-----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, NeUMfVtA04tUxUV1mm8s4/K3AjJjBTJ89hDyqpyi9zGrqy6L/CWy+GmG8jaBAYpm esWbnlTonR8x+FudMGTxlg== 0000712537-00-000012.txt : 20000516 0000712537-00-000012.hdr.sgml : 20000516 ACCESSION NUMBER: 0000712537-00-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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-Q SEC ACT: SEC FILE NUMBER: 001-11138 FILM NUMBER: 631995 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C 20549 ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to 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 of (I.R.S. Employer incorporation or organization) Identification No.) 22 North Sixth Street Indiana, PA 15701 (Address of principal executive offices) (Zip Code) 724-349-7220 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report.) Indicate a check mark 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 X No . Number of shares outstanding of issuer's common stock, $1.00 Par Value as of May 12, 2000 was 58,095,061. FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Included in Part I of this report: PAGE First Commonwealth Financial Corporation and Subsidiaries Consolidated Balance Sheets . . . . . 3 Consolidated Statements of Income. . . . . . . . . 4 Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows. . . . . . . 6 Notes to Consolidated Financial Statements . . . . 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . 22 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . 23 Signatures . . . . . . . . . . . . . . . . . . . . Signature Page FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands) March 31, December 31, 2000 1999 ASSETS Cash and due from banks on demand.... $ 81,584 $ 92,673 Interest-bearing deposits with banks. 749 1,218 Federal funds sold .................. 1,775 8,700 Securities available for sale, at market.............................. 1,143,614 1,144,042 Securities held to maturity, at cost, (Market value $412,650 in 2000 and $435,000 in 1999).................. 426,485 448,347 Loans................................ 2,518,852 2,503,687 Unearned income.................... (3,135) (3,628) Allowance for credit losses........ (33,803) (33,539) Net loans....................... 2,481,914 2,466,520 Property and equipment............... 44,036 43,380 Other real estate owned.............. 1,840 1,707 Other assets......................... 139,168 134,259 TOTAL ASSETS.................... $4,321,165 $4,340,846 LIABILITIES Deposits (all domestic): Noninterest-bearing................ $ 243,507 $ 251,404 Interest-bearing................... 2,663,271 2,697,425 Total deposits.................. 2,906,778 2,948,829 Short-term borrowings................ 444,799 424,827 Other liabilities.................... 44,163 42,152 Company obligated mandatorily redeemable capital securities of subsidiary trust.................... 35,000 35,000 Other long-term debt................. 606,095 603,355 Total long-term debt............ 641,095 638,355 Total liabilities............... 4,036,835 4,054,163 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; 58,095,060 and 58,142,848 shares outstanding at March 31, 2000 and December 31, 1999, respectively....................... 62,525 62,525 Additional paid-in capital........... 68,170 68,330 Retained earnings.................... 261,091 257,773 Accumulated other comprehensive income (45,472) (40,304) Treasury stock (4,430,352 shares at March 31, 2000 and 4,382,564 at December 31, 1999, at cost)........ (55,934) (55,448) Unearned ESOP shares................. (6,050) (6,193) Total shareholders' equity......... 284,330 286,683 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $4,321,165 $4,340,846 The accompanying notes are an integral part of these consolidated financial statements. 3 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands except per share data)
For the 3 Months Ended March 31, 2000 1999 Interest Income Interest and fees on loans............ $51,110 $47,935 Interest and dividends on investments: Taxable interest.................... 22,392 20,465 Interest exempt from Federal income taxes.............................. 2,444 2,249 Dividends........................... 930 704 Interest on Federal funds sold........ 49 49 Interest on bank deposits............. 18 61 Total interest income.............. 76,943 71,463 Interest Expense Interest on deposits.................. 26,165 25,867 Interest on short-term borrowings..... 6,162 2,429 Interest on company obligated mandatorily redeemable capital securities of subsidiary trust....... 831 -0- Interest on other long-term debt...... 8,346 8,444 Total interest on long-term debt... 9,177 8,444 Total interest expense............. 41,504 36,740 Net Interest Income..................... 35,439 34,723 Provision for credit losses........... 2,505 2,213 Net interest income after provision for credit losses......................... 32,934 32,510 Other Income Securities gains...................... -0- 563 Trust income.......................... 1,362 1,814 Service charges on deposit accounts... 2,514 2,396 Gain on sale of loans................. 3 924 Other income.......................... 3,479 3,006 Total other income................. 7,358 8,703 Other Expenses Salaries and employee benefits........ 13,911 13,078 Net occupancy expense................. 1,714 1,756 Furniture and equipment expense....... 1,860 1,873 Data processing expense............... 767 899 Pennsylvania shares tax expense....... 894 847 Other operating expenses.............. 6,004 6,221 Total other expenses............... 25,150 24,674 Income before income taxes.............. 15,142 16,539 Applicable income taxes............... 3,691 4,534 Net income.............................. $11,451 $12,005 Average Shares Outstanding(a)...........57,505,462 61,152,708 Average Shares Outstanding Assuming Dilution(a)..................57,606,948 61,432,570 Per Share Data: Basic earnings per share.............. $ 0.20 $ 0.20 Diluted earnings per share............ $ 0.20 $ 0.20 Cash dividends per share.............. $ 0.140 $ 0.115 (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.
