287,605 Net increase (decrease) in cash and cash equivalents................................... 3,758 (14,765) (12,347) Cash and cash equivalents at January 1.................. 97,615 112,380 124,727 Cash and cash equivalents at December 31................ $101,373 $ 97,615 $112,380
The accompanying notes are an integral part of these consolidated financial statements. 32 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 NOTE 1--Statement of Accounting Policies General The following summary of accounting and reporting policies is presented to aid the reader in obtaining a better understanding of the financial statements and related financial data of First Commonwealth Financial Corporation and its subsidiaries (the "Corporation") contained in this report. The financial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions. In preparing financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. In addition, these estimates and assumptions affect revenues and expenses in the financial statements and as such, actual results could differ from those estimates. Through its subsidiaries which include two commercial banks, a nondepository trust company, and insurance agency, the Corporation provides a full range of loan, deposit, trust and insurance services primarily to individuals and small to middle-market businesses in seventeen counties in central and western Pennsylvania. Under current conditions, the Corporation is reporting one business segment. The Corporation and subsidiaries are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Corporation and its subsidiaries for adherence to laws and regulations. As a consequence, the cost of doing business may be affected. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries. All material intercompany transactions have been eliminated in consolidation. Investments of 20 to 50 percent of the outstanding common stock of investees are accounted for using the equity method of accounting. Securities Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as securities held-to-maturity and are reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are to be classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as securities available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of deferred taxes. The Corporation has securities classified as either held-to-maturity or available-for-sale. The Corporation does not engage in trading activities. Net gain or loss on the sale of securities is determined by using the specific identification method. In June 1998, the Financial Accounting Standards Board ("FASB") issued statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133") which is effective for the first quarter of years beginning after June 15, 2000. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities which require that an entity recognize all derivatives as either assets or liabilities in a balance sheet and measure those instruments at fair value. 33 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 NOTE 1--Statement of Accounting Policies (Continued) Securities (Continued) Management's preliminary analysis is that adoption of FAS No. 133 should not have a material impact on the Corporation's financial condition or results of operations. Effective January 1, 1999, the Corporation adopted the FASB Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("FAS No. 134"). FAS No. 134 amends FAS No. 65 "Accounting for Certain Mortgage Banking Activities". FAS No. 65 required that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities as trading securities while FAS No. 134 requires the resulting mortgage-backed securities or other retained interests be classified based on the entity's ability and intent to sell or hold those investments. On the date FAS No. 134 is initially applied, an enterprise may reclassify mortgage backed securities and other beneficial interests retained after the securitization of mortgage loans held for sale from the trading category, except for those with sales commitments in place. The Corporation currently holds no mortgage backed securities or other beneficial interests retained after the securitization of mortgage loans held for sale. The adoption of FAS No. 134 did not have a material impact on the Corporation's financial condition or results of operations. Loans Loans are carried at the principal amount outstanding. Unearned income on installment loans and leases is taken into income on a declining basis which results in an approximately level rate of return over the life of the loan or lease. Interest is accrued as earned on nondiscounted loans. The Corporation considers a loan to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect principal or interest due according to the contractual terms of the loan. Loan impairment is measured based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Payments received on impaired loans are applied against the recorded investment in the loan. For loans other than those that the Corporation expects repayment through liquidation of the collateral, when the remaining recorded investment in the impaired loan is less than or equal to the present value of the expected cash flows, income is recorded on a cash basis. Mortgage Servicing Rights When the Corporation purchases or originates mortgage loans with a definitive plan to sell or securitize those loans and retain the mortgage servicing rights, the Corporation measures the mortgage servicing rights at cost by allocating the cost of the mortgage loans between the mortgage servicing rights and the mortgage loans (without the mortgage servicing rights) based on their relative fair values at the date of purchase or origination. When the Corporation does not have a definitive plan at the purchase or origination date and later sells or securitizes the mortgage loans and retains the mortgage servicing rights, the Corporation allocates the amortized cost of the mortgage loans between the mortgage servicing rights and the mortgage loans (without mortgage servicing rights) based on their relative fair values at the date of sale. The amount capitalized as the right to service mortgage loans is recognized as a separate asset and amortized in proportion to, and over the period of, estimated net servicing 34 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 1--Statement of Accounting Policies (Continued) Mortgage Servicing Rights (Continued) income (servicing revenue in excess of servicing cost). Mortgage servicing rights are periodically evaluated for impairment based on fair values. Loan Fees Loan origination and commitment fees, net of associated direct costs, are deferred and the net amount is amortized as an adjustment to the related loan yield on the interest method, generally over the contractual life of the related loans or commitments. Other Real Estate Owned Real estate, other than bank premises, is recorded at the lower of cost or fair value less selling costs at the time of acquisition. Expenses related to holding the property, net of rental income, are generally charged against earnings in the current period. Allowance for Credit Losses The allowance for credit losses represents management's estimate of an amount adequate to provide for losses which may be incurred on loans currently held. Management determines the adequacy of the allowance based on historical patterns of loan charge-offs and recoveries, the relationship of the allowance to outstanding loans, industry experience, current economic trends and other factors relevant to the collectibility of loans currently in the portfolio. Bank-Owned Life Insurance In January 1999 and November 1997, the Corporation purchased insurance on the lives of a certain group of employees. The policies accumulate asset values to meet future liabilities including the payment of employee benefits such as health care. Premiums of $20,000 and $25,000 are shown in the Consolidated Statements of Cash Flows for 1999 and 1997, respectively. Increases in the cash surrender value are recorded as other income in the Consolidated Statements of Income. The cash surrender value of bank-owned life insurance is reflected in "other assets" on the Consolidated Balance Sheets. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line and accelerated methods over the estimated useful life of the asset. Charges for maintenance and repairs are expensed as incurred. Where a lease is involved, amortization is charged over the term of the lease or the estimated useful life of the improvement, whichever is shorter. 35 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 1--Statement of Accounting Policies (Continued) Accounting for the Impairment of Long-Lived Assets The Corporation reviews long-lived assets, such as premises and equipment and intangibles for impairment whenever events or changes in circumstances, such as a significant decrease in the market value of an asset or the extent or manner in which an asset is used indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the carrying amount of an asset may not be recoverable, future discounted cash flows expected to result from the use of the asset are estimated. If the sum of the expected cash flows is less than the carrying value of the asset a loss is recognized for the difference between the carrying value and fair market value of the asset. Income Taxes The Corporation records taxes in accordance with the asset and liability method utilized by Statement of Financial Accounting Standards No. 109 ("FAS No. 109"), whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases given the provisions of the enacted tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence. Comprehensive Income Disclosures For all periods presented, "other comprehensive income" (comprehensive income excluding net income) includes only one component, which is the change in unrealized holding gains and losses on available for sale securities. The following table identifies the related tax effects allocated to each component of other comprehensive income in the Statements of Changes in Shareholders' Equity:
December 31, 1999 December 31, 1998 December 31, 1997 Tax Net of Tax Net of Tax Net of Pre-tax (Expense) Tax Pre-tax (Expense) Tax Pre-tax (Expense) Tax Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period $(64,826) $22,689 $(42,137) $1,495 $(524) $971 $7,936 $(2,777) $5,159 Less: reclassification adjustment for gains realized in net income (563) 197 (366) (1,428) 500 (928) (6,819) 2,387 (4,432) Net unrealized gains (losses) (65,389) 22,886 (42,503) 67 (24) 43 1,117 (390) 727 Other comprehensive income $(65,389) $22,886 $(42,503) $ 67 $ (24) $ 43 $1,117 $ (390) $ 727
36 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands, except per share data) NOTE 1--Statement of Accounting Policies (Continued) Cash Flow Statement Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and Federal funds sold. Generally, Federal funds are sold for one-day periods. Supplemental Disclosures 1999 1998 1997 Cash paid during the year for: Interest $150,839 $147,123 $121,600 Income taxes $ 18,832 $ 14,200 $ 16,685 Noncash investing and financing activities: ESOP borrowings $ -0- $ 6,000 $ -0- ESOP loan reductions $ 1,814 $ 429 $ 1,038 Loans transferred to other real estate owned and repossessed assets $ 4,936 $ 6,624 $ 7,314 Gross increase (decrease) in market value adjustment to securities available for sale $(65,390) $ 67 $ 1,117 Stock Split On October 19, 1999, the Corporation's Board of Directors approved a 2-for-1 stock split effected in the form of a 100% stock dividend. Shareholders of record at the close of business November 4, 1999 received one additional share for each share held. The additional shares were distributed on November 18, 1999. Pursuant to the foregoing stock split an additional 31,262,706 common shares were issued, and the sum of $31,263 ($1 per share) was transferred to the Corporation's common stock account, and such amount was charged against the Corporation's additional paid-in capital account. Common stock, additional paid-in capital, and share data for all periods presented have been restated to reflect the stock split as if it had occurred at the beginning of the earliest period presented. 37 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 1--Statement of Accounting Policies (Continued) Earnings Per Common Share Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders less unallocated ESOP shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For all periods presented the dilutive effect on average shares outstanding is the result of compensatory stock options outstanding. Employee Stock Ownership Plan Accounting treatment for the Corporation's Employee Stock Ownership Plan ("ESOP") described in NOTE 18 follows Statement of Position 93-6 ("SOP 93- 6") "Employers Accounting for Employee Stock Ownership Plans" for ESOP shares acquired after December 31, 1992 (new shares). The Corporation has elected, as permitted under SOP 93-6, not to adopt this statement for ESOP shares acquired on or before December 31, 1992 (old shares). ESOP shares purchased subject to debt guaranteed by the Corporation are recorded as a reduction of common shareholders' equity by charging unearned ESOP shares. As shares are committed to be released to the ESOP trust for allocation to plan participants, unearned ESOP shares is credited for the average cost of the shares to the ESOP. Compensation cost recognized for new shares in accordance with the provisions of SOP 93-6 is based upon the fair market value of the shares committed to be released. Additional paid- in capital is charged or credited for the difference between the fair value of the shares committed to be released and the cost of those shares to the ESOP. Compensation cost recognized for old shares committed to be released is recorded at the cost of those shares to the ESOP. Dividends on both old and new unallocated ESOP shares are used for debt service and are reported as a reduction of debt and accrued interest payable. Dividends on allocated ESOP shares are charged to retained earnings and allocated to the plan participants' accounts. The average number of common shares outstanding used in calculating earnings per share excludes all unallocated ESOP shares. Employee Stock Option Plan FASB Statement No. 123 "Accounting for Stock Based Compensation" ("FAS No. 123") defines a method of measuring stock based compensation, such as stock options granted, at an estimated fair value. FAS No. 123 also permits the continued measurement of stock based compensation under provisions of the Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). As permitted under FAS No. 123, the Corporation has elected to use the intrinsic value method to measure stock based compensation under APB 25 and to disclose in a footnote to the financial statements, net income and earnings per share determined as if the fair value methodology of FAS No. 123 was implemented (see NOTE 19). 38 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 2--Sale of Subsidiary Effective April 1, 1999, the Corporation sold all of the outstanding common stock of BSI Financial Services Inc. ("BSI"), a wholly-owned subsidiary of the Corporation, to a bank headquartered in Richmond, Indiana. Cash proceeds in the amount of $1,709 were received, resulting in a loss on sale of $202 which has been reflected in the financial statements. BSI provided mortgage banking, loan servicing and collection services to the Corporation's subsidiary banks and unaffiliated organizations. Services performed by BSI for the subsidiary banks have been transferred to the subsidiary banks or other nonbank subsidiaries of the Corporation. NOTE 3--Business Combination Effective December 31, 1998, the Corporation acquired all of the outstanding shares of Southwest National Corporation ("Southwest"), a Pennsylvania- chartered bank holding company headquartered in Greensburg, Pennsylvania. Each of the 3,043,738 outstanding shares of Southwest National Corporation were exchanged for 5.8 shares of the Corporation's common stock. The aggregate number of shares issued by the Corporation, excluding partial shares was 17,652,156. Related share amounts have been restated for the stock split described in NOTE 1. The merger was accounted for as a pooling of interests, and accordingly, all financial statements were restated as though the merger had occurred at the beginning of the earliest period presented. NOTE 4--Cash and Due From Banks on Demand Regulations of the Board of Governors of the Federal Reserve System impose uniform reserve requirements on all depository institutions with transaction accounts (checking accounts, NOW accounts, etc.). Reserves are maintained in the form of vault cash or a noninterest-bearing balance held with the Federal Reserve Bank. The subsidiary banks maintained with the Federal Reserve Bank average balances of $3,807 during 1999 and $18,561 during 1998. 39 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 5--Securities Available For Sale Below is an analysis of the amortized cost and approximate fair values of securities available for sale at December 31, 1999 and 1998:
1999 1998 Gross Gross Approximate Gross Gross Approximate Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value U.S. Treasury Securities $ 4,970 $ -0- $ (27) $ 4,943 $ 29,961 $ 400 $ -0- $ 30,361 Obligations of U.S. Government Corporations and Agencies: Mortgage Backed Securities 781,690 104 (38,777) 743,017 715,882 2,342 (1,167) 717,057 Other 123,436 -0- (4,068) 119,368 176,571 1,149 (152) 177,568 Obligations of States and Political Subdivisions 75,348 210 (5,940) 69,618 36,225 744 (185) 36,784 Debt Securities Issued by Foreign Governments 430 -0- -0- 430 460 -0- -0- 460 Corporate Securities 70,252 11 (5,812) 64,451 1,099 -0- (7) 1,092 Other Mortgage Backed Securities 85,521 -0- (4,413) 81,108 34,169 61 (552) 33,678 Total Debt Securities 1,141,647 325 (59,037) 1,082,935 994,367 4,696 (2,063) 997,000 Equities 64,330 3 (3,226) 61,107 44,749 887 -0- 45,636 Total Securities Available for Sale $1,205,977 $328 $(62,263) $1,144,042 $1,039,116 $5,583 $(2,063) $1,042,636
Mortgage backed securities include mortgage backed obligations of U.S. Government agencies and corporations, mortgage backed securities issued by other organizations and other asset backed securities. These obligations have contractual maturities ranging from less than one year to 30 years and have an anticipated average life to maturity ranging from less than one year to 21 years. All mortgage backed securities contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact upon prepayment speeds, therefore the Corporation uses computer simulation models to test the average life and yield volatility of all mortgage backed securities under various interest rate scenarios to insure that volatility falls within acceptable limits. At December 31, 1999 and 1998, the Corporation owned no high risk mortgage backed securities as defined by the Federal Financial Institutions Examination Council's Supervisory Policy Statement on Securities Activities. 40 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 5--Securities Available For Sale (Continued) The amortized cost and estimated market value of debt securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties. Approximate Amortized Fair Cost Value Due within 1 year $ 4,962 $ 4,969 Due after 1 but within 5 years 152,005 147,816 Due after 5 but within 10 years 15,585 15,106 Due after 10 years 101,884 90,919 274,436 258,810 Mortgage Backed Securities 867,211 824,125 Total Debt Securities $1,141,647 $1,082,935 Proceeds from the sales of securities available for sale were $39,282, $171,891 and $50,049 during 1999, 1998 and 1997 respectively. Gross gains of $541, $2,817 and $6,833 and gross losses of $0, $1,284 and $14 were realized on those sales during 1999, 1998 and 1997 respectively. Securities available for sale with an approximate fair value of $463,004 and $179,943 were pledged at December 31, 1999 and 1998, respectively to secure public deposits and for other purposes required or permitted by law. NOTE 6--Securities Held to Maturity Below is an analysis of the amortized cost and approximate fair values of debt securities held to maturity at December 31, 1999 and 1998:
1999 1998 Gross Gross Approximate Gross Gross Approximate Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value Obligations of U.S. Government Corporations and Agencies: Mortgage Backed Securities $183,926 $ 60 $ (4,231) $179,755 $224,312 $ 655 $ (429) $224,538 Other 104,790 -0- (2,436) 102,354 105,785 1,296 (92) 106,989 Obligations of States and Political Subdivisions 134,770 176 (6,204) 128,742 140,513 2,556 (512) 142,557 Debt Securities Issued by Foreign Governments 358 -0- -0- 358 358 -0- -0- 358 Corporate Securities 22,212 -0- (711) 21,501 5,249 10 -0- 5,259 Other Mortgage Backed Securities 2,291 -0- (1) 2,290 6,479 5 -0- 6,484 Total Securities Held to Maturity $448,347 $236 $(13,583) $435,000 $482,696 $4,522 $(1,033) $486,185
41 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) Note 6--Securities Held to Maturity (Continued) The amortized cost and estimated market value of debt securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties. Approximate Amortized Fair Cost Value Due within 1 year $ 3,941 $ 3,941 Due after 1 but within 5 years 133,853 131,225 Due after 5 but within 10 years 46,643 45,849 Due after 10 years 77,693 71,940 262,130 252,955 Mortgage Backed Securities 186,217 182,045 Total Debt Securities $448,347 $435,000 There were no sales of securities held to maturity in 1999, 1998 or 1997. Securities held to maturity with an amortized cost of $282,388 and $277,345 were pledged at December 31, 1999 and 1998, respectively, to secure public deposits and for other purposes required or permitted by law. NOTE 7--Loans (all domestic) Loans at year end were divided among these general categories: December 31, 1999 1998 Commercial, financial, agricultural and other $ 417,300 $ 377,733 Real estate loans: Construction and land development 41,734 33,097 1-4 Family dwellings 980,506 1,009,903 Other real estate loans 495,789 387,166 Loans to individuals for household, family and other personal expenditures 502,465 517,907 Leases, net of unearned income 65,893 56,423 Subtotal 2,503,687 2,382,229 Unearned income (3,628) (7,379) Total loans and leases $2,500,059 $2,374,850 Most of the Corporation's business activity was with customers located within Pennsylvania. The portfolio is well diversified, and as of December 31, 1999 and 1998, there were no significant concentrations of credit. NOTE 8--Allowance for Credit Losses Description of changes: 1999 1998 1997 Allowance at January 1 $32,304 $25,932 $25,234 Additions: Recoveries of previously charged off loans 1,381 1,950 1,524 Provision charged to operating expense 9,450 15,049 10,152 Deductions: Loans charged off 9,596 10,627 10,978 Allowance at December 31 $33,539 $32,304 $25,932 42 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 8--Allowance for Credit Losses (Continued) Relationship to impaired loans: 1999 1998 Recorded investment in impaired loans at end of period $12,827 $ 9,741 Average balance of impaired loans for the year $10,808 $10,756 Allowance for credit losses related to impaired loans $ 3,082 $ 1,593 Impaired loans with an allocation of the allowance for credit losses $ 7,471 $ 4,530 Impaired loans with no allocation of the allowance for credit losses $ 5,356 $ 5,211 Income recorded on impaired loans on a cash basis $ 458 $ 286 NOTE 9--Financial Instruments with Off-Balance-Sheet Risk The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amount of those instruments reflects the extent of involvement the Corporation has in particular classes of financial instruments. As of December 31, 1999 and 1998, the Corporation did not own or trade any other financial instruments with significant off-balance-sheet risk including derivatives such as futures, forwards, interest rate swaps, option contracts and the like, although such instruments may be appropriate to use in the future to manage interest rate risk. The Corporation's exposure to credit loss in the event of nonperformance by the other party of the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit written is represented by the contract or notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The following table identifies the notional amount of those instruments at December 31, 1999 and 1998. 1999 1998 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $421,871 $481,354 Standby letters of credit $ 39,847 $ 38,456 Commercial letters of credit $ 514 $ -0- Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, residential and income-producing commercial properties. 43 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 9--Financial Instruments with Off-Balance-Sheet Risk (Continued) Standby letters of credit and commercial letters of credit written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. NOTE 10--Premises and Equipment Premises and equipment are described as follows: Estimated Useful Life 1999 1998 Land Indefinite $ 5,425 $ 5,481 Buildings and improvements 5 - 50 Years 44,582 44,368 Leasehold improvements 5 - 39 Years 9,930 9,725 Furniture and equipment 3 - 25 Years 46,177 44,124 Subtotal 106,114 103,698 Less accumulated depreciation and amortization 65,197 61,769 Total premises and equipment $40,917 $41,929 Depreciation and amortization related to premises and equipment was $5,160 in 1999, $5,669 and $5,171 in 1998 and 1997, respectively. NOTE 11--Interest-Bearing Deposits Components of interest-bearing deposits at December 31 were as follows: 1999 1998 NOW and Super NOW accounts $ 98,545 $ 107,947 Savings and MMDA accounts 1,073,789 1,078,534 Time deposits 1,525,091 1,480,568 Total interest-bearing deposits $2,697,425 $2,667,049 Interest-bearing deposits at December 31, 1999 and 1998, include reallocations from demand deposits of $97,883 and $94,588 and reallocations from NOW and Super NOW accounts of $294,943 and $272,320 respectively into Savings and MMDA accounts. These reallocations are based on a formula approved by the regulatory authorities and have been made to reduce the Corporation's reserve requirement. Included in time deposits at December 31, 1999 and 1998, were certificates of deposit in denominations of $100 or more of $358,261 and $299,412 respectively. Interest expense related to $100 or greater certificates of deposit amounted to $18,103 in 1999, $16,921 in 1998, and $17,574 in 1997. Included in time deposits at December 31, 1999, were certificates of deposit with the following scheduled maturities: 2000 $ 799,072 2001 293,846 2002 340,042 2003 45,619 2004 and thereafter 44,007 $1,522,586 44 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 12--Short-term Borrowings Short-term borrowings at December 31 were as follows:
1999 1998 Ending Average Average Ending Average Average Balance Balance Rate Balance Balance Rate Federal funds purchased $ 2,950 $ 94,161 5.22% $ 47,975 $ 72,511 5.68% Borrowings from FHLB 100,000 49,037 5.21% -0- 18,336 5.73% Securities sold under agreements to repurchase 262,301 124,904 4.66% 84,228 90,383 4.76% Treasury, tax and loan note option 59,576 11,167 4.81% 8,344 14,104 5.24% Total $424,827 $279,269 4.95% $140,547 $195,334 5.23% Maximum total at any month-end $424,960 $278,247
Interest expense on short-term borrowings for the years ended December 31 is detailed below:
1999 1998 1997 Federal funds purchased $ 4,913 $ 4,119 $3,466 Borrowings from FHLB 2,557 1,051 274 Securities sold under agreements to repurchase 5,825 4,305 3,772 Treasury, tax and loan note option 537 739 596 Total interest on short-term borrowings $13,832 $10,214 $8,108
NOTE 13--Company Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust The Corporation established First Commonwealth Capital Trust I ("the Trust"), a Delaware business trust and the Trust issued 35,000 capital securities (liquidation amount of $35 million) during September 1999, through a private offering to qualified investors. Additionally, the Trust issued common securities to the Corporation. The Trust used the proceeds from the sale to buy a series of 9.50% junior subordinated deferrable interest debentures due 2029 from the Corporation with the same economic terms as the capital securities. The Trust will distribute the cash payments it receives from the Corporation on the debentures to the holders of the capital securities and the common securities. The original series A capital securities and series A junior subordinated deferrable interest debentures have since been exchanged for registered series B capital securities and registered series B junior subordinated deferrable interest debentures having the same economic terms as the original series A securities. The Trust will redeem all of the outstanding capital securities when the debentures are paid at maturity on September 1, 2029. Subject to receiving prior approval of the Board of Governors of the Federal Reserve System the Corporation may redeem the debentures, in whole or in part, at any time on or after September 1, 2009, at a redemption price equal to 104.750% of the principal amount of the debentures on September 1, 2009, declining ratably on each September 1 thereafter to 100% on or after September 1, 2019, plus accrued and unpaid interest to the date of redemption. The Corporation may 45 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 13--Company Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust (Continued) 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 $34.2 million. The Corporation used the net proceeds from the issuance of the debentures to partially finance the purchase of 3,819,420 shares of its outstanding common stock (approximately 6.5% of its outstanding shares of common stock) pursuant to a "modified Dutch Auction" tender offer. Unamortized deferred issuance costs associated with the capital securities amounted to $909 as of December 31, 1999 and are being amortized on a straight-line basis over the term of the capital securities. The outstanding balance of the capital securities are included as a separate component of long-term debt on the Consolidated Balance Sheets while interest on the capital securities is included as a separate component of interest expense on the Consolidated Statements of Income. The amortization of the deferred issuance costs is included in interest expense from the capital securities on the Consolidated Statements of Income. NOTE 14--Other Long-term Debt Long-term debt at December 31, follows:
1999 1998 Amount Rate Amount Rate ESOP loan due December, 2005 $ 6,193 Libor +1% $8,007 Libor +1% Bank loan due July, 2003 16,000 FF + 1.25% 0 Borrowings from FHLB due: February, 2000 25,000 4.72% 25,000 4.72% July, 2000 25,000 4.72% 25,000 4.72% August, 2002 -0- 25,000 5.36% November, 2002 50,000 5.82% 50,000 5.82% November, 2002 -0- 25,000 5.33% December, 2002 50,000 5.71% 50,000 5.71% February, 2008 100,000 5.45% 100,000 5.45% February, 2008 100,000 5.48% 100,000 5.48% May, 2008 55,000 5.67% 55,000 5.67% May, 2008 45,000 5.67% 45,000 5.67% November, 2008 50,000 5.03% 50,000 5.03% December, 2008 65,000 4.96% 65,000 4.96% December, 2017 7,264 6.17% 7,476 6.17% June, 2019 8,898 5.72% -0- Mortgage loan due July, 2012 -0- 177 2.00% Mortgage loan due January, 2013 -0- 190 4.50% $603,355 $630,850
All Federal Home Loan Bank stock, along with an interest in unspecified mortgage loans and mortgage-backed securities, with an aggregate statutory value equal to the amount of the preceding advances, have been pledged as collateral with the Federal Home Loan Bank of Pittsburgh. Capital securities included in total long-term debt on the Consolidated Balance Sheets are excluded from NOTE 14, but are described in NOTE 13. 46 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands, except per share data) NOTE 14--Other Long-term Debt (Continued) In October 1999, the parent company entered into an agreement with an unrelated financial institution which enabled the parent company to borrow up to $20,000 through October 2000. As of December 31, 1999, $16,000 was outstanding and $4,000 remained available on this line of credit. At the option of the lender this commitment could be extended for an additional year. Loan terms require payments of eleven quarterly installments equal to one-sixteenth of the outstanding principal amount as of the commitment expiration date plus a balloon payment for the remaining outstanding balance to be paid at maturity. The maturity date of the loan is the third anniversary of the commitment expiration date. Interest on advances taken is accrued at either the daily Federal funds rate plus 1.25%, Euro-rate plus 1.25%, the lender's as-offered rate or prime rate. The parent company may elect the interest rate method to be applied for each advance. Scheduled loan payments for other long-term debt are summarized below: 2000 2001 2002 2003 2004 Thereafter Loan payments $52,051 $5,670 $105,611 $8,634 $1,465 $429,924 During 1998, the Corporation incurred a cost of $960 for the prepayment of FHLB term borrowings with original maturities scheduled for 2007. This amount was recorded on the Consolidated Statements of Income as an extraordinary item, net of $336 of applicable income taxes. NOTE 15--Common Share Commitments At December 31, 1999, the Corporation had 100,000,000 common shares authorized and 62,525,412 shares outstanding. Outstanding shares were reduced by 4,382,564 shares of treasury stock at December 31, 1999 and 649,466 shares at December 31, 1998. The Corporation may be required to issue additional shares to satisfy common share purchases related to the employee stock ownership plan described in NOTE 18. The dilutive effect of stock options outstanding on average shares outstanding in the diluted earnings per share reported on the income statement were 236,230, 332,454 and 173,776 shares at December 31, 1999, 1998 and 1997 respectively. During 1999, 3,921,668 shares of treasury stock were acquired at an average price of $13.09. During 1998, 86,800 shares of treasury stock were acquired at an average price of $12.22 and reissued to the leveraged ESOP. Treasury shares consisting of 188,570 and 131,138 were reissued during 1999 and 1998 upon exercise of stock options. NOTE 16--Income Taxes The income tax provision consists of: 1999 1998 1997 Current tax provision for income exclusive of securities transactions: Federal $19,111 $13,097 $13,384 State 16 (11) 238 Securities transactions 198 547 2,389 Total current tax provision 19,325 13,633 16,011 Deferred tax provision (benefit) 287 (1,404) 1,327 Total tax provision $19,612 $12,229 $17,338 47 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands, except per share data) NOTE 16--Income Taxes (Continued) Temporary differences between financial statement carrying amounts and tax bases of assets and liabilities that represent significant portions of the deferred tax assets (liabilities) at December 31, 1999 and 1998, were as follows: 1999 1998 Deferred tax assets: Allowance for credit losses $11,641 $11,132 Postretirement benefits other than pensions 985 973 Accumulated depreciation 242 278 Unrealized loss on securities available for sale 21,702 -0- Other 827 631 Total deferred tax assets 35,397 13,014 Deferred tax liabilities: Accumulated accretion of bond discount (250) (325) Unrealized gain on securities available for sale -0- (1,184) Lease financing deduction (9,372) (7,829) Loan origination fees and costs (628) (849) Basis difference in assets acquired (892) (1,143) Pension expense (200) (233) Other (262) (257) Total deferred tax liabilities (11,604) (11,820) Net deferred tax asset $23,793 $ 1,194 The total tax provision for financial reporting purposes differs from the amount computed by applying the statutory income tax rate to income before income taxes. The differences are as follows:
1999 1998 1997 % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income Tax at statutory rate $25,425 35.0 $16,179 35.0 $19,907 35.0 Increase (decrease) resulting from: Effect of nontaxable income (5,247) (7.2) (3,894) (8.4) (2,660) (4.7) Merger expenses -0- 0.0 542 1.2 -0- 0.0 State income taxes 16 0.0 (11) (0.0) 238 0.4 Other (582) (0.8) (587) (1.3) (147) (0.2) Total tax provision $19,612 27.0 $12,229 26.5 $17,338 30.5
48 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 17--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. The ESOP acquired 484,178 shares of the Corporation's common stock in 1998 at a corresponding cost of $6,000, which the Corporation borrowed and concurrently loaned this amount to the ESOP. This amount represents leveraged and unallocated shares, and accordingly has been recorded as long- term debt and the offset as a reduction of the common shareholders' equity. Compensation costs related to the plan were $1,555 in 1999, $1,068 in 1998 and $1,032 in 1997. (See NOTE 18). The Corporation also has a savings plan pursuant to the provisions of section 401(k) of the Internal Revenue Code. Under the terms of the plan, each participant will receive an automatic employer contribution to the plan in an amount equal to 3% of compensation. Each participating employee may contribute up to 10% of compensation to the plan which up to 4% is matched 100% by the employer's contribution. Prior to 1999, each participant could contribute up to 5% of compensation to the plan, which was matched by the employer's contribution equal to 80% of the employee's contribution. Employees of Southwest are covered by a 401(k) plan whereby each participant may contribute up to 10% of compensation to the plan of which up to 4% is matched 100% by the employer's contribution. The Southwest Board of Directors may also authorize an annual discretionary contribution to the plan. The Southwest plan was not yet mergered into the Corporation's plan as of December 31, 1999. The 401(k) plan expense was $2,328 in 1999, $2,261 in 1998 and $2,415 in 1997. Upon shareholder approval at the regular 1998 meeting the Corporation established a "Supplemental Executive Retirement Plan" ("SERP") to provide deferred compensation for a select group of management. The purpose of this plan is to restore some of the benefits lost to the highly compensated employees compared to other employees due to limits and restrictions incorporated into the Corporation's 401(k) and ESOP plans. The Corporation's 401(k) and ESOP plans include restrictions on maximum compensation, actual deferral percentage, actual contribution, maximum contribution and maximum salary reduction which are required in order to meet specific legal requirements. Participants in the SERP may elect to contribute up to 10% of plan compensation (compensation in excess of limits of the Corporation's 401(k) and ESOP plans) into the SERP, through salary reduction. The Corporation will make an elective contribution to the SERP equal to the elective contribution of the participant. Each participant of the SERP will also receive a matching contribution equal to 100% of the employee's elective contribution up to 4%, and an additional non-elective contribution from the employer equal to 8% of plan compensation. For 1998, each participant could make an elective contribution for up to 5% of plan compensation which was matched by an employers' contribution equal to 80% of the employee's contribution. The SERP will continue to supplement the Corporation's 401(k) and ESOP plans and will therefore be modified at the same time and in the same respect as the basic plans are modified in future periods. The SERP plan expense was $153 in 1999 and $62 in 1998. Pension Plan of Acquired Subsidiary Southwest's noncontributory defined benefit pension plan covers all eligible employees and provides benefits that are based on each employee's years of service and compensation. 