-----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, LNxREv8uqRKZZcem7L2GwEytgwbEQR46DANY9cFzCm+hnNgfmLH4vP5NMMtg5WV3 Tkl4mvgbAD4ev50ABvr7hA== /in/edgar/work/20000814/0000712537-00-000017/0000712537-00-000017.txt : 20000921 0000712537-00-000017.hdr.sgml : 20000921 ACCESSION NUMBER: 0000712537-00-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: [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: 700275 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 0001.txt 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 June 30, 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 August 8, 2000 was 58,095,060. 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 . . . . . . . . . . . . . . . . . . . . . . . . 24 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . 25 Signatures . . . . . . . . . . . . . . . . . . . . Signature Page FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands) June 30, December 31, 2000 1999 ASSETS Cash and due from banks on demand.... $ 87,968 $ 92,673 Interest-bearing deposits with banks. 727 1,218 Federal funds sold .................. 1,450 8,700 Securities available for sale, at market.............................. 1,131,750 1,144,042 Securities held to maturity, at cost, (Market value $400,740 in 2000 and $435,000 in 1999).................. 413,301 448,347 Loans................................ 2,503,117 2,503,687 Unearned income.................... (2,695) (3,628) Allowance for credit losses........ (33,721) (33,539) Net loans....................... 2,466,701 2,466,520 Property and equipment............... 43,993 43,380 Other real estate owned.............. 1,752 1,707 Other assets......................... 150,077 134,259 TOTAL ASSETS.................... $4,297,719 $4,340,846 LIABILITIES Deposits (all domestic): Noninterest-bearing................ $ 259,115 $ 251,404 Interest-bearing................... 2,751,257 2,697,425 Total deposits.................. 3,010,372 2,948,829 Short-term borrowings................ 308,496 424,827 Other liabilities.................... 41,781 42,152 Company obligated mandatorily redeemable capital securities of subsidiary trust.................... 35,000 35,000 Other long-term debt................. 607,730 603,355 Total long-term debt............ 642,730 638,355 Total liabilities............... 4,003,379 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 June 30, 2000 and December 31, 1999, respectively....................... 62,525 62,525 Additional paid-in capital........... 68,023 68,330 Retained earnings.................... 266,047 257,773 Accumulated other comprehensive income (40,414) (40,304) Treasury stock (4,430,352 shares at June 30, 2000 and 4,382,564 at December 31, 1999, at cost)........ (55,934) (55,448) Unearned ESOP shares................. (5,907) (6,193) Total shareholders' equity......... 294,340 286,683 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $4,297,719 $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 Quarter For the 6 Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Interest Income Interest and fees on loans....... $51,955 $48,049 $103,065 $95,984 Interest and dividends on investments: Taxable interest............... 21,941 22,095 44,333 42,560 Interest exempt from Federal income taxes.................. 2,421 2,348 4,865 4,597 Dividends...................... 904 734 1,834 1,438 Interest on Federal funds sold... 74 10 123 59 Interest on bank deposits........ 22 30 40 91 Total interest income......... 77,317 73,266 154,260 144,729 Interest Expense Interest on deposits............. 27,544 25,573 53,709 51,440 Interest on short-term borrowings 5,612 2,852 11,774 5,281 Interest on company obligated mandatorily redeemable capital securities of subsidiary trust.. 831 -0- 1,662 -0- Interest on other long-term debt. 8,456 8,564 16,802 17,008 Total interest on long-term debt......................... 9,287 8,564 18,464 17,008 Total interest expense........ 42,443 36,989 83,947 73,729 Net Interest Income................ 34,874 36,277 70,313 71,000 Provision for credit losses...... 2,415 2,337 4,920 4,550 Net interest income after provision for credit losses................ 32,459 33,940 65,393 66,450 Other Income Securities gains................. 1,686 -0- 1,686 563 Trust income..................... 1,402 1,209 2,764 3,023 Service charges on deposit accounts........................ 2,622 2,590 5,136 4,986 Gain on sale of loans............ 70 3,978 73 4,902 Other income..................... 4,160 3,057 7,639 6,063 Total other income............ 9,940 10,834 17,298 19,537 Other Expenses Salaries and employee benefits... 12,930 12,520 26,841 25,598 Net occupancy expense............ 1,606 1,609 3,320 3,365 Furniture and equipment expense.. 1,948 1,922 3,808 3,795 Data processing expense.......... 