4 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (Dollars 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, 1998......$62,525 $ 68,978 $235,623 $ 2,199 $(5,913) $(8,007) $355,405 Comprehensive income Net income...................... -0- -0- 12,005 -0- -0- -0- 12,005 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities arising during the period.............. -0- -0- -0- (3,860) -0- -0- (3,860) Less: reclassification adjust- ment for gains on securities included in net income....... -0- -0- -0- ( 366) -0- -0- ( 366) Total other comprehensive income....................... -0- -0- -0- (4,226) -0- -0- (4,226) Total comprehensive income...... -0- -0- 12,005 (4,226) -0- -0- 7,779 Cash dividends declared......... -0- -0- (7,117) -0- -0- -0- (7,117) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 710 710 Discount on dividend reinvestment plan purchases................ -0- (179) -0- -0- -0- -0- (179) Treasury stock acquired......... -0- -0- -0- -0- -0- -0- -0- Treasury stock reissued......... -0- 1 -0- -0- 73 -0- 74 Balance at March 31, 1999.........$62,525 $ 68,800 $240,511 $(2,027) $(5,840) $(7,297) $356,672 Balance at December 31, 1999......$62,525 $ 68,330 $257,773 $(40,304) $(55,448) $(6,193) $286,683 Comprehensive income Net income...................... -0- -0- 11,451 -0- -0- -0- 11,451 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities arising during the period............ -0- -0- -0- ( 5,168) -0- -0- ( 5,168) Less: reclassification adjust- ment for gains on securities included in net income....... -0- -0- -0- -0- -0- -0- -0- Total other comprehensive income....................... -0- -0- -0- ( 5,168) -0- -0- ( 5,168) Total comprehensive income...... -0- -0- 11,451 (5,168) -0- -0- 6,283 Cash dividends declared......... -0- -0- (8,133) -0- -0- -0- (8,133) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 143 143 Discount on dividend reinvestment plan purchases................ -0- (147) -0- -0- -0- -0- (147) Treasury stock acquired......... -0- -0- -0- -0- (873) -0- (873) Treasury stock reissued......... -0- (88) -0- -0- 387 -0- 299 Tax benefit of stock options.... -0- 75 -0- -0- -0- -0- 75 Balance at March 31, 2000.........$62,525 $ 68,170 $261,091 $(45,472) $(55,934) $(6,050) $284,330 The accompanying notes are an integral part of these consolidated financial statements.
