-----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, SY+Q647CgVqPDu9zollSqg/vks10fKbKRnKVjZCX7CTtWxXJ7C3c5BsI5t9U8toG PhMTRR5rVhaiolgKG5q86w== /in/edgar/work/0000712537-00-000022/0000712537-00-000022.txt : 20001115 0000712537-00-000022.hdr.sgml : 20001115 ACCESSION NUMBER: 0000712537-00-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 762769 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 September 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 November 6, 2000 was 58,184,802. 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 . . . . . . . . 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . 25 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . 26 Signatures . . . . . . . . . . . . . . . . . . . . Signature Page FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands) September 30, December 31, 2000 1999 ASSETS Cash and due from banks on demand.... $ 81,635 $ 92,673 Interest-bearing deposits with banks. 569 1,218 Federal funds sold .................. -0- 8,700 Securities available for sale, at market.............................. 1,197,019 1,144,042 Securities held to maturity, at cost, (Market value $397,946 in 2000 and $435,000 in 1999).................. 405,021 448,347 Loans................................ 2,496,329 2,503,687 Unearned income.................... (2,342) (3,628) Allowance for credit losses........ (34,684) (33,539) Net loans....................... 2,459,303 2,466,520 Property and equipment............... 44,410 43,380 Other real estate owned.............. 1,224 1,707 Other assets......................... 140,220 134,259 TOTAL ASSETS.................... $4,329,401 $4,340,846 LIABILITIES Deposits (all domestic): Noninterest-bearing................ $ 245,154 $ 251,404 Interest-bearing................... 2,756,817 2,697,425 Total deposits.................. 3,001,971 2,948,829 Short-term borrowings................ 354,401 424,827 Other liabilities.................... 39,997 42,152 Company obligated mandatorily redeemable capital securities of subsidiary trust.................... 35,000 35,000 Other long-term debt................. 587,461 603,355 Total long-term debt............ 622,461 638,355 Total liabilities............... 4,018,830 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; 58,184,802 and 58,142,858 shares outstanding at September 30, 2000 and December 31, 1999, respectively................. 62,525 62,525 Additional paid-in capital........... 67,593 68,330 Retained earnings.................... 269,458 257,773 Accumulated other comprehensive income (28,440) (40,304) Treasury stock (4,340,610 shares at September 30, 2000 and 4,382,564 at December 31, 1999, at cost)........ (54,801) (55,448) Unearned ESOP shares................. (5,764) (6,193) Total shareholders' equity......... 310,571 286,683 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $4,329,401 $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 9 Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Interest Income Interest and fees on loans....... $52,613 $48,783 $155,678 $144,767 Interest and dividends on investments: Taxable interest............... 22,527 22,924 66,860 65,484 Interest exempt from Federal income taxes.................. 2,399 2,407 7,264 7,004 Dividends...................... 887 797 2,721 2,235 Interest on Federal funds sold... 22 18 145 77 Interest on bank deposits........ 23 10 63 101 Total interest income......... 78,471 74,939 232,731 219,668 Interest Expense Interest on deposits............. 30,258 25,774 83,967 77,214 Interest on short-term borrowings 5,297 3,456 17,071 8,737 Interest on company obligated mandatorily redeemable capital securities of subsidiary trust.. 832 175 2,494 175 Interest on other long-term debt. 8,347 8,749 25,149 25,757 Total interest on long-term debt......................... 9,179 8,924 27,643 25,932 Total interest expense........ 44,734 38,154 128,681 111,883 Net Interest Income................ 33,737 36,785 104,050 107,785 Provision for credit losses...... 2,505 2,363 7,425 6,913 Net interest income after provision for credit losses................ 31,232 34,422 96,625 100,872 Other Income Securities gains................. -0- 2 1,686 565 Trust income..................... 1,327 1,265 4,091 4,288 Service charges on deposit accounts........................ 2,704 2,880 7,840 7,866 Gain on sale of loans............ 89 122 162 5,024 Other income..................... 4,122 3,209 11,761 9,272 Total other income............ 8,242 7,478 25,540 27,015 Other Expenses Salaries and employee benefits... 13,044 12,039 39,885 37,637 Net occupancy expense............ 1,577 1,583 4,897 4,948 Furniture and equipment expense.. 2,081 1,748 5,889 5,543 Data processing expense.......... 745 886 2,436 2,648 Pennsylvania shares tax expense.. 817 882 2,627 2,612 Other operating expenses......... 6,445 6,206 19,173 18,640 Total other expenses.......... 24,709 23,344 74,907 72,028 Income before income taxes......... 14,765 18,556 47,258 55,859 Applicable income taxes.......... 