924 863 1,691 1,762 Pennsylvania shares tax expense.. 916 883 1,810 1,730 Other operating expenses......... 6,724 6,213 12,728 12,434 Total other expenses.......... 25,048 24,010 50,198 48,684 Income before income taxes......... 17,351 20,764 32,493 37,303 Applicable income taxes.......... 4,261 5,938 7,952 10,472 Net income......................... $13,090 $14,826 $24,541 $26,831 Average Shares Outstanding(a)......57,515,772 61,203,388 57,510,617 61,178,188 Average Shares Outstanding Assuming Dilution(a).............57,566,079 61,376,932 57,586,513 61,404,598 Per Share Data(a): Basic earnings per share......... $ 0.23 $ 0.24 $ 0.43 $ 0.44 Diluted earnings per share....... $ 0.23 $ 0.24 $ 0.43 $ 0.44 Cash dividends per share......... $ 0.140 $ 0.130 $ 0.280 $ 0.245 (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- 26,831 -0- -0- -0- 26,831 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities arising during the period.............. -0- -0- -0- (28,548) -0- -0- (28,548) 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- (28,914) -0- -0- (28,914) Total comprehensive income...... -0- -0- 26,831 (28,914) -0- -0- (2,083) Cash dividends declared......... -0- -0- (15,171) -0- -0- -0- (15,171) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 853 853 Discount on dividend reinvestment plan purchases................ -0- (233) -0- -0- -0- -0- (233) Treasury stock acquired......... -0- -0- -0- -0- -0- -0- -0- Treasury stock reissued......... -0- (291) -0- -0- 700 -0- 409 Balance at June 30, 1999..........$62,525 $ 68,454 $247,283 $(26,715) $ (5,213) $(7,154) $339,180 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- 24,541 -0- -0- -0- 24,541 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities arising during the period............ -0- -0- -0- 986 -0- -0- 986 Less: reclassification adjust- ment for gains on securities included in net income....... -0- -0- -0- (1,096) -0- -0- (1,096) Total other comprehensive income....................... -0- -0- -0- (110) -0- -0- (110) Total comprehensive income...... -0- -0- 24,541 (110) -0- -0- 24,431 Cash dividends declared......... -0- -0- (16,267) -0- -0- -0- (16,267) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 286 286 Discount on dividend reinvestment plan purchases................ -0- (294) -0- -0- -0- -0- (294) 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 June 30, 2000..........$62,525 $ 68,023 $266,047 $(40,414) $(55,934) $(5,907) $294,340
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 6 Months Ended June 30, 2000 1999 Operating Activities Net income....................................... $24,541 $26,831 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses................... 4,920 4,550 Depreciation and amortization................. 3,558 4,048 Net gains on sales of assets.................. (1,933) (5,194) Income from increase in cash surrender value of bank owned life insurance................. (1,732) (1,056) Decrease (increase) in interest receivable.... 615 (635) Increase (decrease) in interest payable....... 683 (3,134) Increase in income taxes payable.............. 201 1,870 Change in deferred taxes...................... 30 (1,902) Other-net..................................... (1,150) (7,794) Net cash provided by operating activities... 29,733 17,584 Investing Activities Transactions with securities held to maturity: Proceeds from sales........................... -0- -0- Proceeds from maturities and redemptions...... 40,000 69,747 Purchases..................................... (4,931) (45,777) Transactions with securities available for sale: Proceeds from sales........................... 16,358 38,484 Proceeds from maturities and redemptions...... 44,315 113,743 Purchases..................................... (46,887) (309,355) Proceeds from sales of loans and other assets.... 13,520 86,485 Sale of subsidiary............................... -0- (2,396) Investment in bank owned life insurance.......... (15,000) (20,000) Net decrease in time deposits with banks......... 491 1,408 Net increase in loans............................ (18,415) (79,422) Purchases of premises and equipment.............. (3,944) (2,192) Net cash provided (used) by investing activities.................................. 25,507 (149,275) Financing Activities Repayments of other long-term debt............... (25,240) (110) Proceeds from issuance of other long-term debt... 29,900 9,000 Discount on dividend reinvestment plan purchases. (294) (233) Dividends paid................................... (16,273) (12,202) Net increase in Federal funds purchased.......... 4,875 9,925 Net increase (decrease) in other short-term borrowings..................................... (121,206) 73,359 Net decrease in deposits......................... 