5 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the 3 Months Ended March 31, 2000 1999 Operating Activities Net income....................................... $11,451 $12,005 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses................... 2,505 2,213 Depreciation and amortization................. 1,773 2,217 Net gains on sales of assets.................. (389) (1,389) Income from increase in cash surrender value of bank owned life insurance................. (536) (519) Decrease in interest receivable............... 609 92 Decrease in interest payable.................. (720) (1,071) Increase in income taxes payable.............. 3,878 5,363 Change in deferred taxes...................... (162) (1,819) Other-net..................................... (3,100) (7,856) Net cash provided by operating activities... 15,309 9,236 Investing Activities Transactions with securities held to maturity: Proceeds from sales........................... -0- -0- Proceeds from maturities and redemptions...... 21,877 33,134 Purchases..................................... -0- (31,768) Transactions with securities available for sale: Proceeds from sales........................... -0- 38,085 Proceeds from maturities and redemptions...... 19,416 68,668 Purchases..................................... (26,954) (193,328) Proceeds from sales of loans and other assets.... 4,767 56,257 Investment in bank owned life insurance.......... -0- (20,000) Net decrease in time deposits with banks......... 469 55 Net increase in loans............................ (22,401) (42,454) Purchases of premises and equipment.............. (2,513) (1,134) Net cash used by investing activities....... (5,339) (92,485) Financing Activities Repayments of long-term debt..................... (25,117) (57) Proceeds from issuance of long-term debt......... 28,000 -0- Discount on dividend reinvestment plan purchases. (147) (178) Dividends paid................................... (8,141) (5,086) Net increase in Federal funds purchased.......... 125,050 64,900 Net increase (decrease) in other short-term borrowings..................................... (105,078) 33,008 Net decrease in deposits......................... (42,051) (26,041) Stock option tax benefit......................... 75 -0- Purchase of treasury stock....................... (873) -0- Proceeds from sale of treasury stock............. 298 74 Net cash provided (used) by financing activities................................. (27,984) 66,620 Net increase (decrease) in cash and cash equivalents................................ (18,014) (16,629) Cash and cash equivalents at January 1............. 101,373 97,615 Cash and cash equivalents at March 31.............. $83,359 $ 80,986 The accompanying notes are an integral part of these consolidated financial statements. 6 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) NOTE 1 Management Representation In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of financial position as of March 31, 2000 and the results of operations for the three month periods ended March 31, 2000 and 1999, and statements of cash flows and changes in shareholders' equity for the three month periods ended March 31, 2000 and 1999. The results of the three months ended March 31, 2000 and 1999 are not necessarily indicative of the results to be expected for the entire year. The interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements of First Commonwealth Financial Corporation and Subsidiaries, including the notes thereto. NOTE 2 Financial Statement Reclassifications Amounts in prior periods have been reclassified to conform to the presentation format used in 2000. The reclassifications had no effect on the Corporation's financial condition or results of operations. NOTE 3 Cash Flow Disclosures (dollar amounts in thousands) 2000 1999 Cash paid during the first three months of the year for: Interest $42,224 $37,811 Income Taxes $ -0- $ 950 Noncash investing and financing activities: ESOP loan reductions $ 143 $ 711 Loans transferred to other real estate owned and repossessed assets $ 2,349 $ 1,446 Gross decrease in market value adjustment to securities available for sale $(7,951) $(6,502) 7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000 (Unaudited) NOTE 4 Comprehensive Income Disclosures The following table identifies the related tax effects allocated to each component of other comprehensive income in the Statements of Changes in Shareholders' Equity: (dollar amounts in thousands)
March 31, 2000 March 31, 1999 Tax Net of Tax Net of Pre-tax (Expense) Tax Pre-tax (Expense) Tax Amount Benefit Amount Amount Benefit Amount Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period $(7,951) $2,783 $(5,168) $(5,939) $2,079 $(3,860) Less: reclassification adjustment for gains realized in net income -0- -0- -0- (563) 197 (366) Net unrealized gains (losses) (7,951) 2,783 (5,168) (6,502) 2,276 (4,226) Other comprehensive income $(7,951) $2,783 $(5,168) $(6,502) $2,276 $(4,226)