49 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 17--Retirement Plans (Continued) Pension Plan of Acquired Subsidiary (Continued) Net periodic pension cost of this plan for each of the last three years was as follows: 1999 1998 1997 Service cost $ -0- $ 365 $ 327 Interest cost on projected benefit obligation 394 469 411 Actual return on plan assets (261) (425) (1,042) Net amortization and deferral (153) (179) 507 Net periodic pension cost $ (20) $ 230 $ 203 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: 1999 1998 Market value of plan assets, primarily registered investment companies, U.S. government and agency obligations and money markets $6,485 $7,132 Projected benefit obligation 5,765 7,926 Plan assets (less) greater than projected benefit obligation 720 (794) Unrecognized net transition asset (92) (123) Unrecognized net loss (gain) (56) 1,470 Prepaid pension expense recognized on the balance sheet $ 572 $ 553 Actuarial present value of accumulated benefits, including vested benefits of $5,588 and $7,615 $5,765 $7,926 The following table sets forth the change in benefit obligation: 1999 1998 Benefit obligation at beginning of year $7,926 $6,794 Service cost -0- 365 Interest cost 394 469 Benefit payment (908) (973) Actuarial loss (gain) (1,647) 5,343 Curtailment -0- (4,072) Benefit obligation at end of year $5,765 $7,926 The following table sets forth the change in plan assets: 1999 1998 Fair value of plan assets at beginning of year $7,132 $7,679 Return on plan assets 261 425 Employer contribution -0- -0- Benefits paid (908) (972) Fair value of plan assets at end of year $6,485 $7,132 Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows at December 31: 1999 1998 Discount rates 6.0% 5.0% Rates of increase in compensation levels N/A 3.5 Expected long-term rate of return on assets 6.5 6.0 50 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 17--Retirement Plans (Continued) Pension Plan of Acquired Subsidiary (Continued) Effective December 31, 1998, participants' accrued benefit in the Southwest Bank Pension Plan was frozen. Participants became participants in the First Commonwealth Financial Corporation ESOP Plan with no lapse in credited service, and no loss of accrued benefits. The Southwest Bank Plan is expected to be terminated at some future date, with distribution made in accordance with Plan provisions and applicable regulations. Postretirement Benefits other than Pensions for Acquired Subsidiary Employees of Southwest were covered by a postretirement benefit plan. Net periodic benefit cost of this plan was as follows: 1999 1998 Service cost $ 13 $ 61 Interest cost on projected benefit obligation 197 259 Amortization of transition obligation 2 55 Loss amortization 48 82 Net periodic benefit cost $260 $457 The following table sets forth the plan's funded status and the amounts recognized on the Corporation's Consolidated Balance Sheet as of December 31: 1999 1998 Accumulated postretirement benefit obligation: Retirees $2,762 $2,941 Fully eligible active plan participants 14 155 Other plan participants 183 318 Total accumulated postretirement benefit obligation 2,959 3,414 Plan assets at fair value -- -- Accumulated postretirement benefit obligation in excess of plan assets 2,959 3,414 Unrecognized transition obligation (21) (610) Unrecognized net loss (56) (23) Accrued benefit liability recognized on the balance sheet $2,882 $2,781 The following table sets forth the change in benefit obligation: 1999 1998 Benefit obligation at beginning of year $3,414 $3,805 Service cost 13 61 Interest cost 197 259 Benefit payments (225) (193) Actuarial loss (gain) (440) 642 Curtailment -0- (1,160) Benefit obligation at end of year $2,959 $3,414 51 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 17--Retirement Plans (Continued) Postretirement Benefits other than Pensions for Acquired Subsidiary (Continued) The discount rates used in determining the actuarial present value of the accumulated postretirement benefit obligation were 6.75% and 6.0% for 1999 and 1998 respectively. The health care cost trend rates used for 1999 were projected at an initial rate of 5.75% decreasing over time to an annual rate of 4.50% for grandfathered participants and an initial rate of 5.00% decreasing over time to an annual rate of 4.50% for non-grandfathered participants. The health care cost trend rates used for 1998 were projected at level rates of 5.75% for grandfathered participants and 5% for non- grandfathered participants. This grandfathering is related to cost sharing requirements for different groups of participants for these benefits. The health care cost trend rate assumption can have a significant impact on the amounts reported for this plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects: 1-Percentage- 1-Percentage- Point Increase Point Decrease Effect on total of service and interest cost components $ 14 $ (12) Effect on postretirement benefit obligation $200 $(179) Southwest amended this plan to discontinue participation for active employees December 31, 1998 and to limit participation to employees retiring before January 1, 2002. As the result of this plan curtailment, an additional expense of $1,129 was recorded for 1998. In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS No. 132") which is effective for years beginning after December 15, 1997. FAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. The adoption of FAS No. 132 did not have a material impact on the Corporation's financial condition or results of operations. NOTE 18--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 $6,193 at December 31, 1999 and $8,007 at December 31, 1998. The loans have been recorded as long-term debt on the Corporation's Consolidated Balance Sheets. A like amount of unearned ESOP shares was recorded as a reduction of common shareholders' equity. Unearned ESOP shares, included as a component of shareholders' equity, represents the Corporation's prepayment of future compensation expense. The shares acquired by the ESOP are held in a suspense account and will be released to the ESOP for allocation to the plan participants as the loan is reduced. Repayment of the loans are scheduled to occur over a six year period from contributions to the ESOP by the Corporation and dividends on unallocated ESOP shares. 52 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands, except per share data) NOTE 18--Unearned ESOP Shares (Continued) The following is an analysis of ESOP shares held in suspense: (See NOTE 1 for the definition of "old" and "new shares"). Old New Total Shares Shares Shares in suspense December 31, 1997 342,502 202,398 140,104 Shares acquired during 1998 484,178 -0- 484,178 Shares allocated during 1998 (96,066) (23,520) (72,546) Shares in suspense December 31, 1998 730,614 178,878 551,736 Shares allocated during 1999 (131,927) (32,300) (99,627) Shares in suspense December 31, 1999 598,687 146,578 452,109 The fair market value of the new shares remaining in suspense was approximately $5,425 and $6,759 at December 31, 1999 and 1998 respectively. Interest on ESOP loans was $460 in 1999, $255 in 1998 and $211 in 1997. During 1999, 1998 and 1997, dividends on unallocated shares in the amount of $369, $196 and $213 respectively were used for debt service while all dividends on allocated shares were allocated to the participants. NOTE 19--Stock Option Plan At December 31, 1999, the Corporation had a stock-based compensation plan, which is described below. All of the exercise prices and related number of shares have been restated to reflect the previously described stock split. The plan permits the executive compensation committee to grant options for up to one million shares of the Corporation's common stock through October 15, 2005. Although the vesting requirements and term of future options granted are at the discretion of the executive compensation committee, all options granted during 1997 became vested at December 31, 1997 and expire ten years from the grant date, all options granted during 1998 became vested at December 31, 1998 and expire ten years from the grant date and all options granted during 1999 became vested on December 31, 1999 and expire ten years from the grant date. The Corporation has elected, as permitted by FAS No. 123, to apply APB Opinion 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock options outstanding. Had compensation cost for the Corporation's stock option plan been determined based upon the fair value at the grant dates for awards under the plan consistent with the method of FASB Statement 123, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts shown below:
1999 1998 1997 As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma Net Income $53,030 $52,197 $33,374 $33,374 $39,539 $33,597 Basic earnings per share $ 0.88 $ 0.87 $ 0.54 $ 0.54 $ 0.64 $ 0.54 Diluted earnings per share $ 0.88 $ 0.86 $ 0.54 $ 0.54 $ 0.64 $ 0.54
53 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands, except per share data) NOTE 19--Stock Option Plan (Continued) 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: 1999 1998 1997 Dividend yield 4.29% per annum 3.75% per annum 2.5% per annum Expected volatility 31.4% 90.0% 28.0% Risk-free interest rate 6.3% 5.1% 5.6% Expected option life 9.1 years 9.1 years 5.7 years Under the Corporation's 1995 Stock Option Plan, the Corporation may grant options to its executives and, as amended during 1999, non-employee directors, for up to one million shares of common stock. The Corporation also assumed the Stock Options of United National Bank Corporation ("Unitas") and Reliable Financial Corporation ("RFC") upon the merger of these financial institutions into the Corporation in 1994. A summary of the status of the Corporation's outstanding stock options as of December 31, 1999, 1998 and 1997 and changes for the years ending on those dates is presented below:
1999 1998 1997 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 1,306,346 $10.53 1,052,548 $ 8.75 466,616 $8.05 Granted 610,416 $11.56 404,016 $14.69 624,560 $9.25 Exercised (188,570) $ 8.66 (131,138) $ 8.72 (5,600) $3.22 Forfeited (48,014) $12.08 (19,080) $ 9.81 (33,028) $9.22 Outstanding at end of year 1,680,178 $11.07 1,306,346 $10.53 1,052,548 $8.75 Exercisable at end of year 1,680,178 $11.07 956,058 $11.06 690,038 $8.47
The following table summarizes information about the stock options outstanding at December 31, 1999.
