-----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, AJ+xFHuTc/hwebQDogg7ueYa40DLeDEDJ8RsF6ixu9Jp6SO8Txpa7oQGgdszDUfT 4nKrRneBRMFFS5uek04xKg== 0000712537-01-000005.txt : 20010409 0000712537-01-000005.hdr.sgml : 20010409 ACCESSION NUMBER: 0000712537-01-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251428528 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11138 FILM NUMBER: 1591884 BUSINESS ADDRESS: STREET 1: OLD COURTHOUSE SQUARE STREET 2: 22 N SIXTH ST CITY: INDIANA STATE: PA ZIP: 15701 BUSINESS PHONE: 7243497220 MAIL ADDRESS: STREET 1: 22 NORTH SIXTH STREET STREET 2: P.O. BOX 400 CITY: INDIANA STATE: PA ZIP: 15701 10-K 1 0001.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C 20549 Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 commission file number 0-11242 FIRST COMMONWEALTH FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1428528 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 22 NORTH SIXTH STREET INDIANA, PA 15701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (724) 349-7220 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No . Indicate the number of shares outstanding of each of the issuer's classes of common stock. TITLE OF CLASS OUTSTANDING AT March 28, 2001 Common Stock, $1 Par Value 58,222,096 Shares The aggregate market value of the voting common stock, par value $1 per share, held by non-affiliates of the registrant (Based upon the closing sale price on March 28, 2001), was approximately $545,159,574. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement related to the annual meeting of security holders to be held April 23, 2001 are incorporated by reference into Part III. FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES First Commonwealth Financial Corporation FORM 10-K INDEX PART I PAGE ITEM 1. Business Description of business.......................... 2 Competition...................................... 4 Supervision and regulation....................... 8 ITEM 2. Properties....................................... 7 ITEM 3. Legal Proceedings................................ 7 ITEM 4. Submission of Matters to a Vote of Security Holders......................................... 7 PART II ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters......................... 8 ITEM 6. Selected Financial Data.......................... 9 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.............. 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 27 ITEM 8. Financial Statements and Supplementary Data...... 28 ITEM 9. Disagreements on Accounting and Financial Disclosures..................................... 64 PART III ITEM 10. Directors and Executive Officers of the Registrant..................................... 64 ITEM 11. Management Renumeration and Transactions........ 65 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................. 65 ITEM 13. Certain Relationships and Related Transactions.. 65 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 66 Signatures..................................... 68 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business Description of Business First Commonwealth Financial Corporation (the "Corporation") was incorporated as a Pennsylvania business corporation on November 15, 1982 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Corporation operates two chartered banks, First Commonwealth Bank and Southwest Bank. Personal financial planning and other financial services and insurance products are also provided through First Commonwealth Trust Company and First Commonwealth Insurance Agency. The Corporation also operates through Commonwealth Systems Corporation, a data processing subsidiary and First Commonwealth Professional Resources Inc., ("FCPRI") a subsidiary providing professional services to affiliated organizations. First Commonwealth Bank ("FCB"), a Pennsylvania-chartered banking corporation headquartered in Indiana, Pennsylvania operates through divisions doing business under the following names: NBOC Bank, Deposit Bank, Cenwest Bank, First Bank of Leechburg, Peoples Bank, Central Bank, Peoples Bank of Western Pennsylvania, Unitas Bank and Reliable Bank. On December 31, 1998 the Corporation affiliated, as a result of a statutory merger, with Southwest National Corporation ("SNC") and its wholly-owned subsidiary, Southwest Bank ("Southwest"). SNC was a Pennsylvania-chartered bank holding company headquartered in Greensburg, Pennsylvania. Southwest Bank is a Pennsylvania-chartered, federally insured commercial bank also headquartered in Greensburg, Pennsylvania which traces its origin to 1900. Upon merger, SNC was combined with the Corporation and Southwest Bank became a subsidiary of the Corporation. Through FCB, the Corporation traces its banking origins to 1866. FCB and Southwest ("Subsidiary Banks") conduct business through 92 community banking offices in the counties of Allegheny (4), Armstrong (3), Beaver (1), Bedford (4), Blair (8), Cambria (11), Centre (2), Clearfield (5), Elk (3), Franklin (2), Huntingdon (6), Indiana (9), Jefferson (4), Lawrence (6), Somerset (6), Washington (1), and Westmoreland (17). The Subsidiary Banks engage in general banking business and offer a full range of financial services including such general retail banking services as demand, savings and time deposits and mortgage, consumer installment and commercial loans. The Subsidiary Banks operate a network of 83 automated teller machines ("ATMs") which permits customers to conduct routine banking transactions 24 hours a day. Of the ATMs, 60 are located on the premises of their main or branch offices and 23 are in remote locations. All the ATMs are part of the MAC network which consists of over 23,000 ATMs owned by numerous banks, savings and loan associations and credit unions located throughout 45 states. The ATMs operated by the Subsidiary Banks are also part of the global MasterCard/Cirrus network which is comprised of more than 300,000 ATMs located in the United States, Canada and 58 other countries and territories, which services over 365 million card holders. Such networks allow the Subsidiary Banks' customers to withdraw cash and in certain cases conduct other banking transactions from ATMs of all participating financial institutions. In addition to funds access through the use of ATMs, the MAC debit card offered to the Subsidiary Banks' deposit customers may be used at 300,000 point of sale terminals on the MAC system as well as being used on the global MasterCard system for the purchase of goods and services. The MAC debit card provides customers with the almost universal acceptability of a credit card combined with the convenience of direct debit to the customers' checking account. 2 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Description of Business (Continued) First Commonwealth's corporate philosophy is to encourage its subsidiaries to operate as locally-oriented, community-based financial service affiliates, augmented by experienced, centralized support from the Corporation in selected critical areas. This local market orientation is reflected in the Subsidiary Banks' boards of directors and branch banking centers, which generally have advisory boards comprised of local business persons, professionals and other community representatives, that assist the Subsidiary Banks in responding to local banking needs. The Subsidiary Banks concentrate on customer service and business development, while relying upon the support of the Corporation in identifying operational areas that can be effectively centralized without sacrificing the benefits of a local orientation. Primary candidates for centralization are those functions which are not readily visible to customers and those which are critical to risk management. Asset quality review, financial reporting, investment activities, funds management, internal audit, data processing and loan servicing are among the functions which are managed at the holding company level, either directly or through utilization of non-bank subsidiaries as professional resources providers. Commonwealth Systems Corporation ("CSC") was incorporated as a Pennsylvania business corporation in 1984 by the Corporation to function as its data processing subsidiary and it has its principal place of business in Indiana, Pennsylvania. Before August 1984, it had operated as the data processing department. CSC provides on-line general ledger accounting services and bookkeeping services for deposit and loan accounts to the Corporation, the Banking Subsidiaries and its other nonbank subsidiaries. CSC also acts as a centralized purchasing agent for the purchase of computer hardware and software products by the Corporation and subsidiaries as well as providing technical support for the installation and use of these products. It competes, principally with data processing subsidiaries of other, mostly larger, banks, on the basis of the price and quality of its services and the speed with which such services are delivered. First Commonwealth Trust Company ("FCTC") was incorporated on January 18, 1991 as a Pennsylvania chartered trust company to render general trust services. The trust departments of subsidiary banks were combined to form FCTC, and the corporate headquarters are located in Indiana, Pennsylvania. FCTC has eight branch offices in the service areas of the Subsidiary Banks and offers personal and corporate trust services, including administration of estates and trusts, individual and corporate investment management and custody services and employee benefit trust services. First Commonwealth Insurance Agency ("FCIA") was incorporated as a Pennsylvania business corporation with its principal place of business in Indiana, Pennsylvania. FCIA began operations in January 1998 as a wholly- owned subsidiary of FCB and provides a full range of insurance and annuity products to retail and commercial customers. On June 1, 1989 Commonwealth Trust Credit Life Insurance Company ("Commonwealth Trust") began operations. The Corporation owns 50% of the voting common stock of Commonwealth Trust. Commonwealth Trust provides reinsurance for credit life and credit accident and health insurance sold by the subsidiaries of the two unrelated holding company owners under a joint venture arrangement whereby the net income derived from such reinsurance inures proportionally to the benefit of the holding company selling the underlying insurance to its banks' customers. 3 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) First Commonwealth Capital Trust I, a business trust created under the laws of the State of Delaware, is a wholly-owned subsidiary of the Corporation. The trust was formed during September 1999 for the exclusive purposes of issuing and selling trust preferred securities, using the proceeds from the sale of the trust preferred securities to acquire subordinated debentures issued by the Corporation and engaging in only those other activities necessary or incidental thereto. The Corporation and its subsidiaries employed approximately 1,460 persons (full-time equivalents) at December 31, 2000. The Corporation does not engage in any significant business activities other than holding the stock of its subsidiaries. The Corporation does not at present have any plans to expand or modify its business or that of its subsidiaries, other than as described herein. Nevertheless, it will be receptive to and may actively seek out mergers and acquisitions in the event opportunities which management considers advantageous to the development of the Corporation's business arise, and may otherwise expand or modify its business as management deems necessary to respond to changing market conditions or the laws and regulations affecting the business of banking. Competition The Subsidiary Banks, FCTC and FCIA face intense competition, both from within and without their service areas, in all aspects of business. The Subsidiary Banks compete for deposits, in such forms as checking, savings and NOW (negotiable order of withdrawal) accounts, MMDA (money market deposit accounts) and certificates of deposit, and in making consumer loans and loans to smaller businesses, with numerous other commercial banks and savings banks doing business within their service area. With respect to loans to larger businesses the Subsidiary Banks also compete with much larger banks located outside of their service area. The Subsidiary Banks also compete, primarily in making consumer loans and for deposits, with state and federally chartered savings and loan associations and with credit unions. In recent years the Subsidiary Banks have encountered significant competition for deposits from money market funds, mutual funds and institutions that offer annuities located throughout the United States. Money market funds pay dividends to their shareholders (which are the equivalent of the interest paid by banks on deposits) and they are able to offer services and conveniences similar to those offered by the Subsidiary Banks. Annuities accumulate interest on the amounts deposited over a predetermined time period. The depositor is then entitled to withdraw his funds for a fixed period of time or until death. The effect of such competition has been to increase the costs of the rest of deposits, which provide the funds with which loans are made. In addition to savings and loan associations and credit unions, the Subsidiary Banks also compete for consumer loans with local offices of national finance companies and finance subsidiaries of automobile manufacturers and with national credit card companies such as MasterCard and VISA, whose cards, issued through financial institutions, are held by consumers throughout their service area. The Subsidiary Banks believe that the principal means by which they compete for deposits and consumer and smaller commercial loans are the number and desirability of the locations of their offices and ATMs, the sophistication and quality of their services and the prices (primarily interest rates) of their services. Additionally, the Subsidiary Banks intend to remain competitive by offering financial services that target specific customer needs. Development of an integrated advisory sales model to integrate products between our Banks, Insurance Agency and Trust Company as well as utilization of an employee team to deliver products and services to our commercial customers through our "Total Solutions Financial Management" approach have been positively received by our customers. Specific customer needs are also met through an enhanced customer delivery system that includes telephone banking, which provides convenient access to financial services and hours of operation that extend past those of the Subsidiary Banks' branch offices. The Corporation will continue to enhance its customer delivery system in the future as the Internet is utilized to provide customers access to product information and on-line banking. 