NOTE 5 New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities which require that an entity recognize all derivatives as either assets or liabilities in a balance sheet and measure those instruments at fair value. FAS No. 133 was amended by FASB statement No. 137 in June 1999. FAS No. 137 delays the effective date of FAS No. 133 to the first quarter of years beginning after June 15, 2000. Management's preliminary analysis is that adoption of FAS No. 133 would not have had a material impact on the Corporation's financial condition or results of operations. 8 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS First Three Months of 2000 as Compared to the First Three Months of 1999 This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and results of operations of First Commonwealth Financial Corporation (the "Corporation") including its subsidiaries. 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. Net income in the three months of 2000 was $11.5 million reflecting a decrease of $554 thousand over 1999 results of $12.0 million. The decrease in net income for the 2000 period was primarily the result of gains on the sale of securities and loans which were earned during the 1999 period. Basic earnings per share and diluted earnings per share were both $0.20 per share for the three months of 2000 and the three months of 1999. 9 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Three Months of 2000 as Compared to the First Three Months of 1999 (Continued) Basic earnings per share excluding gains on sale of assets was $0.19 for the three months of 2000 compared to $0.18 for the three months of 1999, representing an increase of 6%. Changes in net interest income increased earnings by $0.05 per share during 2000 while changes in salary and benefit expense decreased earnings by $0.03 during 2000. Return on average assets was 1.07% and return on average equity was 15.96% during the 2000 period, compared to 1.18% and 13.45%, respectively during the same period of 1999. 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 $35.4 million for the three months of 2000 compared to $34.7 million for the same period of 1999. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) was 3.71% for the three months of 2000 compared to 3.77% for the three months of 1999. The following table shows the effect of changes in volumes and rates on interest income and interest expense. Analysis of Changes in Net Interest Income (dollar amounts in thousands) 2000 Change from 1999 Total Change Due Change Due Change To Volume To Rate Interest-earning assets: Time deposits with banks $ (43) $ (39) $ (4) Securities 2,348 463 1,885 Federal funds sold -0- (7) 7 Loans 3,175 2,410 765 Total interest income 5,480 2,827 2,653 Interest-bearing liabilities: Deposits 298 315 (17) Short-term borrowings 3,733 3,191 542 Long-term debt 733 142 591 Total interest expense 4,764 3,648 1,116 Net interest income $ 716 $ (821) $1,537 Interest and fees on loans increased $3.2 million for 2000 over 1999 levels, primarily as a result of volume increases for commercial loans. Average loans for the three months of 2000 increased $123.3 million compared to averages for the three months of 1999 and included increases in commercial loans and municipal loans which were partially offset by decreases in average mortgage loans and credit card loans. The decrease in mortgage loans and credit card loans for the 2000 period resulted from the sale of $42.2 million of 1-4 family residential mortgage 10 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Three Months of 2000 as Compared to the First Three Months of 1999 (Continued) loans in the first quarter of 1999 and the sale of $20.4 million of consumer credit card loans during the second quarter of 1999. The total yield on loans for the first quarter of 2000 was 8.35% representing an increase of 9 basis points (0.09%) compared to the first quarter of 1999. Interest income on investments increased $2.3 million for the three months of 2000 compared to the corresponding period of 1999 and included increases due to rate for U.S. government agency securities and increases due to volume for corporate bonds. Yields on U.S. government agency securities increased 44 basis points (0.44%) for the three months of 2000 compared to the three months of 1999. Average balances of corporate bonds increased $82.7 million for the first quarter of 2000 compared to averages for the first quarter of 1999. Yields on investments for the first quarter of 2000 were 6.88% compared to 6.40% for the first quarter of 1999 period. Interest on deposits increased $298 thousand for the 2000 period compared to 1999, and included increases in interest on time deposits of $461 thousand and decreases in interest on total savings deposits of $163 thousand as customers reinvested deposits in longer term and higher yielding deposit products. Average savings deposits decreased $45.0 million for the three months of 2000 compared to 1999 averages while average time deposits increased $48.8 million for the 2000 period compared to 1999 averages. Interest expense on short-term borrowings increased $3.7 million for the three months of 2000 compared to the three months of 1999 as the average balance of repurchase agreements increased $181.2 million over 1999 averages. The cost of short-term borrowings for the three months of 2000 also increased by 98 basis points (0.98%) compared to 1999 costs of 4.64%. Interest expense on long-term debt increased $733 thousand for 2000 compared to the 1999 period. The long-term debt increase for 2000 resulted primarily from the funding of the repurchase of 3.8 million shares of the Corporation's common stock through a "modified Dutch Auction" tender offer during 1999. The aggregate amount of $49.7 million paid by the Corporation in connection with the repurchase of common shares was funded through the issuance of capital securities and the issuance of a bank loan from an unrelated financial institution. Capital securities borrowings in the amount of $35 million were issued during the third quarter of 1999 bearing an interest rate of 9.50% and maturing in thirty years. 