61,543 37,637 Stock option tax benefit......................... 75 -0- Purchase of treasury stock....................... (873) -0- Proceeds from sale of treasury stock............. 298 409 Net cash provided (used) by financing activities................................. (67,195) 117,785 Net decrease in cash and cash equivalents... (11,955) (13,906) Cash and cash equivalents at January 1............. 101,373 97,615 Cash and cash equivalents at June 30............... $89,418 $ 83,709 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 June 30, 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 June 30, 2000 and the results of operations for the three month and six month periods ended June 30, 2000 and 1999, and statements of cash flows and changes in shareholders' equity for the six month periods ended June 30, 2000 and 1999. The results of the three and six months ended June 30, 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 six months of the year for: Interest $83,264 $ 76,862 Income Taxes $ 7,725 $ 10,450 Noncash investing and financing activities: ESOP loan reductions $ 286 $ 853 Loans transferred to other real estate owned and repossessed assets $ 3,649 $ 2,463 Gross increase (decrease) in market value adjustment to securities available for sale $ (169) $(44,483) 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) June 30, 2000 June 30, 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 $ 1,517 $(531) $ 986 $(43,920) $15,372 $(28,548) Less: reclassification adjustment for gains realized in net income (1,686) 590 (1,096) (563) 197 (366) Net unrealized gains (losses) (169) 59 (110) (44,483) 15,569 (28,914) Other comprehensive income $ (169) $ 59 $ (110) $(44,483) $15,569 $(28,914)
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 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 will not have 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 Six Months of 2000 as Compared to the First Six 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 six months of 2000 was $24.5 million reflecting a decrease of $2.3 million over 1999 results of $26.8 million. The decrease in net income for the 2000 period was primarily the result of gains on the sale of loans which were earned during the 1999 period. Basic earnings per share and diluted earnings per share were $0.43 for the six months of 2000 compared to basic earnings per share and diluted earnings per share of $0.44 for the six months of 1999. Basic earnings per share excluding gains on sale of assets was $0.40 for the six months of 2000 compared to $0.38 for the six months of 1999, representing an increase of 5%. Return on average assets was 1.15% and return on average equity was 17.00% during the 2000 period, compared to 1.29% and 14.95%, 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 $70.3 million for the six months of 2000 compared to $71.0 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 3.70% for the six months of 2000 compared to 3.80% for the six months of 1999. The reduction in net interest margin for the 2000 period compared to 1999 was related to the interest expense on funds borrowed to acquire treasury shares. 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 Six Months of 2000 as Compared to the First Six Months of 1999 (Continued) 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 $ (51) $ (47) $ (4) Securities 2,437 (759) 3,196 Federal funds sold 64 39 25 Loans 7,081 4,951 2,130 Total interest income 9,531 4,184 5,347 Interest-bearing liabilities: Deposits 2,269 685 1,584 Short-term borrowings 6,493 5,100 1,393 Long-term debt 1,456 277 1,179 Total interest expense 10,218 6,062 4,156 Net interest income $ (687) $(1,878) $1,191 Interest and fees on loans increased $7.1 million for 2000 over 1999 levels, primarily as a result of volume increases and rate increases for commercial loans. Average loans for the six months of 2000 increased $128.7 million compared to averages for the six months of 1999 and included increases in commercial loans and municipal loans which were partially offset by decreases in average consumer loans. The decrease in consumer loans for the 2000 period resulted from the sale of $42.2 million of 1-4 family residential mortgage loans in the first quarter of 1999 and the sale of $20.4 million of consumer credit card loans during the second quarter of 1999. The total yield on loans for the first half of 2000 was 8.41% representing an increase of 18 basis points (0.18%) compared to the first half of 1999. Interest income on investments increased $2.4 million for the six 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 40 basis points (0.40%) for the six months of 2000 compared to the six months of 1999. Average balances of corporate bonds increased $70.1 million for the first half of 2000 compared to averages for the first half of 1999. Yields on investments for the first six months of 2000 were 6.89% compared to 6.44% for the first six months of 1999 period. 