4 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Supervision and Regulation The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("the Bank Holding Company Act") and is registered such with the Federal Reserve Board. As a registered bank holding company ("BHC"), it is required to file with the Federal Reserve Board an annual report and other information. The Federal Reserve Board is also empowered to make examinations and inspections of the Corporation and its subsidiaries. The Bank Holding Company Act and Regulation Y of the Federal Reserve Board require every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire direct or indirect ownership or control of more than 5% of the outstanding voting shares or substantially all of the assets of a bank or merge or consolidate with another bank holding company. The Federal Reserve Board may not approve acquisitions by the Corporation of such percentage of voting shares or substantially all the assets of any bank located in any state other than Pennsylvania unless the laws of such state specifically authorize such an acquisition. The Bank Holding Company Act generally prohibits a bank holding company from engaging in a non-banking business or acquiring direct or indirect ownership or control of more that 5% of the outstanding voting shares of any non- banking corporation subject to certain exceptions, the principal exception being where the business activity in question is determined by the Federal Reserve Board to be closely related to banking or to managing or controlling banks to be a proper incident thereto. The Bank Holding Company Act does not place territorial restrictions on the activities of such banking related subsidiaries of bank holding companies. Under the Federal Reserve Act, subsidiary banks of a bank holding company are subject to certain restrictions on extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof, or acceptance of such stock or securities as collateral for loans to any one borrower. A bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or the furnishing of property or services. Under the Pennsylvania Banking Code, there is no limit on the number of Pennsylvania banks that may be owned or controlled by a Pennsylvania bank holding company. The Gramm-Leach-Bliley Act ("GBLA") of 1999 revolutionizes the regulation of financial services companies. GBLA amends the Bank Holding Company Act of 1956 to create a new type of bank holding company, a financial holding company ("FHC"), which is permitted to engage in all activities permitted by a bank holding company as well as securities, merchant banking and insurance activities that were prohibited to BHCs. GLBA also repeals Sections 20 and 32 of the Glass-Steagall Act, which prohibited affiliations between a member bank and a company principally engaged in securities activities. The activities of a BHC that does not qualify to become a FHC will be limited to those the Federal Reserve Board had, prior to enactment of GBLA, deemed closely related to banking. In order to qualify as a FHC, each depository institution subsidiary of a BHC must be well capitalized, well managed and if insured have a satisfactory or better rating under the Community Reinvestment Act of 1977 ("CRA") as its most recent examination and the BHC must file an election with the Federal Reserve Board certifying that it meets the requirements of a FHC. GBLA expands the range of business opportunities for commercial banking organizations and enables banking companies and other types of financial companies such as securities, insurance and financial technology companies to combine more readily. A FHC 5 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Supervision and Regulation (Continued) does not need to obtain prior Federal Reserve Board approval in order to engage in, or acquire a nonbank company that engages in financial activities. The FHC only needs to provide notice to the Federal Reserve Board, describing the activity commenced or conducted by the acquired company, within 30 days after commencing the activity or consummating the acquisition. Subsidiary Banks FCB and Southwest are Pennsylvania-chartered banks and are subject to the supervision of and regularly examined by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation ("FDIC"), and subject to certain regulations of the Federal Reserve Board. The areas of operation subject to regulation by Federal and Pennsylvania laws, regulations and regulatory agencies include reserves against deposits, maximum interest rates for specific classes of loans, truth-in-lending disclosures, permissible types of loans and investments, trust operations, mergers and acquisitions, issuance of securities, payment of dividends, Community Reinvestment Act evaluations, mandatory external audits, establishment of branches and other aspects of operations. Under the Pennsylvania Banking Code, a state bank located in Pennsylvania may establish branches anywhere in the state. Reciprocal Regional Interstate Banking As already noted, a bank holding company located in one state cannot acquire a bank or a bank holding company located in another state unless the law of such other state specifically permits such acquisition. On June 25, 1986, Pennsylvania passed a law (Act No. 1986-69) which provides that a bank holding company located in any state or the District of Columbia can acquire a Pennsylvania bank or bank holding company if the jurisdiction where the acquiring bank holding company is located has passed an enabling law that permits a Pennsylvania bank holding company to acquire a bank or a bank holding company in such jurisdiction. As of December 31, 2000 enabling laws have been passed so that the required reciprocity presently exists with approximately 34 states, of which the following 18 are east of the Mississippi River: Connecticut, Delaware, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Rhode Island, Tennessee, Vermont and West Virginia. A similar law is applicable to savings associations and savings and loan holding companies. It is difficult to determine the precise effects that reciprocal regional interstate banking will have on the Corporation in the future, but the law has increased, and as reciprocity becomes effective for additional states will increase further, the number of potential buyers for Pennsylvania banks and bank holding companies. The law also permits Pennsylvania bank holding companies and Pennsylvania savings and loan holding companies that desire to expand outside Pennsylvania to acquire banks, savings institutions and bank holding companies located in jurisdictions with which Pennsylvania has reciprocity. Effects of Governmental Policies The business and earnings of the Corporation are affected not only by general economic conditions, but also by the monetary and fiscal policies of the United States Government and its agencies, including the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open market operations in United States government securities, changes in 6 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Effects of Governmental Policies the discount rate on borrowings by member banks and savings institutions from the Federal Reserve System and changes in reserve requirements against bank and savings institution deposits. These instruments, together with fiscal and economic policies of various governmental entities, influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans, received on investments or paid for deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of bank holding companies and their subsidiary banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and Pennsylvania economies and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels and loan demand or the effect of such changes on the business and earnings of the Corporation or its subsidiaries. ITEM 2. PROPERTIES The Corporation's principal office is located in the old Indiana County Courthouse complex. This certified Pennsylvania and national historic landmark was built in 1870 and restored by NBOC in the early 1970s. The Corporation, NBOC, CSC and FCB occupy this grand structure, which provides 32,000 square feet of floor space, under a 25-year restoration lease agreement with Indiana County, which NBOC entered into in 1973 and renewed during 1998 for an additional 25 years. Under the lease, NBOC is obligated to pay all taxes, maintenance and insurance on the building and to restore it in conformity with historic guidelines. In order to support future expansion needs and centralization of various functional areas such as loan processing, marketing, and accounting, the Corporation also owns two additional structures, free of all liens and encumbrances. These facilities currently provide office space for the Corporation, CSC, FCTC, FCB, FCIA and FCPRI. The Subsidiary Banks have 92 banking facilities of which 25 are leased and 67 are owned in fee, free of all liens and encumbrances. All of the facilities utilized by the Corporation and its subsidiaries are used primarily for banking activities. Management believes all such facilities to be in good repair and well suited to their uses. Management presently expects that such facilities will be adequate to meet the anticipated needs of the Corporation and its subsidiaries for the immediate future. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings to which the Corporation or its subsidiaries are a party, or of which any of their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have any material adverse effect on the consolidated operations or financial position of the Corporation and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable 7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES Part II ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters First Commonwealth Financial Corporation (the "Corporation") is listed on the New York Stock Exchange under the symbol "FCF." The approximate number of holders of record of the Corporation's common stock is 12,800. The table below sets forth the high and low sales prices per share and cash dividends declared per share for common stock of the Corporation. Cash Dividends Period High Sale Low Sale Per Share 2000 First Quarter $12.000 $8.625 $0.140 Second Quarter $11.625 $9.063 $0.140 Third Quarter $10.188 $8.750 $0.140 Fourth Quarter $10.875 $8.875 $0.145 Cash Dividends Period High Sale Low Sale Per Share 1999 First Quarter $12.406 $10.156 $0.115 Second Quarter $12.188 $10.375 $0.130 Third Quarter $12.750 $11.031 $0.130 Fourth Quarter $14.313 $11.625 $0.140 8 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 6. Selected Financial Data (Dollar Amounts in Thousands, except per share data) The following selected financial data is not covered by the auditor's report and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the consolidated financial statements and related notes. All amounts have been restated to reflect the poolings of interests. Financial statement amounts for prior periods have also been reclassified to conform to the presentation format used in 2000. The reclassifications had no effect on the Corporation's financial condition or result of operations.
Years Ended December 31, 2000 1999 1998 1997 1996 Interest income............................ $311,882 $296,089 $282,067 $253,917 $234,957 Interest expense........................... 174,539 152,653 148,282 124,427 109,189 Net interest income...................... 137,343 143,436 133,785 129,490 125,768 Provision for credit losses................ 10,030 9,450 15,049 10,152 6,301 Net interest income after provision for credit losses.......................... 127,313 133,986 118,736 119,338 119,467 Securities gains........................... 1,745 565 1,457 6,825 1,599 Other operating income..................... 31,938 33,660 27,929 20,599 18,482 Merger and related charges................. -0- -0- 7,915 -0- -0- Other operating expenses................... 99,461 95,569 93,980 89,885 86,191 Income before taxes and extra- ordinary items...................... 61,535 72,642 46,227 56,877 53,357 Applicable income taxes.................... 14,289 19,612 12,229 17,338 16,164 Net income before extraordinary items 47,246 53,030 33,998 39,539 37,193 Extraordinary items (less applicable taxes of $336)................................. -0- -0- (624) -0- -0- Net income................................. $ 47,246 $ 53,030 $ 33,374 $ 39,539 $ 37,193 Per Share Data (a) Net income before extraordinary items.... $0.82 $0.88 $0.55 $0.64 $0.60 Extraordinary items...................... 0.00 0.00 (0.01) 0.00 0.00 Net income............................... $0.82 $0.88 $0.54 $0.64 $0.60 Dividends declared....................... $0.565 $0.515 $0.445 $0.41 $0.37 Average shares outstanding............... 57,558,929 60,333,092 61,333,572 61,671,898 62,310,086 Per Share Data Assuming Dilution (a) Net income before extraordinary items.... $0.82 $0.88 $0.55 $0.64 $0.60 Extraordinary items...................... 0.00 0.00 (0.01) 0.00 0.00 Net income............................... $0.82 $0.88 $0.54 $0.64 $0.60 Dividends declared....................... $0.565 $0.515 $0.445 $0.41 $0.37 Average shares outstanding............... 57,618,671 60,569,322 61,666,026 61,845,674 62,381,790 At End of Period Total assets............................. $4,372,312 $4,340,846 $4,096,789 $3,668,557 $3,339,996 Investment securities.................... 1,636,337 1,592,389 1,525,332 1,015,798 901,411 Loans and leases, net of unearned income. 2,490,827 2,500,059 2,374,850 2,436,337 2,236,523 Allowance for credit losses.............. 33,601 33,539 32,304 25,932 25,234 Deposits................................. 3,064,146 2,948,829 2,931,131 2,884,343 2,756,111 Company obligated mandatorily redeemable capital securities of subsidiary trust. 35,000 35,000 -0- -0- -0- Other long-term debt..................... 621,855 603,355 630,850 193,054 52,737 Shareholders' equity..................... 334,156 286,683 355,405 354,323 341,522 Key Ratios Return on average assets................. 1.10% 1.25% 0.85% 1.15% 1.17% Return on average equity................. 15.65% 15.44% 9.13% 11.31% 11.07% Net loans to deposit ratio............... 80.19% 83.64% 79.92% 83.57% 80.23% Dividends per share as a percent of net income per share....................... 68.90% 58.52% 82.41% 64.06% 61.67% Average equity to average assets ratio... 7.00% 8.10% 9.28% 10.16% 10.53% (a) Where applicable, per share amounts have been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on October 19, 1999.