11 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Three Months of 2000 as Compared to the First Three Months of 1999 (Continued) The provision for credit losses was $2.5 million for the three months of 2000 compared to $2.2 million during the 1999 period. Net charge-offs against the allowance for credit losses were $2.2 million in the 2000 period and $1.4 million in the 1999 period reflecting a increase of $830 thousand. The 2000 increase in net charge-offs included increases in net charge-offs for commercial loans not secured by real estate of $622 thousand and increases in net charge-offs of credit card loans of $189 thousand compared to 1999 net charge-offs. See the "Credit Review" section for an analysis of the quality of the loan portfolio. Below is an analysis of the consolidated allowance for credit losses for the three month periods ended March 31, 2000 and 1999. 2000 1999 (Amounts in thousands) Balance January 1, $33,539 $32,304 Loans charged off: Commercial, financial and agricultural 839 100 Real estate-construction -0- -0- Real estate-commercial -0- 11 Real estate-residential 191 288 Loans to individuals 1,464 1,329 Lease financing receivables 97 -0- Total loans charged off 2,591 1,728 Recoveries of previously charged off loans: Commercial, financial and agricultural 132 25 Real estate-construction -0- -0- Real estate-commercial -0- -0- Real estate-residential 7 14 Loans to individuals 195 278 Lease financing receivables 16 -0- Total recoveries 350 317 Net charge offs 2,241 1,411 Provision charged to operations 2,505 2,213 Balance March 31, $33,803 $33,106 12 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Three Months of 2000 as Compared to the First Three Months of 1999 (Continued) Net securities gains decreased $563 thousand during the 2000 period as there were no securities gains during the 2000 period. The securities gains during 1999 resulted in part from the sales of fixed rate U.S. government agency securities and U.S. Treasury securities classified as securities "available for sale" having book values of $15.0 million and $21.9 million, respectively, which resulted in security gains of $167 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. During the three months of 2000 gains on the sale of loans were $3 thousand compared to gains on sale of loans of $924 thousand for the three months of 1999. 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 which generated a gain of $890 thousand. Service charges on deposits were $2.5 million for the first quarter of 2000 compared to $2.4 million for the first quarter of 1999. Other income for the first three months of 2000 was $3.5 million, representing an increase of $473 thousand compared to the first three months of 1999. Other income for the 2000 period reflected increases in gains on sale of fixed assets of $515 thousand, merchant discount of $117 thousand and reinsurance income of $55 thousand which were partially offset by decreases in loan servicing revenue of $160 thousand and letter of credit fees of $33 thousand. Noninterest expense was $25.2 million for the three months of 2000 reflecting an increase of $476 thousand over the 1999 level of $24.7 million. Although total noninterest expense for 2000 increased over 1999 levels, total noninterest expense as a percent of average assets declined from 2.42% for the three months of 1999 to 2.34% for the same period of 2000. Employee costs were $13.9 million in 2000, representing 1.30% of average assets on an annualized basis compared to $13.1 million or 1.28% of average assets on an annualized basis for 1999. Employee costs for the three months of 2000 reflected increases in total salaries of $483 thousand which included true salary increases of $218 thousand and increases due to reductions in deferred loan origination costs of $265 thousand compared to the corresponding period of 1999. True salary increases for the 2000 period represented an increase of only 1.98% compared to 1999 salaries. The number of full time equivalent employees at March 31, 2000 was 1,432 compared to 1,478 at March 31, 1999, primarily as a result of the early retirement plan offered to employees during 1998. Employee benefit costs for the first three months of 2000 reflected increases of $350 thousand over the first three months of 1999 and included increases in health insurance costs of $122 thousand, increases in the 401(k) plan expenses of $117 thousand 13 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Three Months of 2000 as Compared to the First Three Months of 1999 (Continued) and increases due to the impact of deferred loan origination costs of $75 thousand compared to the first three months of 1999. Outside data processing expenses for the three months of 2000 decreased $132 thousand over the three months of 1999 as a result of decreases in the cost of credit card processing and the elimination of outside processing costs for a subsidiary sold during the second quarter of 1999. Other operating expenses for the 2000 period were $6.0 million reflecting a decrease of $217 thousand from the 1999 amount of $6.2 million. Other operating expenses for the first three months of 2000 included a decrease in write-down of mortgage servicing rights in the amount of $336 thousand. Legal fees, other professional fees and stationery and supplies expenses reflected decreases for the first three months of 2000 of $148 thousand, $185 thousand and $85 thousand, respectively compared to the 1999 period. The first quarter of 2000 included increases in charge card interchange expenses, collection and repossession expenses and FDIC expense compared to the first quarter of 1999. Income tax expense was $3.7 million for the three months of 2000 compared to $4.5 million for the same period of 1999. The Corporation's effective tax rate was 24.4% for the 2000 period compared to 27.4% for 1999. The reduction of the Corporation's effective tax rate for 2000 was primarily the result of increased tax free income from municipal loans during 2000 compared to the 1999 period. 