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 Six Months of 2000 as Compared to the First Six Months of 1999 (Continued) Interest on deposits increased $2.3 million for the 2000 period compared to 1999, as interest on time deposits increased $2.4 million for the six months of 2000 compared to 1999. Average time deposits increased $51.7 million for the six months of 2000 compared to 1999 averages resulting in an increase in interest expense due to volume of $1.4 million. The cost of time deposits for the six months of 2000 increased by 12 basis points (0.12%) compared to 1999 costs of 5.22% resulting in an increase in interest expense due to rate of $1.0 million. Interest expense on short-term borrowings increased $6.5 million for the six months of 2000 compared to the six months of 1999 as the average balance of repurchase agreements increased $181.0 million over 1999 averages. The cost of short-term borrowings for the six months of 2000 also increased by 113 basis points (1.13%) compared to 1999 costs of 4.65%. Interest expense on long-term debt increased $1.5 million for 2000 compared to the 1999 period. The long-term debt increase for 2000 resulted primarily from the funding of the repurchase of 3.8 million shares of the Corporation's common stock through a "modified Dutch Auction" tender offer during 1999. The aggregate amount of $49.7 million paid by the Corporation in connection with the repurchase of common shares was funded through the issuance of capital securities and the issuance of a bank loan from an unrelated financial institution. Capital securities borrowings in the amount of $35 million were issued during the third quarter of 1999 bearing an interest rate of 9.50% and maturing in thirty years. The provision for credit losses was $4.9 million for the six months of 2000 compared to $4.6 million during the 1999 period. Net charge-offs against the allowance for credit losses were $4.7 million in the 2000 period and $3.2 million in the 1999 period reflecting an increase of $1.5 million. The 2000 increase in net charge-offs included increases in net charge-offs for commercial loans not secured by real estate of $1.8 million compared to 1999 net charge-offs. See the "Credit Review" section for an analysis of the quality of the loan portfolio. 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 Six Months of 2000 as Compared to the First Six Months of 1999 (Continued) Below is an analysis of the consolidated allowance for credit losses for the six month periods ended June 30, 2000 and 1999. 2000 1999 (Amounts in thousands) Balance January 1, $33,539 $32,304 Loans charged off: Commercial, financial and agricultural 2,027 201 Real estate-construction -0- -0- Real estate-commercial -0- 67 Real estate-residential 338 625 Loans to individuals 2,812 2,972 Lease financing receivables 226 26 Total loans charged off 5,403 3,891 Recoveries of previously charged off loans: Commercial, financial and agricultural 192 143 Real estate-construction -0- -0- Real estate-commercial -0- -0- Real estate-residential 15 10 Loans to individuals 433 527 Lease financing receivables 25 1 Total recoveries 665 681 Net charge offs 4,738 3,210 Provision charged to operations 4,920 4,550 Balance June 30, $33,721 $33,644 Net securities gains increased $1.1 million during the 2000 period from $563 thousand reported in 1999. The securities gains during 2000 resulted primarily from the sale of Pennsylvania bank stocks with a book value of $14.2 million. The securities gains during 1999 resulted in part from the sales of fixed rate U.S. government agency securities and U.S. Treasury securities classified as securities "available for sale" having book values of $15.0 million and $21.9 million, respectively, which resulted in security gains of $167 thousand and $317 thousand, respectively. Proceeds from the sale of U.S. Treasury securities in 1999 were the primary funding source for the acquisition of $20 million of bank owned life insurance during the first quarter of 1999. 