9 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation including its subsidiaries (The "Corporation") for the years ended December 31, 2000, 1999 and 1998 and are intended to supplement, and should be read in conjunction with, the consolidated financial statements and related footnotes. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. The Corporation acquired Southwest National Corporation and its subsidiary ("Southwest") effective December 31, 1998. The merger was accounted for as a pooling of interests and accordingly, all financial statements have been restated as though the merger had occurred at the beginning of the earliest period presented. During the fourth quarter of 1997 the Corporation formed First Commonwealth Insurance Agency ("FCIA") as a subsidiary of First Commonwealth Bank ("FCB"), a commercial banking subsidiary of the Corporation. FCIA began marketing a wide range of insurance and annuity products to the Corporation's retail and commercial customers beginning January 1, 1998. On October 19, 1999, the Corporation's Board of Directors approved a 2-for-1 stock split effected in the form of a 100% stock dividend. Shareholders of record at the close of business November 4, 1999 received one additional share for each share held. The additional shares were distributed on November 18, 1999. Share data for all periods presented has been restated to reflect the stock split as if it had occurred at the beginning of the earliest period presented. Financial statements 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. Results of Operations Net income in 2000 was $47.2 million, reflecting a decrease of $5.8 million from 1999 results of $53.0 million and compared to $33.4 million reported in 1998. The decrease in net income for 2000 was primarily the result of gains on sale of loans which were realized during 1999. The 1998 period was impacted negatively by a number of merger and other related charges totaling $7.9 million. These charges included merger expenses for the acquisition of Southwest National Corporation, early retirement and postretirement benefit accruals and premises and equipment expenses to standardize depreciation methods. Extraordinary items for 1998 resulted from a single transaction whereby the Corporation incurred a cost of $960 thousand for the prepayment of FHLB term borrowings. This transaction was executed as part of the Corporation's repositioning of its balance sheet to reduce exposure to declining interest rates. 10 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Basic earnings per share and diluted earnings per share were $0.82 for 2000 compared to basic earnings per share and diluted earnings per share of $0.88 for 1999. Basic earnings per share and diluted earnings per share were $0.54 for 1998. Basic earnings per share excluding gains on sale of assets was $0.79 for 2000 compared to $0.82 for 1999. Return on average assets was 1.10% and return on average equity was 15.65% during 2000 compared to 1.25% and 15.44%, respectively for 1999. Return on average assets was 0.85% during 1998 while return on average equity was 9.13%. The following is an analysis of the impact of changes in net income on basic earnings per share: 2000 1999 vs. vs. 1999 1998 Net income per share, prior year $0.88 $0.54 Increase (decrease) from changes in: Net interest income 0.01 0.20 Provision for credit losses (0.02) 0.09 Security transactions 0.02 (0.01) Gain on sale of loans (0.08) 0.06 Other income 0.07 0.05 Salaries and employee benefits (0.09) (0.03) Occupancy and equipment costs (0.02) 0.00 Merger and other related charges 0.00 0.13 Other expenses (0.03) (0.03) Provision for income taxes 0.08 (0.13) Extraordinary items, net of tax 0.00 0.01 Net income per share $0.82 $0.88 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 $137.3 million in 2000 compared to $143.4 million in 1999 and $133.8 million in 1998. The following is an analysis of the average balance sheets and net interest income for each of the three years in the period ended December 31, 2000. 11 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued)
Average Balance Sheets and Net Interest Analysis (Dollar Amounts in Thousands) 2000 1999 1998 Average Income/ Yield or Average Income/ Yield or Average Income/ Yield or Balance Expense Rate(a) Balance Expense Rate(a) Balance Expense Rate(a) Assets Interest-earning assets: Time deposits with banks $ 1,220 $ 82 6.71% $ 1,844 $ 121 6.56% $ 3,692 $ 230 6.23% Investment securities 1,572,290 103,018 6.88 1,608,467 100,853 6.59 1,271,319 78,205 6.43 Federal funds sold 3,821 234 6.12 2,097 105 5.01 35,521 1,893 5.33 Loans (b) (c), net of unearned income 2,503,036 208,548 8.50 2,408,450 195,010 8.21 2,439,436 201,739 8.38 Total interest- earning assets 4,080,367 311,882 7.87 4,020,858 296,089 7.56 3,749,968 282,067 7.69 Noninterest-earning assets: Cash 74,178 80,716 78,999 Allowance for credit losses (34,296) (33,757) (27,388) Other assets 191,534 174,063 138,114 Total noninterest- earning assets 231,416 221,022 189,725 Total Assets $4,311,783 $4,241,880 $3,939,693 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits (d) $ 386,149 $ 9,593 2.48% $ 386,124 $ 8,375 2.17% $ 341,835 $ 7,579 2.22% Savings deposits (d) 652,647 17,027 2.61 712,637 17,769 2.49 715,814 21,379 2.99 Time deposits 1,585,694 88,887 5.61 1,499,857 77,187 5.15 1,530,491 85,002 5.55 Short-term borrowings 371,286 22,218 5.98 279,269 13,832 4.95 195,334 10,214 5.23 Long-term debt 632,837 36,814 5.82 643,746 35,490 5.51 430,677 24,108 5.60 Total interest- bearing liabilities 3,628,613 174,539 4.81 3,521,633 152,653 4.33 3,214,151 148,282 4.61 Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits (d) 349,259 345,311 328,720 Other liabilities 31,971 31,439 31,177 Shareholders' equity 301,940 343,497 365,645 Total noninterest- bearing funding sources 683,170 720,247 725,542 Total Liabilities and Shareholders' Equity $4,311,783 $4,241,880 $3,939,693 Net Interest Income and Net Yield on Interest- earning Assets $137,343 3.59% $143,436 3.76% $133,785 3.73% (a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate. (b) Income on nonaccrual loans is accounted for on the cash basis, and the loan balances are included in interest-earning assets. (c) Loan income includes net loan fees. (d) Average balances do not include reallocations from noninterest-bearing demand deposits and interest-bearing demand deposits into savings deposits which were made for regulatory purposes.
12 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Both interest income and interest expense increased over 1999 levels as a result of both volume increased and rate increases. Average interest- earning assets increased $59.5 million while average interest-bearing liabilities increased $107.0 million in 2000. Asset yields, on a tax- equivalent basis, increased 31 basis points (0.31%) during 2000 to 7.87%, from 7.56% reported in 1999 and compared to 7.69% reported in 1998. The cost of funds for 2000 increased 48 basis points (0.48%) over 1999 costs of 4.33% and compared to costs of 4.61% for 1998. Interest and fees on loans increased $13.5 million for 2000 over 1999 levels, primarily as a result of volume and rate increases for commercial loans. Enhanced marketing strategies continue to enable the Corporation to capitalize on lending opportunities with small to mid-sized commercial customers, including Small Business Administration ("SBA") loans generated through the Corporation's preferred lender status. Average loans for 2000 increased $94.6 million compared to 1999 averages and included increases in commercial loans and municipal loans which were partially offset by decreases in average consumer loans. The decrease in average 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. Interest and fees on loans also reflected increases due to rate of $6.2 million during 2000 as loan yields increased 29 basis points (0.29%) during 2000 to 8.50% from 8.21% reported for 1999 and compared to 8.38% during 1998. Mortgage portfolio yields rose 17 basis points (0.17%) for 2000 compared to 1999 as "teaser-rates" on innovative loan products introduced in previous years were phased out. Yields on commercial loans, municipal loans, and both secured and unsecured revolving credit loans for 2000 also reflected increases compared to 1999 yields reflecting the increase in general interest rates. Interest income on investments increased $2.2 million for 2000 compared to 1999, as rate increases during 2000 were only partially offset by volume decreases. Yields on investments for 2000 were 6.88% compared to 6.59% for 1999 and 6.43% for 1998. Increases in interest income due to rate for U.S. government agency securities were $2.4 million during 2000 as yields on U.S. government agency securities increased 22 basis points (0.22%) compared to 1999 yields. Prepayment speeds of mortgage backed securities which had slowed during 1999 as interest rates rose, began to accelerate at the end of 2000 as interest rates began to decline. The primary risk of owning MBS relates to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact on prepayment speeds. As interest rates increase, prepayment speeds generally decline, resulting in a longer average life of a MBS. Conversely as interest rates decline, prepayment speeds increase, resulting in a shorter average life of a MBS. Using computer simulation models, the Corporation tests the average life and yield volatility of all MBSs under various interest rate scenarios on a regular basis to insure that volatility falls within acceptable limits. The Corporation holds no "high risk" securities nor does the Corporation own any securities of a single issuer exceeding 10% of shareholders' equity other than U.S. government and agency securities. Decreases in interest income on investments due to volume of $2.4 million during 2000 resulted primarily from volume decreases for U.S. government agency securities which were partially offset by volume increases for corporate bonds. Average balances of U.S. government agency securities decreased $111.6 million for 2000 compared to 1999 averages as an inverted yield curve prevented a reinvestment of proceeds generated by paydowns at a positive spread. Average balances of corporate bonds increased $66.1 million over the same time period primarily as a result of investment in trust preferred securities. 13 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Interest on deposits increased $12.2 million for 2000 compared to 1999 as both volumes and rates increased over 1999 levels. Average time deposits increased $85.8 million for 2000 compared to 1999, resulting in an increase in interest expense due to volume of $4.4 million. Increases in average time deposits for 2000 compared to 1999 averages were partially offset by decreases in average savings deposits of $60.0 million. The cost of time deposits for 2000 increased by 46 basis points (0.46%) compared to 1999 costs of 5.15%, resulting in an increase in interest expense due to rate of $7.3 million. Interest on total savings deposits for 2000 also reflected increases due to rate of $2.0 million as deposit costs for total savings deposits increased 18 basis points (0.18%) for 2000 compared to 1999. Average balances of noninterest-bearing demand deposits for 2000 reflected an increase of $3.9 million compared to 1999 averages. Interest expense on short-term borrowings increased $8.4 million during 2000 as the average balance of repurchase agreements increased $150.9 million. The cost of short-term borrowings for 2000 also increased by 103 basis points (1.03%) compared to 1999 costs of 4.95%. Interest expense on long-term debt increased $1.3 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, consequently interest expense on capital securities for 2000 was $3.3 million compared to $1.0 million for 1999. The parent company incurred a $16 million bank loan during 1999 primarily to fund the remaining cost of the stock repurchase. (See NOTE 16 to the financial statements for a description of the Company obligated mandatorily redeemable capital securities of subsidiary trust and NOTE 17 to the financial statements for a description of the bank loan incurred). Net interest margin (net interest income, on a tax-equivalent basis as a percentage of average earning assets), was 3.59% during 2000 compared to 3.76% in 1999 and 3.73% in 1998. The Corporation's use of computer modeling to manage interest rate risk is described in the "Interest Sensitivity" section of this discussion herein. The following table shows the effect of changes in volumes and rates on interest income and interest expense.