3,209 4,804 11,161 15,276 Net income......................... $11,556 $13,752 $36,097 $40,583 Average Shares Outstanding(a)......57,565,411 61,290,374 57,529,015 61,215,994 Average Shares Outstanding Assuming Dilution(a).............57,601,162 61,491,946 57,591,432 61,434,034 Per Share Data(a): Basic earnings per share......... $ 0.20 $ 0.22 $ 0.63 $ 0.66 Diluted earnings per share....... $ 0.20 $ 0.22 $ 0.63 $ 0.66 Cash dividends per share......... $ 0.140 $ 0.130 $ 0.420 $ 0.375 (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- 40,583 -0- -0- -0- 40,583 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities arising during the period.............. -0- -0- -0- (28,671) -0- -0- (28,671) 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- (29,037) -0- -0- (29,037) Total comprehensive income...... -0- -0- 40,583 (29,037) -0- -0- 11,546 Cash dividends declared......... -0- -0- (22,740) -0- -0- -0- (22,740) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 996 996 Discount on dividend reinvestment plan purchases................ -0- (296) -0- -0- -0- -0- (296) Treasury stock reissued......... -0- (267) -0- -0- 1,457 -0- 1,190 Balance at September 30, 1999.....$62,525 $ 68,415 $253,466 $(26,838) $ (4,456) $(7,011) $346,101 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- 36,097 -0- -0- -0- 36,097 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities arising during the period............ -0- -0- -0- 12,960 -0- -0- 12,960 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- 11,864 -0- -0- 11,864 Total comprehensive income...... -0- -0- 36,097 11,864 -0- -0- 47,961 Cash dividends declared......... -0- -0- (24,412) -0- -0- -0- (24,412) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 429 429 Discount on dividend reinvestment plan purchases................ -0- (443) -0- -0- -0- -0- (443) Treasury stock acquired......... -0- -0- -0- -0- (873) -0- (873) Treasury stock reissued......... -0- (369) -0- -0- 1,520 -0- 1,151 Tax benefit of stock options.... -0- 75 -0- -0- -0- -0- 75 Balance at September 30, 2000.....$62,525 $ 67,593 $269,458 $(28,440) $(54,801) $(5,764) $310,571
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 9 Months Ended September 30, 2000 1999 Operating Activities Net income....................................... $36,097 $40,583 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses................... 7,425 6,913 Depreciation and amortization................. 5,415 5,750 Net gains on sales of assets.................. (1,775) (5,266) Income from increase in cash surrender value of bank owned life insurance................. (2,565) (1,591) Decrease (increase) in interest receivable.... 13 (1,722) Increase (decrease) in interest payable....... 2,475 (1,543) Increase in income taxes payable.............. 1,089 2,258 Change in deferred taxes...................... 658 (2,041) Other-net..................................... (1,487) (9,882) Net cash provided by operating activities... 47,345 33,459 Investing Activities Transactions with securities held to maturity: Proceeds from sales........................... -0- -0- Proceeds from maturities and redemptions...... 52,288 99,549 Purchases..................................... (8,926) (93,151) Transactions with securities available for sale: Proceeds from sales........................... 16,358 38,583 Proceeds from maturities and redemptions...... 73,463 156,889 Purchases..................................... (122,896) (374,201) Proceeds from sales of loans and other assets.... 24,963 94,327 Sale of subsidiary............................... -0- (2,396) Investment in bank owned life insurance.......... (15,000) (20,000) Net decrease (increase) in time deposits with banks......................................... 650 (837) Net increase in loans............................ (24,036) (156,133) Purchases of premises and equipment.............. (5,848) (3,736) Net cash used by investing activities....... (8,984) (261,106) Financing Activities Repayments of other long-term debt............... (50,365) (204) Proceeds from issuance of other long-term debt... 34,900 9,000 Proceeds from issuance of company obligated mandatorily redeemable capital securities of subsidiary trust............................... -0- 35,000 Discount on dividend reinvestment plan purchases. (443) (296) Dividends paid................................... (24,407) (20,256) Net increase in Federal funds purchased.......... 8,025 39,025 Net increase (decrease) in other short-term borrowings..................................... (78,452) 151,389 Net increase in deposits......................... 53,143 7,196 Stock option tax benefit......................... 75 -0- Purchase of treasury stock....................... (873) -0- Proceeds from sale of treasury stock............. 298 1,190 Net cash provided (used) by financing activities................................. (58,099) 222,044 Net decrease in cash and cash equivalents... (19,738) (5,603) Cash and cash equivalents at January 1............. 101,373 97,615 Cash and cash equivalents at September 30.......... $81,635 $ 92,012 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 September 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 September 30, 2000 and the results of operations for the three month and nine month periods ended September 30, 2000 and 1999, and statements of cash flows and changes in shareholders' equity for the nine month periods ended September 30, 2000 and 1999. The results of the three and nine months ended September 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 nine months of the year for: Interest $126,206 $113,426 Income Taxes $ 9,410 $ 14,850 Noncash investing and financing activities: ESOP loan reductions $ 429 $ 996 Loans transferred to other real estate owned and repossessed assets $ 4,733 $ 3,351 Gross increase (decrease) in market value adjustment to securities available for sale $ 18,252 $(44,673) Treasury stock reissued for insurance agency interest acquired $ 852 $ -0- 7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 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)