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 Six Months of 2000 as Compared to the First Six Months of 1999 (Continued) During the six months of 2000 gains on the sale of loans were $73 thousand compared to gains on sale of loans of $4.9 million for the six 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 and the sale of $20.4 million of retail credit card loans during the second quarter of 1999 which resulted in gains of $890 thousand and $4.0 million, respectively. Service charges on deposits were $5.1 million for the first half of 2000 compared to $5.0 million for the first half of 1999. Other income for the first six months of 2000 was $7.6 million reflecting an increase of $1.6 million compared to the first six months of 1999. Other income for the 2000 period reflected increases in gains on sale of fixed assets of $515 thousand, merchant discount of $267 thousand and reinsurance income of $73 thousand. Other income for the 2000 period also included an increase in income from bank owned life insurance resulting in part from claim income. Noninterest expense was $50.2 million for the six months of 2000 reflecting an increase of $1.5 million over the 1999 level of $48.7 million. Total noninterest expense as a percent of average assets was 2.34% for the 2000 period and 2.35% for the 1999 period. Employee costs were $26.8 million in 2000, representing 1.25% of average assets on an annualized basis compared to $25.6 million or 1.23% of average assets on an annualized basis for 1999. The number of full time equivalent employees at June 30, 2000 was 1,469 compared to 1,476 at June 30, 1999. Other operating expenses for the 2000 period were $12.7 million reflecting an increase of $294 thousand over the 1999 amount of $12.4 million. The first six months of 2000 included increases in charge card interchange expenses, collection and repossession expenses and telephone expense of $105 thousand, $227 thousand and $129 thousand, respectively. The 2000 period also reflected an increase in FDIC expenses resulting from rate changes as the FDIC Bank Insurance Fund and Savings and Loan Insurance Fund rates were standardized. Legal fees, other professional fees, stationery and supplies expenses and postage expenses reflected decreases for the first half of 2000 compared to the 1999 period. Other operating expenses for the first six months of 2000 also included a decrease in the write-down of mortgage servicing rights in the amount of $336 thousand related to the disposition of BSI in 1999. 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 Six Months of 2000 as Compared to the First Six Months of 1999 (Continued) Income tax expense was $8.0 million for the six months of 2000 compared to $10.5 million for the same period of 1999. The Corporation's effective tax rate was 24.5% for the 2000 period compared to 28.1% 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 and bank owned life insurance during 2000 compared to the 1999 period. Three Months ended June 30, 2000 as Compared to the Three Months Ended June 30, 1999 Net income was $13.1 million for the second quarter of 2000, a decrease of $1.7 million over 1999 results of $14.8 million. Net income excluding the impact of securities transactions and gain on sale of loans reflected a decrease of $292 thousand when comparing the second quarter of 2000 to the second quarter of 1999. Basic earnings per share was $0.23 during the 2000 quarter compared to $0.24 for the same period of 1999. Basic earnings per share excluding the impact of securities transactions and gains on sale of loans was $0.21 during the 2000 quarter compared to $0.20 for the same period of 1999. Return on average assets was 1.22% and return on average equity was 18.03% during the 2000 quarter, compared to 1.41% and 16.42% respectively, during the 1999 quarter. Net interest income for the second quarter of 2000 of $34.9 million represented a decrease of $1.4 million over the second quarter of 1999. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) for the 2000 period was 3.68%, reflecting a decrease of 14 basis points (0.14%) from 3.82% reported in 1999. The reduction in net interest margin was related to the interest expense on funds borrowed to acquire treasury shares. Interest and fees on loans for the three months ended June 30, 2000 increased $3.9 million compared to the three months ended June 30, 1999. The increase in interest and fees on loans for 2000 over 1999 levels was primarily a result of volume increases and rate increases for commercial loans. Average loans for the second quarter of 2000 increased $134.2 million compared to averages for the second quarter 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 total yield on loans for the second quarter of 2000 was 8.47% representing an increase of 26 basis points (0.26%) compared to the second quarter of 1999. 