Analysis of Year-to-Year Changes in Net Interest Income (Dollar Amounts in Thousands) 2000 Change from 1999 1999 Change from 1998 Total Change Due Change Due Total Change Due Change Due Change to Volume to Rate Change to Volume to Rate Interest-earning assets: Time deposits with banks $ (39) $ (41) $ 2 $ (109) $ (115) $ 6 Securities 2,165 (2,383) 4,548 22,648 21,682 966 Federal funds sold 129 86 43 (1,788) (1,781) (7) Loans 13,538 7,765 5,773 (6,729) (2,596) (4,133) Total interest income 15,793 5,427 10,366 14,022 17,190 (3,168) Interest-bearing liabilities: Deposits 12,176 2,922 9,254 (10,629) (815) (9,814) Short-term borrowings 8,386 4,558 3,828 3,618 4,389 (771) Long-term debt 1,324 (601) 1,925 11,382 11,927 (545) Total interest expense 21,886 6,879 15,007 4,371 15,501 (11,130) Net interest income $(6,093) $(1,452) $(4,641) $ 9,651 $ 1,689 $ 7,962
14 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) The provision for credit losses is an amount added to the allowance against which credit losses are charged. The amount of the provision is determined by management based upon its assessment of the size and quality of the loan portfolio and the adequacy of the allowance in relation to the risks inherent within the loan portfolio. The provision for credit losses was $10.0 million in 2000 compared to $9.5 million in 1999 and $15.0 million in 1998. The 1998 period contains an additional provision of $4.2 million recorded in the fourth quarter of 1998 to reflect changing economic conditions. The allowance for credit losses was $33.6 million at December 31, 2000, for a ratio of 1.35% of actual loans outstanding. The ratio of the allowance for credit losses to total loans outstanding as of December 31, 2000 has increased slightly from the 1.34% reported as of December 31, 1999. Net charge-offs for 2000 reflected increases in charge- offs of commercial loans not secured by real estate of $2.0 million and revolving credit loans of $269 thousand which were partially offset by decreases in net charge-offs of 1-4 family residential mortgages, consumer installment and commercial loans secured by real estate. Net charge-offs against the allowance for credit losses were $10.0 million, or 0.40% of average total loans in 2000. This compared to net charge-offs of $8.2 million in 1999 and $8.7 million in 1998. Net charge-offs were 0.34% and 0.36% of average total loans during 1999 and 1998, respectively. For an analysis of credit quality, see the "Credit Review" section of this discussion. The following table presents an analysis of the consolidated allowance for credit losses for the five years ended December 31, 2000 (Dollar Amounts in Thousands):
Summary of Loan Loss Experience 2000 1999 1998 1997 1996 Loans outstanding at end of year $2,490,827 $2,500,059 $2,374,850 $2,436,337 $2,236,523 Average loans outstanding $2,503,036 $2,408,450 $2,439,436 $2,330,657 $2,060,196 Allowance for credit losses: Balance, beginning of year $ 33,539 $ 32,304 $ 25,932 $ 25,234 $ 23,803 Loans charged off: Commercial, financial and agricultural 4,335 1,821 1,513 1,473 633 Loans to individuals 5,521 6,126 7,293 8,022 5,069 Real estate-construction -0- -0- -0- -0- -0- Real estate-commercial 130 427 812 664 440 Real estate-residential 874 1,035 690 819 195 Lease financing receivables 407 187 319 -0- 26 Total loans charged off 11,267 9,596 10,627 10,978 6,363 Recoveries of loans previously charged off: Commercial, financial and agricultural 406 290 462 223 263 Loans to individuals 826 1,057 1,328 1,218 1,033 Real estate-construction -0- -0- -0- -0- -0- Real estate-commercial -0- -0- 70 13 83 Real estate-residential 42 33 87 57 109 Lease financing receivables 25 1 3 13 5 Total recoveries 1,299 1,381 1,950 1,524 1,493 Net loans charged off 9,968 8,215 8,677 9,454 4,870 Provision charged to expense 10,030 9,450 15,049 10,152 6,301 Balance, end of year $ 33,601 $ 33,539 $ 32,304 $ 25,932 $ 25,234 Ratios: Net charge-offs as a percentage of average loans outstanding 0.40% 0.34% 0.36% 0.41% 0.24% Allowance for credit losses as a percentage of average loans outstanding 1.34% 1.39% 1.32% 1.11% 1.22%
15 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Net securities gains increased $1.2 million during 2000 from $565 thousand reported in 1999 and compared to $1.5 million in 1998. The securities gains during 2000 resulted primarily from the sale of Pennsylvania bank stocks with a book value of $19.9 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 securities gains of $167 thousand and $317 thousand, respectively. Proceeds from the sale of U.S. treasury securities in 1999 were the primary funding source for the acquisition of $20 million of bank owned life insurance during the first quarter of 1999. The security gains during 1998 resulted in part from the third and fourth quarter sales of floating collateralized mortgage obligations classified as securities "available for sale" having book values of $87.9 million and $16.1 million respectively, which resulted in security gains of $1.7 million during the third quarter and security losses of $803 thousand during the fourth quarter. These securities were sold to reduce the exposure to accelerated prepayments in a declining interest rate environment. The $89.6 million proceeds from the sale of securities in the third quarter of 1998 were used to reduce outstanding Federal funds purchased while the $15.3 million proceeds in the fourth quarter of 1998 were reinvested in higher yielding municipal securities. The 1998 securities gains also included the sale of U.S. treasury securities having a book value of $45.8 million with the proceeds being reinvested in mortgage backed and other U.S. government agency securities with similar average expected maturities and the sale of Pennsylvania bank stocks having a book value of $5.2 million. Securities losses of $586 thousand were incurred during the fourth quarter of 1998 primarily as a result of the sale of mutual funds classified as equity securities having a book value of $5.8 million. Trust income of $5.6 million for 2000 compared to $5.5 million for 1999 and $5.3 million for 1998. Enhanced referral programs and integrated growth plans for financial affiliates have been initiated to help improve sales in various areas including trust assets managed. Additional noninterest income analysis is planned for 2001 through the use of recently implemented customer and product profitability systems. Conversion of deposit processing systems utilized by the Corporation's data processing subsidiary to new software during 2001 will facilitate the offering of enhanced deposit products and services which are expected to increase deposit fees in future periods. Gains on sale of loans decreased $4.7 million for 2000 from 1999 gains on sale of loans of $5.0 million and compared to $1.6 million reported in 1998. Gains on sale of loans for the 1999 period resulted primarily from the sale of $42.2 million of residential mortgage loans during the first quarter of 1999 and the sale of its $20.4 million retail credit card loans during the second quarter of 1999 which generated gains of $890 thousand and $4.0 million, respectively. Gains on sale of loans for 1998 resulted primarily from the sale of $52.5 million of 1-4 family residential mortgage loans during the fourth quarter of 1998 which resulted in a gain of $1.3 million. Other income for 2000 was $15.6 million representing an increase of $3.1 million over 1999 income of $12.5 million and compared to $11.4 for 1998. Other income for the 2000 period reflected a gain on sale of fixed assets of $515 thousand and increases in merchant discount of $401 thousand and MAC interchange fees of $628 thousand compared to 1999 revenues. Insurance commissions, which have continued to increases since FCIA's formation in 1998, generated increases of $415 thousand during 2000 compared to 1999. Other income for the 2000 period also included an increase in income from bank owned life insurance of $1.3 million, resulting from claim income and the impact of an additional $15 million investment during 2000. As a result of branch analysis including the evaluation of the potential sale or consolidation of branches competing in the same market area, the Corporation sold two of its branches located in State College, Pennsylvania during 1998 that resulted in a gain of $950 thousand, which is included in other revenue for 1998. 16 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Total other operating expenses increased $3.9 million to $99.5 million for 2000 compared to $95.6 million and $101.9 million in 1999 and 1998, respectively. Total noninterest expense as a percent of average assets was 2.31% for the 2000 period compared to 2.26% for 1999. Employee costs were $52.5 million in 2000, representing 1.22% of average assets compared to $49.8 million and 1.17% of average assets for 1999. Employee costs for 1998 were $48.7 million or 1.24% of average assets. Salary and benefit costs for 2000 were negatively impacted by decreases in deferred loan origination costs as loan volumes for 2000 decreased over 1999 volumes. Although increases in employee insurance expenses of $498 thousand represented an increase of 12.1% for 2000 compared to 1999, these increases were less than anticipated. The Corporation continues to address hospitalization and other employee insurance costs in future periods by utilizing the expertise of FCIA's staff to enable dependable and high quality benefits to be offered in the most cost effective manner. Additional increases in employee benefit costs during 2000 occurred in 401(k) plan expenses as employees took advantage of contribution and investment enhancements to the plan instituted during 1999. The 2000 period included decreases in employee benefit costs for pension and postretirement benefits totaling $504 thousand at Southwest as a result of plan curtailment discussed below. Salary and benefit costs increased only 2.3% for 1999 compared to 1998 and were favorably impacted by the early retirement plan offered to employees during the fourth quarter of 1998. The success of the early retirement plan accelerated the process of right-sizing the Corporation beyond normal attrition management by adjusting employment levels quickly while continuing the Corporation's tradition of not laying off employees due to merger activity. Furniture and equipment expenses of $8.2 million for 2000 reflected increases of $501 thousand over 1999 levels and included increases in software depreciation and maintenance costs totaling $358 thousand as well as increases in furniture and equipment depreciation and repairs. The 1999 period reflected decreases in occupancy and furniture and equipment expenses as a result of the sale of two branches in 1998 and the closing or consolidation of several branches in 1999. Computer software depreciation and maintenance costs are expected to increase in future periods as software utilized by the Corporation's data