Options Outstanding Options Exercisable Weighted-Average Range of Number Outstanding Remaining Contract Weighted-Average Number Exercisable Weighted-Average Exercise Prices at 12/31/99 Life Exercise Price at 12/31/99 Exercise Price $2.50-2.99 20,328 2.3 $ 2.71 20,328 $ 2.71 $4.00-4.99 8,800 3.2 $ 4.04 8,800 $ 4.04 $9.1875-9.25 697,067 7.0 $ 9.22 697,067 $ 9.22 $11.1825-11.5625 596,083 9.1 $11.56 596,083 $11.56 $14.6875 357,900 8.2 $14.69 357,900 $14.69 Total 1,680,178 $11.07 1,680,178 $11.07
54 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 20--Commitments and Contingent Liabilities There are no material legal proceedings to which the Corporation or its subsidiaries are a party, or of which any of their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have any material adverse effect on the consolidated operations or financial position of the Corporation and its subsidiaries. NOTE 21--Related Party Transactions Some of the Corporation's or its subsidiaries' directors, executive officers, principal shareholders and their related interests, had transactions with the subsidiary banks in the ordinary course of business. All loans and commitments to loans in such transactions were made on substantially the same terms, including collateral and interest rates, as those prevailing at the time for comparable transactions. In the opinion of management, these transactions do not involve more than the normal risk of collectibility nor do they present other unfavorable features. It is anticipated that further such extensions of credit will be made in the future. The following is an analysis of loans to those parties whose aggregate loan balances exceeded $60 during 1999. Balances December 31, 1998 $10,308 Advances 7,889 Repayments (8,889) Other (904) Balances December 31, 1999 $ 8,404 "Other" primarily reflects the change in those classified as a "related party" as a result of mergers, resignations and retirements. NOTE 22--Regulatory Restrictions and Capital Adequacy The amount of funds available to the parent from its subsidiary banks is limited by restrictions imposed on all financial institutions by banking regulators. At December 31, 1999, dividends from subsidiary banks were restricted not to exceed $79,092. These restrictions have not had, and are not expected to have, a significant impact on the Corporation's ability to meet its cash obligations. The Corporation is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of total and Tier I capital (common and certain other "core" equity capital) to risk weighted assets, and of Tier I capital to average assets. As of December 31, 1999, the Corporation and its banking subsidiaries meet all capital adequacy requirements to which they are subject. 55 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 22--Regulatory Restrictions and Capital Adequacy (Continued) As of December 31, 1999, the most recent notifications from the Federal Reserve Board and Federal Deposit Insurance Corporation categorized First Commonwealth Bank and Southwest Bank as well capitalized under the regulatory framework for prompt corrective action. To be considered as well capitalized, the banks must maintain minimum total risk-based capital, Tier I risk-based capital and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category.
To Be Well Capitalized Under Prompt Corrective Actual Regulatory Minimum Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 1999 Total Capital to Risk Weighted Assets First Commonwealth Financial Corporation (a) $384,368 14.4% $213,009 8.0% Not Applicable Not Applicable First Commonwealth Bank $287,968 13.7% $168,687 8.0% $210,859 10.0% Southwest Bank $ 92,933 17.6% $ 42,308 8.0% $ 52,886 10.0% Tier I Capital to Risk Weighted Assets First Commonwealth Financial Corporation (a) $351,085 13.2% $106,504 4.0% Not Applicable Not Applicable First Commonwealth Bank $261,744 12.4% $ 84,344 4.0% $126,515 6.0% Southwest Bank $ 86,322 16.3% $ 21,154 4.0% $ 31,731 6.0% Tier I Capital to Average Assets First Commonwealth Financial Corporation (a) $351,085 7.4% $141,488 3.0% Not Applicable Not Applicable First Commonwealth Bank $261,744 7.2% $108,724 3.0% $181,207 5.0% Southwest Bank $ 86,322 8.2% $ 31,790 3.0% $ 52,983 5.0% As of December 31, 1998 Total Capital to Risk Weighted Assets First Commonwealth Financial Corporation $372,538 15.8% $188,929 8.0% Not Applicable Not Applicable First Commonwealth Bank $269,259 14.4% $149,993 8.0% $187,492 10.0% Southwest Bank $ 86,040 18.4% $ 37,364 8.0% $ 46,705 10.0% Tier I Capital to Risk Weighted Assets First Commonwealth Financial Corporation $342,999 14.5% $ 94,464 4.0% Not Applicable Not Applicable First Commonwealth Bank $245,823 13.1% $ 74,997 4.0% $112,495 6.0% Southwest Bank $ 80,184 17.2% $ 18,682 4.0% $ 28,023 6.0% Tier I Capital to Average Assets First Commonwealth Financial Corporation $342,999 8.6% $119,491 3.0% Not Applicable Not Applicable First Commonwealth Bank $245,823 8.0% $ 92,383 3.0% $153,972 5.0% Southwest Bank $ 80,184 9.2% $ 26,274 3.0% $ 43,790 5.0%
(a) Includes $35,000 of Company obligated mandatorily redeemable capital securities of subsidiary trust described in NOTE 13 which qualify as Tier I Capital. 56 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 23--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) Balance Sheets December 31, 1999 1998 Assets Cash $ 5,122 $ 4,501 Securities available for sale 103 145 Loans to affiliated parties 480 498 Investment in subsidiaries 330,400 348,597 Investment in jointly-owned company 3,477 3,059 Premises and equipment 6,992 6,022 Dividends receivable from subsidiaries 2,786 2,914 Receivable from subsidiaries 3,574 3,588 Other assets 2,711 526 Total assets $355,645 $369,850 Liabilities and Shareholders' Equity Accrued expenses and other liabilities $ 2,544 $ 1,352 Dividends payable 8,141 5,086 Loans payable 22,193 8,007 Subordinated debentures payable 36,083 -0- Shareholders' equity 286,684 355,405 Total liabilities and shareholders' equity $355,645 $369,850 Statements of Income Years Ended December 31, 1999 1998 1997 Interest and dividends $ 149 $ 251 $ 94 Dividends from subsidiaries 36,506 28,559 37,023 Interest expense (1,758) (255) (214) Net securities gains 57 203 382 Other revenue 15 1,008 16 Operating expenses (11,476) (8,111) (8,262) Income before taxes and equity in undistributed earnings of subsidiaries 23,493 21,655 29,039 Applicable income tax benefits 4,421 2,348 2,610 Income before equity in undistributed earnings of subsidiaries 27,914 24,003 31,649 Equity in undistributed earnings of subsidiaries 25,116 9,371 7,890 Net income $53,030 $33,374 $39,539 57 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 23--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) (Continued) Statements of Cash Flows Years Ended December 31, 1999 1998 1997 Operating Activities Net income $ 53,030 $ 33,374 $ 39,539 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,655 1,470 1,522 Net (gains) losses on sale of assets 144 (203) (381) Decrease (Increase) in prepaid income taxes (242) 13 229 Undistributed equity in subsidiaries (25,116) (9,371) (7,890) Other - net (818) (1,642) (403) Net cash provided by operating activities 28,653 23,641 32,616 Investing Activities Transactions with securities available for sale: Purchases of investment securities -0- (10,091) (6,734) Sales of investment securities 102 13,709 5,419 Net change in loans to affiliated parties 17 (28) 48 Purchases of premises and equipment (1,476) (2,036) (1,005) Additional net investment in subsidiary (2,406) (1,770) -0- Sale of subsidiary 1,709 -0- -0- Net cash used by investing activities (2,054) (216) (2,272) Financing Activities Net decrease in short-term borrowings -0- -0- (103) Issuance of subordinated debentures 36,083 -0- -0- Issuance of other long-term debt 16,000 -0- -0- Discount on dividend reinvestment plan purchases (358) (1,016) (630) Treasury stock acquired (51,331) (2,123) (5,908) Treasury stock reissued 1,453 2,217 16 Cash dividends paid (27,825) (25,746) (21,739) Net cash used by financing activities (25,978) (26,668) (28,364) Net increase (decrease) in cash 621 (3,243) 1,980 Cash at beginning of year 4,501 7,744 5,764 Cash at end of year $ 5,122 $ 4,501 $ 7,744 58 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 23--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) (Continued) Supplemental disclosures Proceeds from the issuance of subordinated debentures and other long-term debt during 1999 were used primarily to fund the purchase of 3,819,420 shares of the Corporation's common stock pursuant to a "modified Dutch Auction" tender offer. Noncash investing and financing activities: 1999 1998 1997 ESOP borrowings $ -0- $6,000 $ -0- ESOP loan reductions $1,814 $ 429 $1,038 The Corporation borrowed $6,000 in 1998 and concurrently loaned this amount to the ESOP on identical terms. The loan was recorded as long-term debt and the offset was recorded as a reduction of the common shareholders' equity. Loan payments in the amount of $1,814 in 1999, $429 in 1998 and $1,038 in 1997 were made by the ESOP thereby reducing the outstanding amount related to unearned ESOP shares to $6,193 at December 31, 1999. NOTE 24--Fair Values of Financial Instruments Below are various estimated fair values at December 31, 1999 and 1998, as required by Statement of Financial Accounting Standards No. 107 ("FAS No. 107"). Such information, which pertains to the Corporation's financial instruments, is based on the requirements set forth in FAS No. 107 and does not purport to represent the aggregate net fair value of the Corporation. It is the Corporation's general practice and intent to hold its financial instruments to maturity, except for certain securities designated as securities available for sale, and not to engage in trading activities. Many of the financial instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Therefore, the Corporation had to use significant estimations and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and the methodologies in absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. The following methods and assumptions were used by the Corporation in estimating financial instrument fair values: Cash and short-term instruments: The balance sheet carrying amounts for cash and short-term instruments approximate the estimated fair values of such assets. Securities: Fair values for securities held to maturity and securities available for sale are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of nonmarketable equity securities, such as Federal Home Loan Bank stock, is considered a reasonable estimate of fair value. 