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. 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 14 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY (Continued) 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. Net loans increased by $15.4 million in the first three months of 2000 as increases in commercial loans secured by real estate and increases in municipal loans were partially offset by decreases in loans to individuals and decreases in commercial loans not secured by real estate. Growth of the commercial loan portfolio has been achieved in part through continued development of commercial lending specialists. Total deposits decreased $42.1 million for the first three months of 2000 and included decreases in noninterest bearing deposits of $7.9 million and decreases in total savings deposits of $39.1 million which were partially offset by increases in time deposits of $4.9 million since year-end. Customers continue to reinvest savings deposits in higher yielding investments both within and outside the commercial banking industry. Future sources of deposits utilized could include the use of brokered time deposits offered outside the Corporation's traditional market area. Marketable securities that the Corporation holds in its investment portfolio are an additional source of liquidity. These securities are classified as "securities available for sale" and 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 March 31, 2000, securities available for sale had an amortized cost of $1,213.5 million and an approximate fair value of $1,143.6 million. 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. 15 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Sensitivity (Continued) An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period. If interest-sensitive assets ("ISA") exceed interest-sensitive liabilities ("ISL") during the 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. 16 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Sensitivity (Continued) 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 March 31, 2000 and December 31, 1999 (Dollar amounts in thousands): March 31, 2000 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 587,458 $117,887 $ 227,739 $ 933,084 Investments.............. 37,176 33,696 62,246 133,118 Other interest-earning assets.................. 11,114 3,776 3,176 18,066 Total interest-sensitive assets................ 635,748 155,359 293,161 1,084,268 Certificates of deposits. 315,636 179,782 271,124 766,542 Other deposits........... 1,025,683 -0- -0- 1,025,683 Borrowings............... 468,014 25,301 1,436 494,751 Total interest-sensitive liabilities........... 1,809,333 205,083 272,560 2,286,976 GAP....................$(1,173,585) $(49,724) $ 20,601 $(1,202,708) ISA/ISL.................. 0.35 0.76 1.08 0.47 Gap/Total assets......... 27.16% 1.15% 0.48% 27.83% December 31, 1999 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 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 deposits. 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% 17 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Sensitivity (Continued) 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 March 31, 2000, indicated that a 300 basis point (3.00%) movement in interest rates in either direction over the next twelve months would not have a significant impact on the Corporation's anticipated net interest income over that time frame 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. 18 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW The following table identifies amounts of loan losses and nonperforming loans. Past due loans are those 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 and are in compliance with the restructured terms. At March 31, 2000 1999 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ 11,643 $ 10,649 Past due loans 14,468 13,013 Renegotiated loans 1,482 64 Total Nonperforming Loans $ 27,593 $ 23,726 Other real estate owned $ 1,840 $ 2,053 Loans outstanding at end of period $2,515,717 $2,360,694 Average loans outstanding (year-to-date) $2,507,679 $2,384,385 Nonperforming loans as percent of total loans 1.10% 1.01% Provision for credit losses $ 2,505 $ 2,213 Net charge-offs $ 2,241 $ 1,411 Net charge-offs as percent of average loans outstanding 0.09% 0.06% Provision for credit losses as percent of net charge-offs 111.78% 156.84% Allowance for credit losses as percent of average loans outstanding 1.35% 1.39% Allowance for credit losses as percent of end-of-period loans outstanding 1.34% 1.40% Allowance for credit losses as percent of nonperforming loans 122.51% 139.53% 19 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW (Continued) The Corporation considers a loan to be impaired when, based on current information and events, it is probable that the Corporation 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. Impaired loans include loans on a nonaccrual basis and renegotiated loans. The following table identifies impaired loans, and information regarding the relationship of impaired loans to the reserve for credit losses at March 31, 2000 and March 31, 1999: 2000 1999 (amounts in thousands) Recorded investment in impaired loans at end of period $13,125 $10,713 Year to date average balance of impaired loans $12,932 $10,373 Allowance for credit losses related to impaired loans $ 2,928 $ 2,431 Impaired loans with an allocation of the allowance for credit losses $ 5,568 $ 5,180 