processing subsidiary to process loan and deposit accounts is replaced and placed in service during 2001. The new application software will enable the subsidiary banks to provide customers with enhanced products and services including internet banking. Technology continues to have a great impact on financial services companies and their ability to compete in the marketplace. The Corporation is committed to providing banking, trust and insurance services through traditional branch and telephone channels in the markets we serve, as well as meeting the changing needs of our customers. Outside data processing expenses were $3.3 million for 2000 compared to $3.4 million for both 1999 and 1998. Outside data processing expenses are managed by the Corporation's data processing subsidiary along with management of internal data processing costs. Outsourced data processing needs are evaluated based on technology, efficiency and cost considerations. This cost would be expected to be reduced by 2002 as Southwest Bank is converted from an outsourced environment to our internal systems. Included in the 1998 period were merger and related charges of $7.9 million. Merger expenses incurred during the acquisition of Southwest National Corporation for legal, accounting, printing, filing and other professional services totaled $1.6 million and were expensed during the fourth quarter of 1998. As part of the evaluation of appropriate staffing levels for the 17 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Corporation after inclusion of Southwest, an early retirement plan was offered to employees during the fourth quarter of 1998. Salary and benefit costs of the early retirement plan in the amount of $4.7 million are included in merger and other related charges for 1998, as approximately 5% of employees took advantage of this opportunity. In anticipation of the merger of Southwest benefit plans into those of the Corporation in the near future, Southwest curtailed their postretirement benefit plan during the fourth quarter of 1998. An additional accrual adjustment of $1.1 million related to this curtailment is included in merger and other related charges for 1998. Additional merger and other related charges of $462 thousand were incurred during 1998 to standardize depreciation for Southwest to that of the Corporation and to write-off signs and supplies that become obsolete as a result of the merger. Other operating expenses for 2000 were $25.4 million, an increase of $749 thousand over the $24.6 million reported for 1999. Collection and repossession expenses increased $454 thousand for 2000 compared to 1999 as accelerated collection efforts attempted to reduce nonperforming loan levels and minimize risk of loss in future periods. FDIC expenses increased $180 thousand during 2000, primarily as a result of rate changes implemented when the FDIC Bank Insurance Fund and Savings and Loan Insurance Fund rates were standardized. Express freight charges for 2000 increased $198 thousand compared to 1999 partially because of the impact of gasoline prices on carrier providers. Other operating expenses for 2000 also included increases in advertising and promotions, charge card interchange, and checkbook printing expenses. Increases in other operating expenses for 2000 were partially offset by decreases in other professional fees, postage and printing costs of $210 thousand, $171 thousand and $116 thousand, respectively compared to 1999 costs. Other operating expenses for the 1999 period included an increase in the write-down of mortgage servicing rights in the amount of $336 thousand related to the disposition of BSI. The disposition of BSI in 1999 also resulted in a loss on sale of $202 thousand. Advertising, charge card interchange and telephone expense reflected increases for the 1999 period of $265 thousand, $335 thousand, and $265 thousand, respectively compared to the 1998 period. Since 1999, telephone expenses have been analyzed and successfully reduced during 2000. Other professional fees, legal fees and audit and accounting fees decreased for 1999 compared to 1998. Income tax expense was $14.3 million during 2000 representing a decrease of $5.3 million over the 1999 amount of $19.6 million and compared to $12.2 million in 1998. The Corporation's effective tax rate was 23.2% for 2000 compared to 27.0% for 1999 and 26.5% for 1998. The reduction in the Corporation's effective tax rate was primarily the result of increased tax free income from municipal loans and bank owned life insurance. Extraordinary items for 1998 resulted from a single transaction whereby the Corporation incurred a cost of $960 thousand for the prepayment of FHLB term borrowings. This transaction was executed as part of the Corporation's repositioning of its balance sheet to reduce exposure to declining interest rates. 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. 18 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Liquidity (Continued) Increased competition from nonbanking sources such as mutual funds, insurance companies and brokerage and investment banking firms have required banks to rely more heavily on alternative funding from other borrowings. Many of our competitors have significantly greater resources (financial and other) than us and may offer certain services that our banks do not provide at this time. In addition certain of our banks' competitors are not subject to the regulation and supervision to which we and our banks are subject, and therefore may have competitive advantages over our banks. The impact of increased competition for deposits could become more consequential in the future. The Corporation monitors liquidity through regular computations of prescribed liquidity ratios. The Corporation actively manages liquidity within a defined range and has developed liquidity contingency plans, including ensuring availability of alternate funding sources to maintain liquidity under a variety of business conditions. In addition to the previously described funding sources the Corporation's ability to access the capital markets was demonstrated during 1999 through the issuance of $35 million of capital securities. The Corporation's long-term liquidity source is a large core deposit base and a strong capital position. Core deposits are the most stable source of liquidity a bank can have due to the long-term relationship with a deposit customer. Deposits increased $115.3 million in 2000 and included an increase of $18.2 million in core deposits. Non-core deposits, which are time deposits in denominations of $100 thousand or more represented 14.86% of total deposits at December 31, 2000, up from 12.15% of total deposits at December 31, 1999. Non-core deposits increased by $97.1 million in 2000 and $58.8 million 1999 due in part to an increase in public funds. The increase in non-core deposits during 2000 also included 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. Time deposits of $100 thousand or more at December 31, 2000, 1999 and 1998 had remaining maturities as follows:
Maturity Distribution of Large Certificates of Deposit (Dollar Amounts in Thousands) 2000 1999 1998 Amount Percent Amount Percent Amount Percent Remaining Maturity: 3 months or less $358,112 79% $273,376 76% $151,121 50% Over 3 months through 6 months 36,941 8 13,372 4 40,363 14 Over 6 months through 12 months 19,241 4 14,503 4 27,546 9 Over 12 months 41,088 9 57,010 16 80,382 27 Total $455,382 100% $358,261 100% $299,412 100%
Net loans decreased $9.3 million during 2000 as residential real estate loans and loans to individuals decreased by $47.6 million and $52.3 million respectively, compared to year-end 1999. Decreases during 2000 for consumer loans were partially offset by increases in commercial loans secured by real estate and increases in municipal loans of $64.3 million and $35.5 million over the same time period. 19 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Below is a schedule of loans by classification for the five years ended December 31, 2000.
Loans by Classification (Dollar Amounts in Thousands) 2000 1999 1998 1997 1996 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Commercial, financial, agricultural and other $ 443,618 18% $ 417,300 16% $ 377,733 16% $ 363,699 15% $ 316,550 14% Real estate-construction 37,146 2 41,734 2 33,097 1 35,308 1 39,120 2 Real estate-commercial 560,066 22 495,789 20 387,166 16 384,794 16 356,106 16 Real estate-residential 932,915 37 980,506 39 1,009,903 42 1,048,405 43 941,147 41 Loans to individuals 450,154 18 502,465 20 517,907 22 569,742 23 578,204 25 Net leases 68,975 3 65,893 3 56,423 3 51,245 2 36,329 2 Gross loans and leases 2,492,874 100% 2,503,687 100% 2,382,229 100% 2,453,193 100% 2,267,456 100% Unearned income (2,047) (3,628) (7,379) (16,856) (30,933) Total loans, and leases net of unearned income $2,490,827 $2,500,059 $2,374,850 $2,436,337 $2,236,523
An additional source of liquidity is marketable securities that the Corporation holds in its investment portfolio. These securities are classified as "securities available for sale". While the Corporation does not have specific intentions to sell these securities, they have been designated as "available for sale" because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of December 31, 2000, securities available for sale had an amortized cost of $1,250 million and an approximate fair value of $1,238 million. Gross unrealized gains were $4.6 million and gross unrealized losses were $16.6 million. Based upon the Corporation's historical ability to fund liquidity needs from other sources, the current available for sale portfolio is deemed to be more than adequate, as the Corporation does not anticipate a need to liquidate the investments until maturity. Below is a schedule of the contractual maturity distribution of securities held to maturity and securities available for sale at December 31, 2000.
Maturity Distribution of Securities Held to Maturity (Dollar Amounts in Thousands) States and Total Weighted U.S. Government Agencies Political Other Amortized Average and Corporations Subdivisions Securities Cost Yield* Within 1 year $ 13,341 $ 3,957 $ -0- $ 17,298 5.90% After 1 but within 5 years 96,448 19,636 22,972 139,056 6.46 After 5 but within 10 years 29,857 28,739 255 58,851 6.96 After 10 years 108,720 74,182 -0- 182,902 6.56 Total $248,366 $126,514 $23,227 $398,107 6.56%
Maturity Distribution of Securities Available for Sale At Amortized Cost (Dollar Amounts in Thousands) U.S. Treasury, and other States and Total Weighted U.S. Government Agencies Political Other Amortized Average and Corporations Subdivisions Securities Cost Yield* Within 1 year $ 10,032 $ 1,945 $ 250 $ 12,227 6.60% After 1 but within 5 years 117,555 6,860 101,131 225,546 6.67 After 5 but within 10 years 58,385 11,829 6,316 76,530 6.54 After 10 years 694,066 55,432 186,407 935,905 6.77 Total $880,038 $76,066 $294,104 $1,250,208 6.73% *Yields are calculated on a tax-equivalent basis.