59 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1999, 1998 and 1997 (Dollar Amounts in Thousands) NOTE 24--Fair Values of Financial Instruments (Continued) Loans receivable: Fair values of variable rate loans subject to frequent repricing and which entail no significant credit risk are based on the carrying values. The estimated fair values of other loans are estimated by discounting the future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest is considered a reasonable estimate of fair value. Off-balance-sheet instruments: Many of the Corporation's off-balance-sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon, therefore the commitment amounts do not necessarily represent future cash requirements. Management has determined that due to the uncertainties of cash flows and difficulty in predicting the timing of such cash flows, fair values were not estimated for these instruments. Deposit liabilities: For deposits which are payable on demand at the reporting date, representing all deposits other than time deposits, management estimates that the carrying value of such deposits is a reasonable estimate of fair value. The carrying amounts of variable rate time deposit accounts and certificates of deposit approximate their fair values at the report date. Fair values of fixed rate time deposits are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregated expected maturities. The carrying amount of accrued interest approximates its fair value. Short-term borrowings: The carrying amounts of short-term borrowings such as Federal funds purchased, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and treasury, tax and loan notes approximate their fair values. Long-term debt: The carrying amounts of variable rate debt approximate their fair values at the report date. Fair values of fixed rate debt are estimated by discounting the future cash flows using the Corporation's estimated incremental borrowing rate for similar types of borrowing arrangements. The following table presents carrying amounts and estimated fair values of the Corporation's financial instruments at December 31, 1999 and 1998. 1999 1998 Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value Financial assets Cash and due from banks $ 92,673 $ 92,673 $ 96,615 $ 96,615 Interest-bearing deposits with banks 1,218 1,218 1,914 1,914 Federal funds sold 8,700 8,700 1,000 1,000 Securities available for sale 1,144,042 1,144,042 1,042,636 1,042,636 Investments held to maturity 448,347 435,000 482,696 486,185 Loans, net of allowance 2,466,520 2,547,096 2,342,546 2,389,039 Financial liabilities Deposits 2,948,829 2,913,140 2,931,131 2,946,535 Short-term borrowings 424,827 424,827 140,547 140,547 Long-term debt 638,355 581,254 630,850 635,252 60 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of First Commonwealth Financial Corporation: We have audited the accompanying consolidated balance sheets of First Commonwealth Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. The 1998 and 1997 consolidated financial statements give retroactive effect to the merger of First Commonwealth Financial Corporation and Southwest National Corporation on December 31, 1998, which has been accounted for as a pooling of interests as described in Note 3 to the consolidated financial statements. We did not audit the balance sheet of Southwest National Corporation as of December 31, 1998, or the related statements of income, shareholders' equity, and cash flows of Southwest National Corporation for the years ended December 31, 1998 and 1997, which statements reflect total assets of 23% as of December 31, 1998, and net interest income of 25% and 26% of the related consolidated totals for the years ended December 31, 1998 and 1997, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Southwest National Corporation for 1998 and 1997, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of First Commonwealth Financial Corporation and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /S/Deloitte & Touche, LLP Pittsburgh, Pennsylvania January 28, 2000 61 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data INDEPENDENT AUDITORS' REPORT To the Board of Directors Southwest National Corporation: We have audited the consolidated balance sheet of Southwest National Corporation and subsidiary as of December 31, 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the two-year period ended December 31, 1998 (not presented separately herein). These consolidated financial statements are the responsibility of Southwest National Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southwest National Corporation and subsidiary at December 31, 1998, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /S/KPMG LLP Pittsburgh, Pennsylvania February 17, 1999 62 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Quarterly Summary of Financial Data - Unaudited (Dollar Amounts in Thousands, except per share data) The unaudited quarterly results of operations, restated to reflect pooling of interests for the years ended December 31, 1999 and 1998 are as follows:
1999 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income................................................. $71,801 $73,636 $75,360 $76,710 Interest expense................................................ 36,740 36,989 38,154 40,770 Net interest income........................................ 35,061 36,647 37,206 35,940 Provision for credit losses..................................... 2,213 2,337 2,363 2,537 Net interest income after provision for credit losses........... 32,848 34,310 34,843 33,403 Securities gains................................................ 563 -0- 2 -0- Other operating income.......................................... 7,319 9,944 6,581 6,444 Other operating expenses........................................ 24,191 23,490 22,870 23,064 Income before income taxes................................. 16,539 20,764 18,556 16,783 Applicable income taxes......................................... 4,534 5,938 4,804 4,336 Net income................................................. $12,005 $14,826 $13,752 $12,447 Basic earnings per share (a).................................... $ 0.20 $ 0.24 $ 0.22 $ 0.22 Diluted earnings per share (a).................................. $ 0.20 $ 0.24 $ 0.22 $ 0.21 Average shares outstanding (a)..................................61,152,708 61,203,388 61,290,374 57,713,182 Average shares outstanding assuming dilution (a)................61,432,570 61,376,932 61,491,946 58,003,391
1998 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income................................................. $68,450 $72,016 $72,408 $70,547 Interest expense................................................ 35,201 38,023 38,394 36,664 Net interest income........................................ 33,249 33,993 34,014 33,883 Provision for credit losses..................................... 2,475 2,625 2,857 7,092 Net interest income after provision for credit losses........... 30,774 31,368 31,157 26,791 Securities gains (losses)....................................... 982 -0- 1,657 (1,182) Other operating income.......................................... 5,056 5,833 5,798 8,194 Merger and other related charges................................ -0- -0- -0- 7,915 Other operating expenses........................................ 22,930 22,843 23,005 23,508 Income before taxes and extraordinary items................ 13,882 14,358 15,607 2,380 Applicable income taxes......................................... 3,900 3,864 4,063 402 Net income before extraordinary items...................... 9,982 10,494 11,544 1,978 Extraordinary items, net of income taxes........................ -0- -0- -0- (624) Net income................................................. $ 9,982 $10,494 $11,544 $ 1,354 Basic earnings per share, before extraordinary items (a)........ $ 0.16 $ 0.17 $ 0.19 $ 0.03 Diluted earnings per share, before extraordinary items (a)...... $ 0.16 $ 0.17 $ 0.19 $ 0.03 Average shares outstanding (a)..................................61,607,954 61,545,594 61,503,208 60,685,824 Average shares outstanding assuming dilution (a)................62,023,294 61,901,396 61,796,158 60,953,602 (a) Per share amounts have been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on October 19, 1999.