14 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) Three Months ended June 30, 2000 as Compared to the Three Months Ended June 30, 1999 (Continued) Interest income on investments for the three months ended June 30, 2000 was $25.3 million, reflecting an increase of $89 thousand over the three months ended June 30, 1999. Rate increases for investments during the second quarter of 2000 were offset by volume decreases compared to the 1999 period. Yields on investments for the 2000 quarter were 6.90% compared to 6.48% for the same period of 1999 reflecting an increase of 42 basis points (0.42%). Interest on deposits for the second quarter of 2000 was $27.5 million reflecting an increase of $2.0 million compared to the second quarter of 1999. Interest on total savings deposits for the three months ended June 30, 2000 increased $67 thousand compared to the same period of 1999, as rate increases were partially offset by volume decreases. Interest on time deposits for the 2000 quarter increased $1.9 million over 1999 levels of $19.3 million as both rates and volumes increased. The cost of time deposits increased 32 basis points (0.32%) for the second quarter of 2000 compared to the second quarter of 1999. Average time deposits for the three months ended June 30, 2000 were $1.6 billion, representing an increase of $54.8 million over 1999 averages. Total cost of deposits for the second quarter of 2000 was 3.75% compared to 3.47% for the second quarter of 1999, an increase of 29 basis points (0.29%). Interest on short-term borrowings for the second quarter of 2000 increased $2.8 million compared to the second quarter of 1999, primarily as a result of volume increases for repurchase agreements. Average repurchase agreements for the three months ended June 30, 2000 were $266.1 million compared to averages for the three months ended June 30, 1999 of $85.2 million. Interest on short-term borrowings during the second quarter of 2000 also reflected rate increases in all categories. The cost of short- term borrowings for the second quarter of 2000 was 5.97% compared to 4.66% for the second quarter of 1999. Interest on long-term debt for the three months ended June 30, 2000 increased $723 thousand over the three months ended June 30, 1999. Long term debt increases during 2000 were primarily the result of capital securities issued during the third quarter of 1999 as partial funding for the previously discussed "modified Dutch Auction" tender offer. 15 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) Three Months ended June 30, 2000 as Compared to the Three Months Ended June 30, 1999 (Continued) Provision for credit losses was $2.4 million for the three months ended June 30, 2000 compared to $2.3 million for the three months ended June 30, 1999. Net charge-offs for the second quarter of 2000 were $2.5 million, compared to net charge-offs of $1.8 million for the second quarter of 1999. Net charge-offs for the second quarter of 2000 included increases in net charge-offs of commercial loans not secured by real estate of $1.1 million which were partially offset by decreases in net charge-offs of consumer real estate loans and loans to individuals compared to 1999 levels. Securities gains were $1.7 million for the second quarter of 2000. There were no securities gains during the second quarter of 1999. The securities gains during 2000 resulted primarily from the sale of Pennsylvania bank stocks with a book value of $14.2 million. Trust income was $1.4 million for the second quarter of 2000 compared to $1.2 million for the second quarter of 1999. During the three months ended June 30, 2000 gains on the sale of loans were $70 thousand compared to gains on sale of loans of $4.0 million for the three months ended June 30, 1999. Gains on sale of loans for the 1999 period resulted primarily from the sale of $20.4 million of retail credit card loans which resulted in a gain of $4.0 million. Other income of $4.2 million for the second quarter of 2000 represented an increase of $1.1 million over 1999 levels. Other income for the second quarter of 2000 included increases in merchant discount, income from bank owned life insurance and insurance commissions of $151 thousand, $659 thousand and $363 thousand, respectively, compared to the same period of 1999. Total noninterest expense for the three months ended June 30, 2000 was $25.0 million reflecting an increase of $1.0 million over the $24.0 million that was reported for the corresponding period of 1999. Employee costs were $12.9 million during the second quarter of 2000 reflecting an increase of $410 thousand over 1999 levels. Outside data processing costs for the second quarter of 2000 increased to $924 thousand, from $863 thousand reported for the second quarter of 1999. Other operating expenses for the three months ended June 30, 2000 increased $511 thousand compared to the three months ended June 30, 1999. Collection and repo expenses reflected increases of $86 thousand for the 2000 quarter as collection efforts for delinquent loans were accelerated. Express, freight and storage expenses for the second quarter of 2000 increased $70 thousand over the second quarter of 1999, partially as a result of higher gas prices being passed on from carriers. Additional cost increases for the second quarter of 2000 compared to the corresponding period of 1999 occurred in FDIC expense, other professional fees and telephone expenses. 