20 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Interest Sensitivity The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances. While no single number can accurately describe the impact of changes in interest rates on net interest income, interest rate sensitivity positions, or "gaps" when measured over a variety of time periods may be helpful. An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period. If interest-sensitive assets ("ISA") exceeds interest-sensitive liabilities ("ISL") during a prescribed time period, a positive gap results. Conversely, when ISL exceeds ISA during a time period, a negative gap results. A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively when interest rates fall during the time period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes. In other words, as interest rates fall, a negative gap should tend to produce a positive effect on earnings and when interest rates rise, a negative gap should tend to affect earnings negatively. The primary components of ISA include adjustable rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and short-term borrowings. The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated as of December 31, 2000 and 1999 (Dollar Amounts in Thousands):
2000 Cumulative 0-90 Days 91-180 Days 181-365 Days 0-365 Days Loans $ 621,536 $130,374 $ 244,605 $ 996,515 Investments 130,220 47,279 105,423 282,922 Other interest-earning assets 11,552 -0- -0- 11,552 Total interest-sensitive assets 763,308 177,653 350,028 1,290,989 Certificates of deposit 274,963 264,805 470,828 1,010,596 Other deposits 1,018,205 -0- -0- 1,018,205 Borrowings 274,673 884 457 276,014 Total interest-sensitive liabilities 1,567,841 265,689 471,285 2,304,815 Gap $ (804,533) $(88,036) $(121,257) $(1,013,826) ISA/ISL 0.49 0.67 0.74 0.56 Gap/Total assets 18.40% 2.01% 2.77% 23.19%
1999 Cumulative 0-90 Days 91-180 Days 181-365 Days 0-365 Days Loans $ 697,645 $113,547 $ 204,090 $ 1,015,282 Investments 44,666 39,497 66,465 150,628 Other interest-earning assets 18,799 2,759 4,532 26,090 Total interest-sensitive assets 761,110 155,803 275,087 1,192,000 Certificates of deposit 325,985 231,804 277,769 835,558 Other deposits 1,074,451 -0- -0- 1,074,451 Borrowings 467,255 961 127,108 595,324 Total interest-sensitive liabilities 1,867,691 232,765 404,877 2,505,333 Gap $(1,106,581) $(76,962) $(129,790) $(1,313,333) ISA/ISL 0.41 0.67 0.68 0.48 Gap/Total assets 25.49% 1.77% 2.99% 30.26%
21 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (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 twelve month period. Simulations are prepared under the base case where interest rates remain flat and most likely case where interest rates are defined using projections of economic factors. Additional simulations are produced estimating the impact on net interest income of a 300 basis point (3.00%) movement upward or downward from the base case scenario. The Corporation's current asset/liability management policy indicates that a 300 basis point (3.00%) change in interest rates up or down cannot result in more than a 7.5% change in net interest income when compared to a base case without Board approval and a strategy in place to reduce interest rate risk below the established maximum level. The analysis at December 31, 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 and the Corporation's position would remain well within current policy guidelines. The Corporation's "Asset/Liability Management Committee" ("ALCO") is responsible for the identification, assessment and management of interest rate risk exposure, liquidity, capital adequacy and investment portfolio position. The primary objective of the ALCO process is to ensure that the Corporation's balance sheet structure maintains prudent levels of risk within the context of currently known and forecasted economic conditions and to establish strategies which provide the Corporation with appropriate compensation for the assumption of those risks. The ALCO attempts to mitigate interest rate risk through the use of strategies such as asset disposition, asset and liability pricing and matched maturity funding. The ALCO strategies are established by the Corporation's senior management and are approved by the Corporation's board of directors. Final loan maturities and rate sensitivity of the loan portfolio excluding consumer installment and mortgage loans and before unearned income at December 31, 2000 were as follows (Dollar Amounts in Thousands): Within One One to After Year 5 Years 5 Years Total Commercial and industrial $157,096 $ 80,434 $ 53,898 $ 291,428 Financial institutions 160 -0- -0- 160 Real estate-construction 13,854 6,166 17,126 37,146 Real estate-commercial 84,316 92,191 383,559 560,066 Other 23,985 15,934 112,111 152,030 Totals $279,411 $194,725 $566,694 $1,040,830 Loans at fixed interest rates 144,198 359,826 Loans at variable interest rates 50,527 206,868 Totals $194,725 $566,694 22 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Credit Review Maintaining a high quality loan portfolio is of great importance to the Corporation. The Corporation manages the risk characteristics of the loan portfolio through the use of prudent lending policies and procedures and monitors risk through a periodic review process provided by internal auditors, regulatory authorities and our loan review staff. These reviews include the analysis of credit quality, diversification of industry, compliance to policies and procedures, and an analysis of current economic conditions. In the management of its credit portfolio, the Corporation emphasizes the importance of the collectibility of loans and leases as well as asset and earnings diversification. The Corporation immediately recognizes as a loss all credits judged to be uncollectible and has established an allowance for credit losses that may exist in the portfolio at a point in time, but have not been specifically identified. The Corporation's written lending policy requires certain underwriting standards to be met prior to funding any loan, including requirements for credit analysis, collateral value coverage, documentation, and terms. The principal factor used to determine potential borrowers' creditworthiness is business cash flows or consumer income available to service debt payments. Secondary sources of repayment, including collateral or guarantees, are frequently obtained. The lending policy provides limits for individual and bank committees lending authorities. In addition to the bank loan approval process, requests for borrowing relationships which will exceed one million dollars must also be approved by the Corporation's Credit Committee. This Committee consists of a minimum of three members of the Corporation's board of directors. Early in 2000, the Corporation initiated an additional level of approval for credit relationships between $500 thousand and $1.0 million. This procedure requires approval of those credits by a committee consisting of senior lenders of the Corporation. Commercial and industrial loans are generally granted to small and middle market customers for operating, expansion or asset acquisition purposes. Operating cash flows of the business enterprise are identified as the principal source of repayment, with business assets held as collateral. Collateral margins and loan terms are based upon the purpose and structure of the transaction as set forth in loan policy. Commercial real estate loans are granted for the acquisition or improvement of real property. Generally, commercial real estate loans do not exceed 75% of the appraised value of property pledged to secure the transaction. Repayment of such loans are expected from the operations of the subject real estate and are carefully analyzed prior to approval. Real estate construction loans are granted for the purposes of constructing improvements to real property, both commercial and residential. On-site inspections are conducted by qualified individuals prior to periodic permanent project financing, which is generally committed prior to the commencement of construction financing. 23 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Real estate loans secured by 1-4 family residential housing properties are granted subject to statutory limits in effect for each bank regarding the maximum percentage of appraised value of the mortgaged property. Residential loan terms are normally established in compliance with secondary market requirements. Residential mortgage portfolio interest rate risk is controlled by secondary market sales, variable interest rate loans and balloon maturities. Loans to individuals represent financing extended to consumers for personal or household purposes, including automobile financing, education, home improvement, and personal expenditures. These loans are granted in the form of installment, credit card, or revolving credit transactions. Consumer creditworthiness is evaluated on the basis of ability to repay, stability of income sources, and past credit history. The Corporation maintains an allowance for credit losses at a level deemed sufficient to absorb losses which are inherent in the loan and lease portfolios at each balance sheet date. Management reviews the adequacy of the allowance on at least a quarterly basis to ensure that the provision for credit losses has been charged against earnings in an amount necessary to maintain the allowance at a level that is appropriate based on management's assessment of probable estimated losses. The Corporation's methodology for assessing the appropriateness of the allowance for credit losses consists of several key elements. These elements include a specific allowance for primary watch list classified loans, an allowance based on historical trends, an additional allowance for special circumstances, and an unallocated portion. The Corporation consistently applies the following comprehensive methodology and procedure at the subsidiary bank level. The allowance for primary watch list classified loans addresses those loans maintained on the Corporation's primary watch list which are assigned a rating of substandard, doubtful, or loss. Substandard loans are those with a well-defined weakness or a weakness which jeopardizes the repayment of the debt. A loan may be classified as substandard as a result of impairment of the borrower's financial condition and repayment capacity. Loans for which repayment plans have not been met or collateral equity margins do not protect the Corporation may also be classified as substandard. Doubtful loans have the characteristics of substandard loans with the added characteristic that collection or liquidation in full, on the basis of presently existing facts and conditions, is highly improbable. Although the possibility of loss is extremely high for doubtful loans, the classification of loss is deferred until pending factors, which might improve the loan, have been determined. Loans rated as doubtful in whole or in part are placed in nonaccrual status. Loans which are classified as loss are considered uncollectible and are charged to the allowance for credit losses at the next meeting of the Corporation's credit committee after placement in this category. There were no loans classified as loss on the primary watch list as of December 31, 2000. Loans on the primary watch list may also be impaired loans, which are defined as nonaccrual loans or troubled debt restructurings which are not in compliance with their restructured terms. Each of the classified loans on the primary watch list are individually analyzed to determine the level of the potential loss in the credit under the current circumstances. The specific reserve established for these criticized and impaired loans is based on careful analysis of the loan's performance, the related collateral value, cash flow considerations and the financial capability of any guarantor. The allowance for primary watch list classified loans is equal to the total amount of potential unconfirmed losses for the individual classified loans on the watch list. Primary watch list loans are managed and monitored by assigned account officers within the Corporation in conjunction with Senior Management. The allowance based on historical trends uses charge-off experience of the Corporation to estimate potential unconfirmed losses in the balances of the loan and lease portfolios. The historical loss experience percentage is 24 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) based on the charge-off history for the twenty most recent quarters. Historical loss experience percentages are applied to all non-classified loans to obtain the portion of the allowance for credit losses which is based on historical trends. Before applying the historical loss experience percentages, loan balances are reduced by the portion of the loan balances which are subject to guarantee by a government agency. Loan balances are also adjusted for unearned discount on installment loans. The additional allowance for special circumstances provides management with the opportunity to estimate additional potential allowance amounts which may be needed to cover specific factors. The specific factors that management currently evaluates consist of portfolio risk or concentrations of credit, off balance sheet risk, economic conditions, management or staff considerations, and comparative peer analysis variances. Portfolio risks include unusual changes or recent trends in specific portfolios such as unexpected changes in the trends or levels of delinquency or charge-offs, unusual repossession activities or large levels of unsecured loans in a portfolio. The Corporation also maintains an unallocated allowance. The unallocated allowance is used to cover any factors or conditions which may cause a potential credit loss but are not specifically identifiable. It is prudent to maintain an unallocated portion of the allowance because no matter how detailed an analysis of potential credit losses is performed these estimates by definition lack precision. Management must make estimates using assumptions and information which is often subjective and changing rapidly. Since all identified losses are immediately charged off, no portion of the allowance for credit losses is restricted to any individual credit or groups of credits, and the entire allowance is available to absorb any and all credit losses. However, for analytical purposes, the following table sets forth an allocation of the allowance for credit losses at December 31 according to the categories indicated:
Allocation of the Allowance for Credit Losses (Dollar Amounts in Thousands) 2000 1999 1998 1997 1996 Commercial, industrial, financial, agricultural and other $ 6,263 $ 6,321 $ 4,375 $ 3,726 $ 3,628 Real estate-construction 643 831 414 415 461 Real estate-commercial 9,064 7,675 5,119 4,912 4,731 Real estate-residential 10,211 9,928 10,319 8,595 8,145 Loans to individuals 4,938 5,131 5,223 4,583 4,933 Lease financing receivables 638 586 512 393 285 Unallocated 1,844 3,067 6,342 3,308 3,051 Total $33,601 $33,539 $32,304 $25,932 $25,234 Allowance as percentage of average total loans 1.34% 1.39% 1.32% 1.11% 1.22%