September 30, 2000 September 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 $19,938 $(6,978) $12,960 $(44,110) $15,439 $(28,671) Less: reclassification adjustment for gains realized in net income (1,686) 590 (1,096) (563) 197 (366) Net unrealized gains (losses) 18,252 (6,388) 11,864 (44,673) 15,636 (29,037) Other comprehensive income $18,252 $(6,388) $11,864 $(44,673) $15,636 $(29,037)
NOTE 5 Joint Venture Buy-Out For Insurance Agency When the Corporation formed First Commonwealth Insurance Agency ("FCIA"), its wholly-owned subsidiary, it entered into a joint venture agreement with a partner to assist FCIA in establishing itself as a full service insurance agency in exchange for an undivided 50% interest in FCIA's expiring list of policy holders. Effective August 31, 2000 the Corporation acquired the 50% interest in the policy holders' list owned by its joint venture partner; thereby becoming the sole owner of such list. In exchange the joint venture partner received 89,742 shares of the Corporation's common stock. The net effect of this transaction is expected to reduce operating expenses by an estimated $100 thousand per quarter. NOTE 6 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. Changes in the fair value of derivatives must be recognized in earnings when they occur unless the derivative qualifies as a hedge. If a derivative qualifies as hedge, a company can elect to use hedge accounting to eliminate or reduce income-statement volatility that would arise from reporting changes in a derivative's fair value in income. FAS No. 133 was amended by FASB statement No. 137 which delays the effective date of FAS No. 133 to the first quarter of years beginning after June 15, 2000. FAS No. 133 was also amended in June 2000 by FAS No. 138. FAS No. 138 addresses and clarifies issues causing implementation difficulties for numerous entities applying FAS No. 133. FAS No. 138 includes amendments to FAS No. 133 which resulted from decisions made by the FASB related to the Derivatives Implementation Group ("DIG") process. The DIG was created by the FASB to facilitate 8 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) NOTE 6 New Accounting Pronouncements (Continued) implementation by identifying issues that arise from applying the requirements of FAS No. 133 and to advise the FASB on how to resolve those issues. The Corporation currently has no freestanding derivative or hedging instruments. Management is in the process of reviewing contracts from various functional areas of the Corporation to identify potential derivatives embedded within these contracts. 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. In September 2000, the FASB issued statement No. 140, "Accounting for Transfer and Servicing of Financial Assets and Extinquishments of Liabilities" which replaces FASB statement No. 125, issued in June 1996. FAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of FAS No. 125. The statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. FAS No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for years ending after December 15, 2000. Implementation of FAS No. 140 should not have a material impact on the Corporation's financial condition or results of operations. 9 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 Nine Months of 2000 as Compared to the First Nine 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 nine months of 2000 was $36.1 million reflecting a decrease of $4.5 million over 1999 results of $40.6 million. The decrease in net income for the 2000 period was primarily the result of gains on the sale of loans which were realized during the 1999 period. Basic earnings per share and diluted earnings per share were $0.63 for the nine months of 2000 compared to basic earnings per share and diluted earnings per share of $0.66 for the nine months of 1999. Basic earnings per share excluding gains on sale of assets was $0.60 for both the 2000 and 1999 nine month periods. Return on average assets was 1.12% and return on average equity was 16.29% during the 2000 period, compared to 1.29% and 15.18%, 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 $104.1 million for the nine months of 2000 compared to $107.8 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 3.64% for the nine months of 2000 compared to 3.80% for the nine months of 1999. The reduction in net interest margin for the 2000 period compared to 1999 was primarily related to the interest expense on funds borrowed to acquire treasury shares. 