63 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 24, 2000 is incorporated herein by reference in response to the listing of directors. The table below lists the current executive officers of the Corporation. Name Age Positions Held During the Past Five Years E. James Trimarchi 77 Chairman of the Board of the Corporation, Chairman of the Board of FCTC, CSC, FCB and FCIA; Director of CTCLIC, FCPRI; Former President and Chief Executive Officer of the Corporation Joseph E. O'Dell 54 President, Chief Executive Officer and director of the Corporation; Director of FCB, FCTC, FCPRI, Southwest Bank and FCIA; Vice Chairman of the Board of CSC; Former Senior Executive Vice President and Chief Operating Officer of the Corporation; former President and Chief Executive Officer of FCB Gerard M. Thomchick 44 Senior Executive Vice President and Chief Operating Officer of the Corporation; President, Chief Executive Officer and Director of CTCLIC; President and Director of FCPRI; Director of FCB, FCTC and FCIA David R. Tomb, Jr. 68 Senior Vice President, Secretary, Treasurer and Director of the Corporation; Secretary and Cashier of FCB; Secretary of FCIA, FCTC, FCPRI and CSC; Director of FCB, CSC, FCTC, FCPRI, FCIA and CTCLIC David S. Dahlmann 50 Vice Chairman of the Corporation; President and Chief Executive Officer of Southwest Bank; Former President and Chief Executive Officer of Southwest National; Director of Southwest Bank and FCPRI John J. Dolan 43 Executive Vice President and Chief Financial Officer of the Corporation; Chief Financial Officer of FCB; Chief Financial Officer, Comptroller of CTCLIC; Treasurer and Assistant Secretary of FCTC; Chief Financial Officer of FCPRI; Treasurer of FCIA; Administrative Trustee of First Commonwealth Capital Trust I William R. Jarrett 65 Senior Vice President, Risk Management of the Corporation 64 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) R. John Previte 50 Senior Vice President, Investments of the Corporation; Investment Officer of FCB and Southwest Rosemary Krolick 46 Executive Vice President and Chief Information Officer of the Corporation; President, Chief Executive Officer and director of CSC; Director of FCPRI Each of the officers identified above has held the position indicated above or other executive positions with the same entity (or a subsidiary thereof) for at least the past five years except where noted. Executive officers of the Corporation serve at the pleasure of the Board of Directors of the Corporation and for a term of office extending through the election and qualification of their successors. ITEM 11 - MANAGEMENT RENUMERATION Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 24, 2000 is incorporated herein by reference in response to this item. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 24, 2000 is incorporated herein by reference in response to this item. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 24, 2000 is incorporated herein by reference in response to this item. 65 FIRST COMMONWEALTH FINANCIAL CORPORATION PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K (A) Documents Filed as Part of this Report 1) Financial Statements All financial statements of the registrant as set forth under Item 8 of this Report on Form 10-K. 2) Financial Statement Schedules Schedule Number Description Page I Indebtedness to Related Parties N/A II Guarantees of Securities of Other Issuers N/A Page Number or Exhibit Incorporated by 3) Number Description Reference to 3.1 Articles of Incorporation Exhibit 3(i) to the Corporation's quarterly report on Form 10Q for the quarter ended March 31, 1994 3.2 By-Laws of Registrant Exhibit 3.2 to Form S-4 filed October 15, 1993 10.1 Employment Contract Exhibit 10.2 to Form S-4 Sumner E. Brumbaugh Filed October 15, 1993 10.2 Employment Contract Exhibit 10.4 to Form S-4 Robert C. Williams filed June 17, 1994 10.3 Change in Control Exhibit 10.4 to Form 10-K Agreement dated filed March 21, 1996 October 27, 1995 Joseph E. O'Dell 10.4 Change in Control Exhibit 10.5 to Form 10-K Agreement dated filed March 21, 1996 October 27, 1995 Gerard M. Thomchick 10.5 Change in Control Exhibit 10.6 to Form 10-K Agreement dated filed March 21, 1996 October 30, 1995, entered into between First Commonwealth Financial Corporation and John J. Dolan, together with a schedule listing substantially identical Change in Control Agreements with the following individuals: George E. Dash, William R. Jarrett, R. John Previte, David L. Dawson, Johnston A. Glass, Rosemary Krolick, Domenic P. Rocco and Robert C. Wagner. 10.6 Employment Contract Exhibit 10.4 to Form S-4 David S. Dahlmann filed November 2, 1998 10.7 Supplemental Executive Exhibit 10.7 to Form 10-K Retirement Plan filed March 31, 1999 66 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K PART IV (Continued) 10.8 Deferred Compensation Exhibit 10.8 to Form 10-K Plan filed March 31, 1999 10.9 Cash Incentive Bonus Exhibit 10.9 to Form 10-K Program filed March 31, 1999 21.1 Subsidiaries of the Page 69 Registrant 23.1 Consent of Deloitte & Page 70 Touche LLP Certified Public Accountants 23.2 Consent of KPMG LLP Page 71 Certified Public Accountants 24.1 Power of Attorney Page 72 27.1 Financial Data Schedule Page 73 (B) Report on Form 8-K (1) Form 8-K dated November 2, 1999 reporting the declaration of a 2-for-1 stock split effected in the form of a 100% stock dividend. Form 8-K also reported changes in the registrant's Dividend Reinvestment Plan. 67 FIRST COMMONWEALTH FINANCIAL CORPORATION SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Indiana, Pennsylvania, on the 29th day of March 2000. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) /S/JOSEPH E. O'DELL Joseph E. O'Dell, President and Chief Executive Officer 68 EX-21 2 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 21.1 - SUBSIDIARIES OF FIRST COMMONWEALTH FINANCIAL CORPORATION Percent Ownership By Registrant First Commonwealth Bank 100% 22 North Sixth Street Indiana, PA 15701 Southwest Bank 100% 111 South Main Street Greensburg, PA 15601 Unitas Mortgage Corporation 100% 17 East High Street Carlisle, PA 17013 Unitas Financial Corporation 100% PO Box 777 Chambersburg, PA 17201 Commonwealth Systems Corporation 100% 22 North Sixth Street Indiana, PA 15701 Incorporated under the laws of Pennsylvania First Commonwealth Trust Company 100% 614 Philadelphia Street Indiana, PA 15701 Incorporated under the laws of Pennsylvania First Commonwealth Professional Resources Incorporated 100% 22 North Sixth Street Indiana, PA 15701 First Commonwealth Capital Trust I 100% 22 North Sixth Street Indiana, PA 15701 Commonwealth Trust Credit Life Insurance Company 50% 100 West Clarendon, Suite 800 Phoenix, AZ 85013 EX-23 3 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 23.1 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in Registration Statement No. 33-55687 of First Commonwealth Financial Corporation on Form S-8 of our report dated January 28, 2000, appearing in this Annual Report on Form 10-K of First Commonwealth Financial Corporation for the year ended December 31, 1999. /S/Deloitte & Touche LLP Pittsburgh, Pennsylvania March 29, 2000 EX-23 4 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 23.2 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors First Commonwealth Financial Corporation: We consent to incorporation by reference in the registration statement (No. 33-55687) on Form S-8 of First Commonwealth Financial Corporation of our report dated February 17, 1999, relating to the consolidated balance sheet of Southwest National Corporation and subsidiary as of December 31, 1998, the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the two-year period ended December 31, 1998, which report appears in the December 31, 1999, annual report on Form 10-K of First Commonwealth Financial Corporation. /S/KPMG LLP Pittsburgh, Pennsylvania March 29, 2000 EX-24 5 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 24.1 - POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENT - that each person whose signature appears below constitutes and appoints Joseph E. O'Dell and David R. Tomb, Jr., and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to do done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE AND CAPACITY DATE /S/DAVID S. DAHLMANN March 14, 2000 David S. Dahlmann, Director /S/JOHN A. ROBERTSHAW, JR. March 14, 2000 John A. Robertshaw, Jr., Director /S/DAVID R. TOMB, JR. March 14, 2000 David R. Tomb, Jr., Sr. Vice President, Secretary and Treasurer and Director /S/JOHNSTON A. GLASS March 14, 2000 Johnston A. Glass, Director /S/RONALD C. GEISER March 14, 2000 Ronald C. Geiser, Director /S/DALE P. LATIMER March 14, 2000 Dale P. Latimer, Director /S/THOMAS L. DELANEY March 14, 2000 Thomas L. Delaney /S/E. H. BRUBAKER March 14, 2000 E. H. Brubaker, Director /S/JOSEPH E. O'DELL March 14, 2000 Joseph E. O'Dell, President and CEO and Director /S/HARVEY H. HEILMAN, JR. March 14, 2000 Harvey H. Heilman, Jr., Director /S/JOHN J. DOLAN March 14, 2000 John J. Dolan, Executive Vice President & Chief Financial Officer (1) /S/JAMES W. NEWILL March 16, 2000 James W. Newill, Director /S/RAY T. CHARLEY March 16, 2000 Ray T. Charley, Director /S/LAURIE STERN SINGER March 16, 2000 Laurie Stern Singer, Director (1) Also Chief Accounting Officer EX-27 6
9 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 92,673 1,218 8,700 0 1,144,042 448,347 435,000 2,503,687 33,539 4,340,846 2,948,829 424,827 42,152 638,355 0 0 62,525 224,158 4,340,846 196,428 100,853 226 297,507 103,331 152,653 144,854 9,450 565 93,615 72,642 53,030 0 0 53,030 0.88 0.88 7.59 12,765 15,815 62 0 32,304 9,596 1,381 33,539 30,472 0 3,067
-----END PRIVACY-ENHANCED MESSAGE-----