Other than those described below, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. The following table identifies nonperforming loans at December 31. A loan is placed in a nonaccrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt. Past due loans are those loans which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower. 25 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued)
Nonperforming and Impaired Assets and Effect on Interest Income Due to Nonaccrual (Dollar Amounts in Thousands) 2000 1999 1998 1997 1996 Loans on nonaccrual basis $10,698 $12,765 $ 9,677 $11,387 $ 9,536 Past due loans 22,086 15,815 15,780 13,955 14,046 Renegotiated loans 2,263 62 64 67 280 Total nonperforming loans $35,047 $28,642 $25,521 $25,409 $23,862 Nonperforming loans as a percentage of total loans 1.41% 1.15% 1.07% 1.04% 1.07% Allowance as percentage of nonperforming loans 95.87% 117.10% 126.58% 102.06% 105.75% Other real estate owned $ 1,661 $ 1,707 $ 2,370 $ 1,950 $ 1,732 Gross income that would have been recorded at original rates $ 750 $ 724 $ 961 $ 1,017 $ 799 Interest that was reflected in income 333 458 286 146 223 Net reduction to interest income due to nonaccrual $ 417 $ 266 $ 675 $ 871 $ 576
The reduction of income due to renegotiated loans was less than $50 thousand in any year presented. The level of nonperforming loans at year-end 2000 increased by $6.4 million over 1999 levels as increases in past due and renegotiated loans were only partially offset by decreases in nonaccrual loans. Increases for past due loans primarily resulted from increases for commercial loans secured by real estate and commercial and industrial loans of $5.1 million and $2.1 million, respectively. The major portion of these increases relate to small business loans, of which $1.6 million were guaranteed by the SBA. The Corporation continues to aggressively collect these loans. Also, early in 2000 the Corporation initiated an additional level of approval for credit relationships between $500 thousand and $1.0 million. This procedure requires approval of those credits by a committee consisting of senior lenders of the Corporation. The increase in renegotiated loans for 2000 compared to 1999 was the result of the modification of loan terms for one commercial borrower. Decreases for nonaccrual loans for 2000 occurred primarily in commercial loans which reflected decreases of $658 thousand for commercial loans secured by real estate and decreases for commercial and industrial loans of $1.5 million compared to 1999. Nonperforming loans as a percentage of total loans was 1.41% at December 31, 2000 compared to 1.15% at December 31, 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 remained safely within acceptable levels. Capital Resources Equity capital increased $47.5 million in 2000 to $334.2 million. Dividends declared decreased equity by $32.9 million during 2000, an increase over dividends for the 1999 period as the dividend rate was increased. The retained net income of $14.4 million remained in permanent capital to fund future growth and expansion. Long-term debt payments and fair value adjustments to unearned ESOP shares increased equity capital by $793 thousand. The market value adjustment to securities available for sale 26 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Capital Resources (Continued) increased equity by $32.5 million. Amounts paid to fund the discount on reinvested dividends reduced equity by $593 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 $327 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 the insurance agency'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. See NOTE 25 for an analysis of regulatory capital guidelines and the Corporation's capital ratios relative to these measurement standards. Inflation and Changing Prices Management is aware of the impact inflation has on interest rates and therefore the impact it can have on a bank's performance. The ability of a financial institution to cope with inflation can only be determined by analysis and monitoring of its asset and liability structure. The Corporation monitors its asset and liability position with particular emphasis on the mix of interest-sensitive assets and liabilities in order to reduce the effect of inflation upon its performance. However, it must be remembered that the asset and liability structure of a financial institution is substantially different from an industrial corporation in that virtually all assets and liabilities are monetary in nature, meaning that they have been or will be converted into a fixed number of dollars regardless of changes in general price levels. Examples of monetary items include cash, loans and deposits. Nonmonetary items are those assets and liabilities which do not gain or lose purchasing power solely as a result of general price level changes. Examples of nonmonetary items are premises and equipment. Inflation can have a more direct impact on categories of noninterest expenses such as salaries and wages, supplies and employee benefit costs. These expenses are very closely monitored by management for both the effects of inflation and increases relating to such items as staffing levels, usage of supplies and occupancy costs. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk Information appearing in Item 7 of this report under the caption "Interest Sensitivity" is incorporated herein by reference in response to this item. 27 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Balance Sheets (Dollar Amounts in Thousands) December 31, 2000 1999 Assets Cash and due from banks.....................$ 90,723 $ 92,673 Interest-bearing bank deposits.............. 427 1,218 Federal funds sold.......................... 11,125 8,700 Securities available for sale, at market.... 1,238,230 1,144,042 Securities held to maturity, at cost, (market value $398,661 in 2000 and $435,000 in 1999) 398,107 448,347 Loans....................................... 2,492,874 2,503,687 Unearned income........................... (2,047) (3,628) Allowance for credit losses............... (33,601) (33,539) Net loans............................ 2,457,226 2,466,520 Property and equipment...................... 44,671 43,380 Other real estate owned..................... 1,661 1,707 Other assets................................ 130,142 134,259 Total assets.........................$4,372,312 $4,340,846 Liabilities Deposits (All Domestic): Noninterest-bearing.......................$ 244,010 $ 251,404 Interest-bearing.......................... 2,820,136 2,697,425 Total deposits....................... 3,064,146 2,948,829 Short-term borrowings....................... 272,171 424,827 Other liabilities........................... 44,984 42,152 Company obligated mandatorily redeemable capital securities of subsidiary trust.... 35,000 35,000 Other long-term debt........................ 621,855 603,355 Total long-term debt................ 656,855 638,355 Total liabilities.................... 4,038,156 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 and 58,195,450 shares outstanding in 2000; 62,525,412 shares issued and 58,142,848 shares outstanding in 1999................................... 62,525 62,525 Additional paid-in capital.................. 67,223 68,330 Retained earnings........................... 272,169 257,773 Accumulated other comprehensive income (loss) (7,808) (40,304) Treasury stock (4,329,962 and 4,382,564 shares at December 31, 2000 and 1999, respectively, at cost).................................. (54,666) (55,448) Unearned ESOP shares........................ (5,287) (6,193) Total shareholders' equity........... 334,156 286,683 Total liabilities and shareholders' equity..........$4,372,312 $4,340,846 The accompanying notes are an integral part of these consolidated financial statements. 28 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Statements of Income (Dollar Amounts in Thousands, except per share data)
Years Ended December 31, 2000 1999 1998 Interest Income Interest and fees on loans................... $208,548 $195,010 $201,739 Interest and dividends on investments: Taxable interest........................... 89,723 88,266 69,467 Interest exempt from Federal income taxes.. 9,638 9,479 6,600 Dividends.................................. 3,657 3,108 2,138 Interest on Federal funds sold............... 234 105 1,893 Interest on bank deposits.................... 82 121 230 Total interest income.................... 311,882 296,089 282,067 Interest Expense Interest on deposits......................... 115,507 103,331 113,960 Interest on short-term borrowings............ 22,218 13,832 10,214 Interest on mandatorily redeemable capital securities of subsidiary trust............. 3,325 1,007 -0- Interest on other long-term debt............. 33,489 34,483 24,108 Total interest on long-term debt......... 36,814 35,490 24,108 Total interest expense................... 174,539 152,653 148,282 Net interest income............................ 137,343 143,436 133,785 Provision for credit losses.................... 10,030 9,450 15,049 Net interest income after provision for credit losses................................ 127,313 133,986 118,736 Other Income Securities gains............................. 1,745 565 1,457 Trust income................................. 5,555 5,525 5,251 Service charges on deposits.................. 10,562 10,645 9,628 Gain on sale of loans........................ 257 4,996 1,630 Other income................................. 15,564 12,494 11,420 Total other income....................... 33,683 34,225 29,386 Other Expenses Salaries and employee benefits............... 52,529 49,806 48,710 Net occupancy expense........................ 6,577 6,537 6,750 Furniture and equipment expense.............. 8,154 7,653 7,485 Data processing expense...................... 3,310 3,449 3,354 Pennsylvania shares tax expense.............. 3,495 3,477 3,152 Merger and related charges................... -0- -0- 7,915 Other operating expenses..................... 25,396 24,647 24,529 Total other expenses..................... 99,461 95,569 101,895 Income before income taxes and extra- ordinary items................................ 61,535 72,642 46,227 Applicable income taxes........................ 14,289 19,612 12,229 Net income before extraordinary items.......... 47,246 53,030 33,998 Extraordinary items (less applicable income taxes of $336)............................... -0- -0- (624) Net Income..................................... $47,246 $53,030 $33,374 Average Shares Outstanding (a)................. 57,558,929 60,333,092 61,333,572 Average Shares Outstanding Assuming Dilution (a) 57,618,671 60,569,322 61,666,026 Earnings per common share: (a) Net income before extraordinary items........ $0.82 $0.88 $ 0.55 Extraordinary items.......................... $0.00 $0.00 $(0.01) Net income................................... $0.82 $0.88 $ 0.54 Earnings per common share assuming dilution: (a) Net income before extraordinary items........ $0.82 $0.88 $ 0.55 Extraordinary items.......................... $0.00 $0.00 $(0.01) Net income................................... $0.82 $0.88 $ 0.54 (a) Where applicable, 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. 29 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Statements of Changes in Shareholders' Equity (Dollar Amounts in Thousands) Accumulated
Additional Other Unearned Total Common Paid-in Retained Comprehensive Treasury ESOP Shareholders' Stock Capital Earnings Income Stock Shares Equity Balance at December 31, 1997............. $63,322 $74,998 $228,230 $2,156 $(11,947) $(2,436) $354,323 Comprehensive income Net income............................. -0- -0- 33,374 -0- -0- -0- 33,374 Other comprehensive income, net of tax: Unrealized holding gains on securities arising during the period............ -0- -0- -0- 971 -0- -0- 971 Less: reclassification adjustment for gains on securities included in net income...................... -0- -0- -0- (928) -0- -0- (928) Total other comprehensive income....... -0- -0- -0- 43 -0- -0- 43 Total comprehensive income.............. -0- -0- 33,374 43 -0- -0- 33,417 Cash dividends declared.................. -0- -0- (25,981) -0- -0- -0- (25,981) Net increase in unearned ESOP shares..... -0- 158 -0- -0- -0- (5,571) (5,413) Discount on dividend reinvestment plan purchases............................... -0- (1,016) -0- -0- -0- -0- (1,016) Treasury stock acquired.................. -0- -0- -0- -0- (2,123) -0- (2,123) Treasury stock reissued.................. -0- (38) -0- -0- 2,255 -0- 2,217 Treasury stock cancelled in merger....... (795) (5,107) -0- -0- 5,902 -0- -0- Cash issued for partial shares in merger. (2) (17) -0- -0- -0- -0- (19) Balance at December 31, 1998............. 62,525 68,978 235,623 2,199 (5,913) (8,007) 355,405 Comprehensive income Net income............................. -0- -0- 53,030 -0- -0- -0- 53,030 Other comprehensive income, net of tax: Unrealized holding losses on securities arising during the period.. -0- -0- -0- (42,137) -0- -0- (42,137) Less: reclassification adjustment for gains on securities included in net income......................... -0- -0- -0- (366) -0- -0- (366) Total other comprehensive income....... -0- -0- -0- (42,503) -0- -0- (42,503) Total comprehensive income.............. -0- -0- 53,030 (42,503) -0- -0- 10,527 Cash dividends declared.................. -0- -0- (30,880) -0- -0- -0- (30,880) Decrease in unearned ESOP shares......... -0- 53 -0- -0- -0- 1,814 1,867 Discount on dividend reinvestment plan purchases............................... -0- (358) -0- -0- -0- -0- (358) Treasury stock acquired.................. -0- -0- -0- -0- (51,331) -0- (51,331) Treasury stock reissued.................. -0- (343) -0- -0- 1,796 -0- 1,453 Balance at December 31, 1999............. 62,525 68,330 257,773 (40,304) (55,448) (6,193) 286,683 Comprehensive income Net income............................. -0- -0- 47,246 -0- -0- -0- 47,246 Other comprehensive income, net of tax: Unrealized holding gains on securities arising during the period.. -0- -0- -0- 33,630 -0- -0- 33,630 Less: reclassification adjustment for gains on securities included in net income......................... -0- -0- -0- (1,134) -0- -0- (1,134) Total other comprehensive income....... -0- -0- -0- 32,496 -0- -0- 32,496 Total comprehensive income.............. -0- -0- 47,246 32,496 -0- -0- 79,742 Cash dividends declared.................. -0- -0- (32,850) -0- -0- -0- (32,850) Decrease in unearned ESOP shares......... -0- (113) -0- -0- -0- 906 793 Discount on dividend reinvestment plan purchases............................... -0- (593) -0- -0- -0- -0- (593) Treasury stock acquired.................. -0- -0- -0- -0- (873) -0- (873) Treasury stock reissued.................. -0- (476) -0- -0- 1,655 -0- 1,179 Tax benefit of stock options............. -0- 75 -0- -0- -0- -0- 75 Balance at December 31, 2000............. $62,525 $67,223 $272,169 $(7,808) $(54,666) $(5,287) $334,156 The accompanying notes are an integral part of these consolidated financial statements.