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 Nine Months of 2000 as Compared to the First Nine 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 $ (38) $ (31) $ (7) Securities 2,122 (1,636) 3,758 Federal funds sold 68 40 28 Loans 10,911 6,835 4,076 Total interest income 13,063 5,208 7,855 Interest-bearing liabilities: Deposits 6,753 1,037 5,716 Short-term borrowings 8,334 5,804 2,530 Long-term debt 1,711 (25) 1,736 Total interest expense 16,798 6,816 9,982 Net interest income $(3,735) $(1,608) $(2,127) Interest and fees on loans increased $10.9 million for 2000 over 1999 levels, primarily as a result of volume increases and rate increases for commercial loans. Average loans for the nine months of 2000 increased $117.4 million compared to averages for the nine 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 nine months of 2000 was 8.46% representing an increase of 24 basis points (0.24%) compared to the same period of 1999. Interest income on investments increased $2.1 million for the nine 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 30 basis points (0.30%) for the nine months of 2000 compared to the nine months of 1999. Average balances of corporate bonds increased $65.7 million for the nine months of 2000 compared to averages for the corresponding period of 1999. Yields on investments for the first nine months of 2000 were 6.89% compared to 6.52% for the first nine months of 1999. 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 Nine Months of 2000 as Compared to the First Nine Months of 1999 (Continued) Interest on deposits increased $6.8 million for the 2000 period compared to 1999, as interest on time deposits increased $6.5 million for the nine months of 2000 compared to 1999. Average time deposits increased $68.2 million for the nine months of 2000 compared to 1999 averages resulting in an increase in interest expense due to volume of $2.1 million. The cost of time deposits for the nine months of 2000 increased by 33 basis points (0.33%) compared to 1999 costs of 5.16% resulting in an increase in interest expense due to rate of $4.4 million. Interest expense on short-term borrowings increased $8.3 million for the nine months of 2000 compared to the nine months of 1999 as the average balance of repurchase agreements increased $178.5 million over 1999 averages. The cost of short-term borrowings for the 2000 period also increased by 113 basis points (1.13%) compared to 1999 costs of 4.78%. Interest expense on long-term debt increased $1.7 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 $7.4 million for the nine months of 2000 compared to $6.9 million during the 1999 period. Net charge-offs against the allowance for credit losses were $6.3 million in the 2000 period compared to $5.0 million in the 1999 period, reflecting an increase of $1.3 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. The increase in net charge- offs for commercial loans not secured by real estate was partially offset by decreases in net charge-offs for consumer loans in the 2000 period compared to 1999. See the "Credit Review" section for an analysis of the quality of the loan portfolio. 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 Nine Months of 2000 as Compared to the First Nine Months of 1999 (Continued) Below is an analysis of the consolidated allowance for credit losses for the nine month periods ended September 30, 2000 and 1999. 2000 1999 (Amounts in thousands) Balance January 1, $33,539 $32,304 Loans charged off: Commercial, financial and agricultural 2,304 447 Real estate-construction -0- -0- Real estate-commercial 43 212 Real estate-residential 491 763 Loans to individuals 4,171 4,651 Lease financing receivables 297 78 Total loans charged off 7,306 6,151 Recoveries of previously charged off loans: Commercial, financial and agricultural 344 264 Real estate-construction -0- -0- Real estate-commercial -0- -0- Real estate-residential 28 26 Loans to individuals 629 841 Lease financing receivables 25 -0- Total recoveries 1,026 1,131 Net charge offs 6,280 5,020 Provision charged to operations 7,425 6,913 Balance September 30, $34,684 $34,197 Net securities gains increased $1.1 million during the 2000 period from $565 thousand reported in 1999. The securities gains during 2000 resulted primarily from the sale of Pennsylvania bank stocks with a book value of $14.4 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. 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 Nine Months of 2000 as Compared to the First Nine Months of 1999 (Continued) During the nine months of 2000 gains on the sale of loans were $162 thousand compared to gains on sale of loans of $5.0 million for the nine 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. Other income for the first nine months of 2000 was $11.8 million representing an increase of $2.5 million compared to the first nine months of 1999. Other income for the 2000 period reflected increases in gains on sale of fixed assets of $515 thousand, merchant discount of $395 thousand, ATM fees of $614 thousand and insurance commissions of $427 thousand. Other income for the 2000 period also included an increase in income from bank owned life insurance of $974 thousand, resulting in part from claim income. Noninterest expense was $74.9 million for the nine months of 2000 reflecting an increase of $2.9 million over the 1999 