16 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) Three Months ended June 30, 2000 as Compared to the Three Months Ended June 30, 1999 (Continued) Income taxes decreased $1.7 million for the second quarter of 2000 compared to the 1999 quarter as income before income taxes decreased $3.4 million for the corresponding period. The Corporation's effective tax rate was 24.6% for the 2000 period compared to 28.6% for the 1999 period. The Corporation's effective tax rate was impacted by an increase in tax free income for the second quarter of 2000 compared to the second quarter of 1999. 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 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 remained flat in the first six months of 2000 as increases in commercial loans secured by real estate and increases in municipal loans were offset by decreases in residential real estate loans, loans to individuals and commercial loans not secured by real estate. Although end of period loan balances at June 30, 2000 compared to December 31, 1999 have not increased, both end of period and average loans outstanding have increased since June 30, 1999. 17 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY (Continued) Total deposits increased $61.5 million for the first six months of 2000 and included increases in noninterest-bearing deposits of $7.7 million and increases in time deposits of $61.8 million since year-end. Total savings deposits decreased $8.0 million during the same time period. Customers continue to reinvest savings deposits in higher yielding investments both within and outside the commercial banking industry. Included in the increase in time deposits during the first half of 2000 was the issuance of brokered time deposits in the amount of $26.1 million. Although the Corporation's primary source of funds remains traditional deposits from within the communities served by its banking subsidiaries, future sources of deposits utilized could include the use of brokered time deposits offered outside the Corporation's traditional market area. 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 June 30, 2000 securities available for sale had an amortized cost of $1,193.9 million and an approximate fair value of $1,131.8 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. 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. 18 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 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 June 30, 2000 and December 31, 1999 (Dollar amounts in thousands): June 30, 2000 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 584,016 $134,836 $237,862 $ 956,714 Investments.............. 44,229 37,770 67,996 149,995 Other interest-earning assets.................. 2,177 -0- -0- 2,177 Total interest-sensitive assets................ 630,422 172,606 305,858 1,108,886 Certificates of deposits. 260,495 153,448 366,218 780,161 Other deposits........... 1,059,469 -0- -0- 1,059,469 Borrowings............... 357,503 450 1,174 359,127 Total interest-sensitive liabilities........... 1,677,467 153,898 367,392 2,198,757 GAP....................$(1,047,045) $ 18,708 $(61,534) $(1,089,871) ISA/ISL.................. 0.38 1.12 0.83 0.50 Gap/Total assets......... 24.36% 0.44% 1.43% 25.36% December 31, 1999 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 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% 19 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 June 30, 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. 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 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 June 30, 2000 1999 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ 11,427 $ 9,869 Past due loans 15,360 12,507 Renegotiated loans 1,638 63 Total Nonperforming Loans $ 28,425 $ 22,439 Other real estate owned $ 1,752 $ 1,808 Loans outstanding at end of period $2,500,422 $2,369,905 Average loans outstanding (year-to-date) $2,511,020 $2,382,276 Nonperforming loans as percent of total loans 1.14% 0.95% Provision for credit losses $ 4,920 $ 4,550 Net charge-offs $ 4,738 $ 3,210 Net charge-offs as percent of average loans outstanding 0.19% 0.13% Provision for credit losses as percent of net charge-offs 103.84% 141.74% Allowance for credit losses as percent of average loans outstanding 1.34% 1.41% Allowance for credit losses as percent of end-of-period loans outstanding 1.35% 1.42% Allowance for credit losses as