Impaired loans with no allocation of the allowance for credit losses $ 7,557 $ 5,533 Year to date income recorded on impaired loans on a cash basis $ 199 $ 159 Other than those described above, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. Additionally, the portfolio is well diversified and as of March 31, 2000, there were no significant concentrations of credit. Nonperforming loans at March 31, 2000 increased $3.9 million compared to 1999 levels and included increases in past due loans, nonaccrual loans and renegotiated loans of $1.5 million, $994 thousand and $1.4 million, respectively. Past due loans reflected increases in past due loans secured by residential real estate of $1.6 million. Nonaccrual loans reflected increases in nonaccrual loans secured by commercial real estate of $617 thousand and increases in nonaccrual commercial loans not secured by real estate of $659 thousand. Increases in nonaccrual 20 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW (Continued) commercial loans for 2000 were partially offset by decreases in nonaccrual loans secured by residential real estate of $170 thousand. The increase in renegotiated loans at March 31, 2000 compared to the corresponding period of 1999 were the result of the modification of loan terms for one commercial borrower. Although nonperforming loans as a percent of total loans have increased from 1.01% at March 31, 1999 to 1.10% at March 31, 2000 this ratio has decreased since year-end 1999 amounts of 1.15%. The allowance for credit losses as a percent of nonperforming loans at March 31, 2000 has also increased over year-end 1999 levels. The Corporation's loan portfolio continues to be monitored by senior management to identify potential portfolio risks and detect potential credit deterioration in the early stages. Credit risk is mitigated through the use of sound underwriting policies and collateral requirements. Management attempts to minimize loan losses by analyzing and modifying collection techniques on a periodic basis. Management believes that the allowance for credit losses and nonperforming loans remain safely within acceptable levels. CAPITAL RESOURCES Equity capital decreased $2.4 million in the first three months of 2000. Dividends declared reduced equity by $8.1 million during the 2000 period, while earnings retention was $3.3 million, representing an earnings retention rate of 29%. The retained net income remains in permanent capital to fund future growth and expansion. Payments by the Corporation's Employee Stock Ownership Plan ("ESOP") to reduce debt it incurred to acquire the Corporation's common stock for future distribution as employee compensation, net of fair value adjustments to Unearned ESOP shares, increased equity by $143 thousand. Amounts paid to fund the discount on reinvested dividends reduced equity by $147 thousand. The market value adjustment to securities available for sale decreased equity by $5.2 million. The cost of purchasing treasury shares decreased equity by $873 thousand while proceeds from the reissuance of treasury shares to provide for stock options exercised increased equity by $299 thousand during 2000. 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. 21 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CAPITAL RESOURCES (Continued) The Federal Reserve Board has issued risk-based capital adequacy guidelines which are designed principally as a measure of credit risk. These guidelines require: (1) at least 50% of a banking organization's total capital be common and other "core" equity capital ("Tier I Capital"); (2) assets and off-balance-sheet items be weighted according to risk; (3) the total capital to risk-weighted assets ratio be at least 8%; and (4) a minimum leverage ratio of Tier I capital to average total assets. The minimum leverage ratio is not specifically defined, but is generally expected to be 3-5 percent for all but the most highly rated banks, as determined by a regulatory rating system. The table below presents the Corporation's capital position at March 31, 2000: Percent Amount of Adjusted (in thousands) Assets Tier I Capital $352,849 13.1% Risk-Based Requirement 107,689 4.0 Total Capital 386,501 14.4 Risk-Based Requirement 215,378 8.0 Minimum Leverage Capital 352,849 8.2 Minimum Leverage Requirement 129,303 3.0 At March 31, 2000 the Corporation's banking subsidiaries are considered well capitalized as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information appearing in Item 2 of this report under the caption "Interest Sensitivity" is incorporated herein by reference in response to this item. 22 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There were 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 a material adverse effect on the consolidated operations or financial position of the Corporation and its subsidiaries. ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 23 SIGNATURES Pursuant to the requirements 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. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) DATED: MAY 15, 2000 /S/ Joseph E. O'Dell Joseph E. O'Dell, President and Chief Executive Officer DATED: MAY 15, 2000 /S/ John J. Dolan John J. Dolan, Executive Vice President and Chief Financial Officer 24 EX-27 2
9 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 81,584 749 1,775 0 1,143,614 426,485 412,650 2,518,852 33,803 4,321,165 2,906,778 444,799 44,163 641,095 0 0 62,525 221,805 4,321,165 51,110 25,766 67 76,943 26,165 41,504 35,439 2,505 0 25,150 15,142 11,451 0 0 11,451 0.20 0.20 7.80 11,643 14,468 1,482 0 33,539 2,591 350 33,803 0 0 0
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