level of $72.0 million. Total noninterest expense as a percent of average assets was 2.32% for the 2000 period compared to 2.28% for the 1999 period. Employee costs were $39.9 million in 2000, representing 1.24% of average assets on an annualized basis compared to $37.6 million or 1.19% of average assets on an annualized basis for 1999. Salary costs for the first nine months of 2000 increased $1.8 million over 1999 levels of $29.4 million. Employee benefit costs for the first nine months of 2000 reflected increases of $497 thousand over the first nine months of 1999 and primarily included increases in health insurance costs and a reduction of deferred loan origination costs compared to the first nine months of 1999. The number of full time equivalent employees at September 30, 2000 was 1,444 compared to 1,438 at September 30, 1999. Furniture and equipment expenses of $5.9 million for the first nine months of 2000 reflected increases of $346 thousand over 1999 levels. Other operating expenses for the 2000 period were $19.2 million reflecting an increase of $533 thousand over the 1999 amount of $18.6 million. The first nine months of 2000 included increases in charge card interchange, checkbook printing, collection and repossession expenses and promotions expense. 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. Express freight charges for the first nine months of 2000 increased over the first nine months of 1999 partially because of the impact of gasoline prices on carrier providers. Legal fees, other professional fees, filing and recording fees and postage expenses reflected decreases for the first nine months of 2000 compared to the 1999 period. Other operating expenses for the 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) First Nine Months of 2000 as Compared to the First Nine Months of 1999 (Continued) first nine 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. Income tax expense was $11.2 million for the nine months of 2000 compared to $15.3 million for the same period of 1999. The Corporation's effective tax rate was 23.6% for the 2000 period compared to 27.3% for the corresponding period of 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 September 30, 2000 as Compared to the Three Months Ended September 30, 1999 Net income was $11.6 million for the third quarter of 2000, a decrease of $2.2 million over 1999 results of $13.8 million. Basic earnings per share was $0.20 during the 2000 quarter compared to $0.22 for the same period of 1999. Return on average assets was 1.07% and return on average equity was 14.97% during the 2000 quarter, compared to 1.28% and 15.65% respectively, during the 1999 quarter. Net interest income for the third quarter of 2000 of $33.7 million represented a decrease of $3.0 million compared to the third 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 3.53%, reflecting a decrease of 27 basis points (0.27%) from 3.80% reported in 1999. The reduction in net interest margin was partially related to the interest expense on funds borrowed to acquire treasury shares. Net interest margin for the third quarter of 2000 compared to the 1999 period was also negatively impacted by the rate on short term liabilities increasing faster than short term yields on assets. Interest and fees on loans for the three months ended September 30, 2000 increased $3.8 million compared to the three months ended September 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 third quarter of 2000 increased $95.1 million compared to averages for the third 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 third quarter of 2000 was 8.56% representing an increase of 38 basis points (0.38%) compared to the third quarter of 1999. 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 September 30, 2000 as Compared to the Three Months Ended September 30, 1999 (Continued) Interest income on investments for the three months ended September 30, 2000 was $25.8 million, reflecting a decrease of $315 thousand over the three months ended September 30, 1999. Volume decreases for investments during the third quarter of 2000 were partially offset by rate increases compared to the 1999 period. Average investments for the third quarter of 2000 decreased $67.1 million compared to averages for the third quarter of 1999. Yields on investments for the 2000 quarter were 6.89% compared to 6.68% for the same period of 1999 reflecting an increase of 21 basis points (0.21%). Interest on deposits for the third quarter of 2000 was $30.3 million reflecting an increase of $4.5 million compared to the third quarter of 1999. Interest on total savings deposits for the three months ended September 30, 2000 increased $315 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 $4.2 million over 1999 levels of $19.1 million as both rates and volumes increased. The cost of time deposits increased 73 basis points (0.73%) for the third quarter of 2000 compared to the third quarter of 1999. Average time deposits for the three months ended September 30, 2000 were $1.6 billion reflecting an increase of $100.8 million over 1999 averages. Total cost of deposits for the third quarter of 2000 was 4.00% compared to 3.44% for the third quarter of 1999, an increase of 56 basis points (0.56%). Interest on short-term borrowings for the third quarter of 2000 increased $1.8 million compared to the third quarter of 1999, primarily as a result of volume increases for repurchase agreements. Interest on short-term borrowings during the third quarter of 2000 also reflected rate increases. The cost of short-term borrowings for the third quarter of 2000 was 6.23% compared to 4.98% for the third quarter of 1999. Interest on long-term debt for the three months ended September 30, 2000 increased $255 thousand over the three months ended September 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. Provision for credit losses was $2.5 million for the three months ended September 30, 2000 compared to $2.4 million for the three months ended September 30, 1999. Net charge-offs for the third quarter of 2000 were $1.5 million, compared to net charge-offs of $1.8 million for the third quarter of 1999. Net charge-offs for the third quarter of 2000 included decreases in charge-offs of loans to individuals and charge-offs of commercial loans secured by real estate compared to 1999 levels. 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 September 30, 2000 as Compared to the Three Months Ended September 30, 1999 (Continued) Other income of $4.1 million for the third quarter of 2000 represented an increase of $913 thousand over 1999 levels. Other income for the third quarter of 2000 included increases in ATM interchange fees, utility payment processing fees and income from bank owned life insurance of $428 thousand, $139 thousand and $298 thousand, respectively, compared to the same period of 1999. Total noninterest expense for the three months ended September 30, 2000 was $24.7 million reflecting an increase of $1.4 million over the $23.3 million that was reported for the corresponding period of 1999. Employee costs were $13.0 million during the third quarter of 2000 reflecting an increase of $1.0 million over 1999 levels. Employee cost increases for the third quarter of 2000 included salary increases of $840 thousand and employee benefit cost increases of $166 thousand compared to the third quarter of 1999. Employee benefit costs for the third quarter of 2000 were primarily the result of increased health insurance costs. Cost decreases for the third quarter of 2000 included a reduction in outside data processing expenses and Pennsylvania shares tax expense compared to the third quarter of 1999. Other operating expenses for the three months ended September 30, 2000 increased $239 thousand compared to the three months ended September 30, 1999. Collection and repo expenses reflected increases for the 2000 quarter as collection efforts for delinquent loans were accelerated. Express, freight and storage expenses for the third quarter of 2000 increased over the third quarter of 1999, partially as a result of higher gas prices being passed on from carriers. Cost decreases for the third quarter of 2000 compared to the corresponding period of 1999 occurred in other professional fees and telephone expenses. Income taxes decreased $1.6 million for the third quarter of 2000 compared to the 1999 quarter as income before income taxes decreased $3.8 million for the corresponding period. The Corporation's effective tax rate was 21.7% for the 2000 period compared to 25.9% for the 1999 period. The Corporation's effective tax rate was impacted by an increase in tax free income for the third quarter of 2000 compared to the third quarter of 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 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 decreased $7.2 million in the first nine 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 and loans to individuals. Total deposits increased $53.1 million for the first nine months of 2000 and included increases in time deposits of $97.2 million which were partially offset by decreases in demand deposits and total savings deposits of $6.3 million and $37.8 million, respectively. 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 nine months 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. 18 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY (Continued) 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 September 30, 2000 securities available for sale had an amortized cost of $1,240.7 million and an approximate fair value of $1,197.0 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. 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. 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) 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 September 30, 2000 and December 31, 1999 (Dollar amounts in thousands): September 30, 2000 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 589,409 $134,158 $ 244,237 $ 967,804 Investments.............. 43,216 42,907 84,519 170,642 Other interest-earning assets.................. 569 -0- -0- 569 Total interest-sensitive assets................ 633,194 177,065 328,756 1,139,015 Certificates of deposits. 233,659 185,564 428,284 847,507 Other deposits........... 1,030,656 -0- -0- 1,030,656 Borrowings............... 376,447 790 884 378,121 Total interest-sensitive liabilities........... 1,640,762 186,354 429,168 2,256,284 GAP....................