percent of nonperforming loans 118.63% 149.94% 21 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 June 30, 2000 and June 30, 1999: 2000 1999 (amounts in thousands) Recorded investment in impaired loans at end of period $13,065 $ 9,932 Year to date average balance of impaired loans $13,023 $10,252 Allowance for credit losses related to impaired loans $ 2,696 $ 2,299 Impaired loans with an allocation of the allowance for credit losses $ 5,192 $ 4,392 Impaired loans with no allocation of the allowance for credit losses $ 7,873 $ 5,540 Year to date income recorded on impaired loans on a cash basis $ 277 $ 124 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 June 30, 2000, there were no significant concentrations of credit. Nonperforming loans at June 30, 2000 increased $6.0 million compared to 1999 levels and included increases in nonaccrual loans, past due loans and renegotiated loans of $1.5 million, $2.9 million and $1.6 million, respectively. Nonaccrual loans reflected increases in nonaccrual loans secured by commercial real estate of $1.1 million and increases in nonaccrual commercial loans not secured by real estate of $1.2 million. Increases in nonaccrual commercial loans for 2000 were partially 22 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) offset by decreases in nonaccrual loans secured by residential real estate of $631 thousand. Past due loans reflected increases in past due loans secured by residential real estate of $2.9 million. The increase in renegotiated loans at June 30, 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 0.95% at June 30, 1999 to 1.14% at June 30, 2000 this ratio has remained stable since year-end 1999 amounts of 1.15%. The allowance for credit losses as a percent of nonperforming loans at June 30, 2000 has increased over year-end 1999 levels of 117.10%. 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 increased $7.7 million in the first half of 2000. Dividends declared reduced equity by $16.3 million during the 2000 period, while earnings retention was $8.3 million, representing an earnings retention rate of 33.7%. 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 $286 thousand. Amounts paid to fund the discount on reinvested dividends reduced equity by $294 thousand. The market value adjustment to securities available for sale decreased equity by $110 thousand. The cost of purchasing treasury shares decreased equity by $873 thousand while proceeds from the reissuance of treasury shares to provide for stock options exercised increased equity by $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. 23 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 June 30, 2000: Percent Amount of Adjusted (in thousands) Assets Tier I Capital $359,782 13.3% Risk-Based Requirement 108,115 4.0 Total Capital 393,503 14.6 Risk-Based Requirement 216,231 8.0 Minimum Leverage Capital 359,782 8.4 Minimum Leverage Requirement 128,697 3.0 At June 30, 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. 24 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 On April 24, 2000, the Corporation held its regularly scheduled annual meeting of shareholders. The following proposals were scheduled to be acted upon. Due to lack of required proxy response only proposal 1 was considered and acted upon during the April 24, 2000 meeting of shareholders. Voting on proposal 2 was adjourned to a meeting held on May 11, 2000. Proposal 1 The following directors were elected for terms to expire in 2003: E.H. Brubaker Thomas J. Hanford H.H. Heilman, Jr. James W. Newill John A. Robertshaw, Jr. Laurie Stern Singer Robert C. Williams Proposal 2 A proposal to amend the Corporation's 1995 Compensatory Stock Option Plan to increase the number of shares of the Corporation's stock available for grant under the Option Plan from 2,000,000 to 4,500,000, an increase of 2,500,000 was approved. For 30,129,187 Against 3,784,704 Abstain 1,194,469 Non-voting 23,034,488 25 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART II - OTHER INFORMATION 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 26 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: AUGUST 11, 2000 /S/JOSEPH E. O'DELL Joseph E. O'Dell, President and Chief Executive Officer DATED: AUGUST 11, 2000 /S/ JOHN J. DOLAN John J. Dolan, Executive Vice President and Chief Financial Officer 27 EX-27 2 0002.txt
9 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 87,968 727 1,450 0 1,131,750 413,301 400,740 2,500,422 33,721 4,297,719 3,010,372 308,496 41,781 642,730 0 0 62,525 231,815 4,297,719 103,065 51,032 163 154,260 53,709 83,947 70,313 4,920 1,686 50,198 32,493 24,541 0 0 24,541 0.43 0.43 7.84 11,427 15,360 1,638 0 33,539 5,403 665 33,721 0 0 0
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