$(1,007,568) $ (9,289) $(100,412) $(1,117,269) ISA/ISL.................. 0.39 0.95 0.77 0.50 Gap/Total assets......... 23.27% 0.21% 2.32% 25.81% December 31, 1999 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 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% 20 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 September 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. 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 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 September 30, 2000 1999 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ 11,953 $ 10,184 Past due loans 17,687 15,776 Renegotiated loans 1,630 63 Total Nonperforming Loans $ 31,270 $ 26,023 Other real estate owned $ 1,224 $ 1,628 Loans outstanding at end of period $2,493,987 $2,437,391 Average loans outstanding (year-to-date) $2,504,998 $2,387,563 Nonperforming loans as percent of total loans 1.25% 1.07% Provision for credit losses $ 7,425 $ 6,913 Net charge-offs $ 6,280 $ 5,020 Net charge-offs as percent of average loans outstanding 0.25% 0.21% Provision for credit losses as percent of net charge-offs 118.23% 137.71% Allowance for credit losses as percent of average loans outstanding 1.38% 1.43% Allowance for credit losses as percent of end-of-period loans outstanding 1.39% 1.40% Allowance for credit losses as percent of nonperforming loans 110.92% 131.41% 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) 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 September 30, 2000 and September 30, 1999: 2000 1999 (amounts in thousands) Recorded investment in impaired loans at end of period $13,583 $10,247 Year to date average balance of impaired loans $13,166 $10,031 Allowance for credit losses related to impaired loans $ 2,483 $ 2,854 Impaired loans with an allocation of the allowance for credit losses $ 5,200 $ 4,833 Impaired loans with no allocation of the allowance for credit losses $ 8,383 $ 5,414 Year to date income recorded on impaired loans on a cash basis $ 300 $ 280 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 September 30, 2000, there were no significant concentrations of credit. Nonperforming loans at September 30, 2000 increased $5.2 million compared to 1999 levels and included increases in nonaccrual loans, past due loans and renegotiated loans of $1.8 million, $1.9 million and $1.6 million, respectively. Nonaccrual loans reflected increases in nonaccrual loans secured by commercial real estate of $1.4 million and increases in nonaccrual home equity loans of $677 thousand. Increases in nonaccrual commercial loans and home equity loans for 2000 were partially 23 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 $436 thousand. Past due loans reflected increases in past due loans secured by residential real estate of $1.3 million and past due loans secured by commercial real estate of $1.7 million. Past due loans at September 30, 2000 reflected a decrease of past due loans to individuals. The increase in renegotiated loans at September 30, 2000 compared to the corresponding period of 1999 was the result of the modification of loan terms for one commercial borrower. Nonperforming loans as a percent of total loans was 1.25% at September 30, 2000 compared to 1.15% at December 31, 1999 and 1.07% at September 30, 1999. 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 $23.9 million in the first nine months of 2000. Dividends declared reduced equity by $24.4 million during the 2000 period, while earnings retention was $11.7 million, representing an earnings retention rate of 32.4%. 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 $429 thousand. Amounts paid to fund the discount on reinvested dividends reduced equity by $443 thousand. The market value adjustment to securities available for sale increased equity by $11.9 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. Equity capital during 2000 also reflected an increase of $852 thousand from the reissuance of treasury shares to fund the buy-out of FCIA's joint venture partner (See NOTE 4 to the Consolidated Financial Statements.) 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. 24 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 September 30, 2000: Percent Amount of Adjusted (in thousands) Assets Tier I Capital $363,668 13.2% Risk-Based Requirement 109,962 4.0 Total Capital 398,031 14.5 Risk-Based Requirement 219,923 8.0 Minimum Leverage Capital 363,668 8.5 Minimum Leverage Requirement 128,679 3.0 At September 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. 25 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 Not applicable 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: NOVEMBER 13, 2000 /S/ Joseph E. O'Dell Joseph E. O'Dell, President and Chief Executive Officer DATED: NOVEMBER 13, 2000 /S/ John J. Dolan John J. Dolan, Executive Vice President and Chief Financial Officer 27 EX-27 2 0002.txt
9 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 81,635 569 0 0 1,197,019 405,021 397,946 2,496,329 34,684 4,329,401 3,001,971 354,401 39,997 622,461 0 0 62,525 248,046 4,329,401 155,678 76,845 208 232,731 83,967 128,681 104,050 7,425 1,686 74,907 47,258 36,097 0 0 36,097 0.63 0.63 7.86 11,953 17,687 1,630 0 33,539 7,306 1,026 34,684 0 0 0
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