30 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Statements of Cash Flows (Dollar Amounts in Thousands)
Years Ended December 31, 2000 1999 1998 Operating Activities Net income............................................ $ 47,246 $ 53,030 $ 33,374 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses........................ 10,030 9,450 15,049 Depreciation and amortization...................... 7,480 7,735 7,914 Net gains on sales of assets....................... (1,929) (5,192) (3,829) Income from increase in cash surrender value of bank owned life insurance........................ (3,419) (2,126) (1,365) Increase in interest receivable.................... (932) (773) (4,011) Increase in interest payable....................... 7,620 1,815 1,159 Increase (decrease) in income taxes payable........ 255 445 (584) Change in deferred taxes........................... 1,533 287 (1,404) Other - net........................................ (1,751) (11,922) 6,567 Net cash provided by operating activities....... 66,133 52,749 52,870 Investing Activities Transactions with securities held to maturity: Sales.............................................. -0- -0- -0- Maturities and redemptions......................... 67,735 127,566 211,948 Purchases of investment securities................. (17,458) (93,151) (184,668) Transactions with securities available for sale: Sales.............................................. 22,391 39,282 171,891 Maturities and redemptions......................... 108,636 193,605 184,508 Purchases of investment securities................. (173,514) (398,933) (891,718) Proceeds from sales of loans and other assets......... 36,482 99,692 104,609 Sale of subsidiary.................................... -0- (2,431) -0- Investment in bank owned life insurance............... (15,000) (20,000) -0- Net decrease in time deposits with banks.............. 790 689 3,127 Net increase in loans................................. (36,435) (227,347) (50,580) Purchases of premises and equipment................... (7,736) (5,197) (7,702) Net cash used by investing activities........... (14,109) (286,225) (458,585) Financing Activities Proceeds from issuance of other long-term debt........ 89,900 25,000 469,800 Repayments of other long-term debt.................... (70,493) (50,319) (37,576) Proceeds from issuance of company obligated mandatorily redeemable capital securities of subsidiary trust.................................... -0- 35,000 -0- Discount on dividend reinvestment plan purchases...... (593) (358) (1,016) Dividends paid........................................ (32,553) (27,825) (25,746) Net increase (decrease) in Federal funds purchased.... 13,875 (45,025) (60,675) Net increase (decrease) in other short-term borrowings (166,531) 329,306 (2,228) Sale of branch and deposits, net of cash received..... -0- -0- (8,612) Stock option tax benefit.............................. 75 -0- -0- Acquisition of treasury stock......................... (873) (51,331) (2,123) Reissuance of treasury stock.......................... 326 1,453 2,217 Net increase in deposits.............................. 115,318 21,333 56,909 Net cash provided (used) by financing activities (51,549) 237,234 390,950 Net increase (decrease) in cash and cash equivalents................................... 475 3,758 (14,765) Cash and cash equivalents at January 1.................. 101,373 97,615 112,380 Cash and cash equivalents at December 31................ $101,848 $101,373 $ 97,615
The accompanying notes are an integral part of these consolidated financial statements. 31 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 NOTE 1--Statement of Accounting Policies General The following summary of accounting and reporting policies is presented to aid the reader in obtaining a better understanding of the financial statements and related financial data of First Commonwealth Financial Corporation and its subsidiaries (the "Corporation") contained in this report. The financial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions. In preparing financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. In addition, these estimates and assumptions affect revenues and expenses in the financial statements and as such, actual results could differ from those estimates. Through its subsidiaries which include two commercial banks, a nondepository trust company and insurance agency, the Corporation provides a full range of loan, deposit, trust and insurance services primarily to individuals and small to middle-market businesses in seventeen counties in central and western Pennsylvania. Under current conditions, the Corporation is reporting one business segment. The Corporation and subsidiaries are subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the Corporation and its subsidiaries for adherence to laws and regulations. As a consequence, the cost of doing business may be affected. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries. All material intercompany transactions have been eliminated in consolidation. Investments of 20 to 50 percent of the outstanding common stock of investees are accounted for using the equity method of accounting. Reclassifications Financial statement 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. Securities Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as securities held-to-maturity and are reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are to be classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as securities available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of deferred taxes. The Corporation has securities classified as either held-to-maturity or available-for-sale. The Corporation does not engage in trading activities. Net gain or loss on the sale of securities is determined by using the specific identification method. 32 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 NOTE 1--Statement of Accounting Policies (Continued) Securities (Continued) Effective January 1, 1999, the Corporation adopted the Financial Accounting Standards Board ("FASB") Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("FAS No. 134"). FAS No. 134 amends FAS No. 65 "Accounting for Certain Mortgage Banking Activities". FAS No. 65 required that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities as trading securities while FAS No. 134 requires the resulting mortgage-backed securities or other retained interests be classified based on the entity's ability and intent to sell or hold those investments. On the date FAS No. 134 is initially applied, an enterprise may reclassify mortgage backed securities and other beneficial interests retained after the securitization of mortgage loans held for sale from the trading category, except for those with sales commitments in place. The Corporation currently holds no mortgage backed securities or other beneficial interests retained after the securitization of mortgage loans held for sale. The adoption of FAS No. 134 did not have a material impact on the Corporation's financial condition or results of operations. Loans Loans are carried at the principal amount outstanding. Unearned income on installment loans and leases is taken into income on a declining basis which results in an approximately level rate of return over the life of the loan or lease. Interest is accrued as earned on nondiscounted loans. The Corporation considers a loan to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect principal or interest due according to the contractual terms of the loan. Loan impairment is measured based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Payments received on impaired loans are applied against the recorded investment in the loan. For loans other than those that the Corporation expects repayment through liquidation of the collateral, when the remaining recorded investment in the impaired loan is less than or equal to the present value of the expected cash flows, income is recorded on a cash basis. Mortgage Servicing Rights When the Corporation purchases or originates mortgage loans with a definitive plan to sell or securitize those loans and retain the mortgage servicing rights, the Corporation measures the mortgage servicing rights at cost by allocating the cost of the mortgage loans between the mortgage servicing rights and the mortgage loans (without the mortgage servicing rights) based on their relative fair values at the date of purchase or origination. When the Corporation does not have a definitive plan at the purchase or origination date and later sells or securitizes the mortgage loans and retains the mortgage servicing rights, the Corporation allocates the amortized cost of the mortgage loans between the mortgage servicing rights and the mortgage loans (without mortgage servicing rights) based on their relative fair values at the date of sale. The amount capitalized as the right to service mortgage loans is recognized as a separate asset and amortized in proportion to, and over the period of, estimated net servicing 33 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 1--Statement of Accounting Policies (Continued) Mortgage Servicing Rights (Continued) income (servicing revenue in excess of servicing cost). Mortgage servicing rights are periodically evaluated for impairment based on fair values. Loan Fees Loan origination and commitment fees, net of associated direct costs, are deferred and the net amount is amortized as an adjustment to the related loan yield on the interest method, generally over the contractual life of the related loans or commitments. Other Real Estate Owned Real estate, other than bank premises, is recorded at the lower of cost or fair value less selling costs at the time of acquisition. Expenses related to holding the property, net of rental income, are generally charged against earnings in the current period. Allowance for Credit Losses The allowance for credit losses represents management's estimate of an amount adequate to provide for losses which may be incurred on loans currently held. Management determines the adequacy of the allowance based on historical patterns of loan charge-offs and recoveries, the relationship of the allowance to outstanding loans, industry experience, current economic trends and other factors relevant to the collectibility of loans currently in the portfolio. Bank-Owned Life Insurance The Corporation purchased insurance on the lives of a certain group of employees. The policies accumulate asset values to meet future liabilities including the payment of employee benefits such as health care. Increases in the cash surrender value are recorded as other income in the Consolidated Statements of Income. The cash surrender value of bank-owned life insurance is reflected in "other assets" on the Consolidated Balance Sheets in the amount of $65,961 and $48,382 at December 31, 2000 and 1999, respectively. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line and accelerated methods over the estimated useful life of the asset. Charges for maintenance and repairs are expensed as incurred. Where a lease is involved, amortization is charged over the term of the lease or the estimated useful life of the improvement, whichever is shorter. The Corporation records computer software in accordance with the American Institute of Certified Public Accountants' Statement of Position 98-1, " Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). The statement identifies the following three stages of software development: the preliminary project stage, the application development stage, and the post-implementation stage. In compliance with SOP 98-1, the Corporation expenses costs incurred during the preliminary project stage and capitalizes certain costs incurred during the application development stage. Once software is in operation, maintenance costs are expensed over the maintenance period while upgrades which result in additional functionality or enhancement are capitalized. Training and data conversion costs are expensed as incurred. Capitalized costs are amortized on a straight-line basis over a period of 3-7 years, depending on the life of the software license. 34 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands, except per share data) NOTE 1--Statement of Accounting Policies (Continued) Accounting for the Impairment of Long-Lived Assets The Corporation reviews long-lived assets, such as premises and equipment and intangibles for impairment whenever events or changes in circumstances, such as a significant decrease in the market value of an asset or the extent or manner in which an asset is used indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the carrying amount of an asset may not be recoverable, future discounted cash flows expected to result from the use of the asset are estimated. If the sum of the expected cash flows is less than the carrying value of the asset a loss is recognized for the difference between the carrying value and fair market value of the asset. Income Taxes The Corporation records taxes in accordance with the asset and liability method utilized by FASB Statement No. 109 ("FAS No. 109"), whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases given the provisions of the enacted tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence. Comprehensive Income Disclosures For all periods presented, "other comprehensive income" (comprehensive income excluding net income) includes only one component, which is the change in unrealized holding gains and losses on available for sale securities, net of related tax effects. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and Federal funds sold. Generally, Federal funds are sold for one-day periods. Stock Split On October 19, 1999, the Corporation's Board of Directors approved a 2-for-1 stock split effected in the form of a 100% stock dividend. Shareholders of record at the close of business November 4, 1999 received one additional share for each share held. The additional shares were distributed on November 18, 1999. Pursuant to the foregoing stock split an additional 31,262,706 common shares were issued, and the sum of $31,263 ($1 per share) was transferred to the Corporation's common stock account, and such amount was charged against the Corporation's additional paid-in capital account. Common stock, additional paid-in capital, and share data for prior periods have been restated to reflect the stock split as if it had occurred at the beginning of the earliest period presented. 35 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 NOTE 1--Statement of Accounting Policies (Continued) Employee Stock Ownership Plan Accounting treatment for the Corporation's Employee Stock Ownership Plan ("ESOP") described in NOTE 21 follows Statement of Position 93-6 ("SOP 93- 6") "Employers Accounting for Employee Stock Ownership Plans" for ESOP shares acquired after December 31, 1992 (new shares). The Corporation has elected, as permitted under SOP 93-6, not to adopt this statement for ESOP shares acquired on or before December 31, 1992 (old shares). ESOP shares purchased subject to debt guaranteed by the Corporation are recorded as a reduction of common shareholders' equity by charging unearned ESOP shares. As shares are committed to be released to the ESOP trust for allocation to plan participants, unearned ESOP shares is credited for the average cost of the shares to the ESOP. Compensation cost recognized for new shares in accordance with the provisions of SOP 93-6 is based upon the fair market value of the shares committed to be released. Additional paid- in capital is charged or credited for the difference between the fair value of the shares committed to be released and the cost of those shares to the ESOP. Compensation cost recognized for old shares committed to be released is recorded at the cost of those shares to the ESOP. Dividends on both old and new unallocated ESOP shares are used for debt service and are reported as a reduction of debt and accrued interest payable. Dividends on allocated ESOP shares are charged to retained earnings and allocated to the plan participants' accounts. The average number of common shares outstanding used in calculating earnings per share excludes all unallocated ESOP shares. Employee Stock Option Plan FASB Statement No. 123 "Accounting for Stock Based Compensation" ("FAS No. 123") defines a method of measuring stock based compensation, such as stock options granted, at an estimated fair value. FAS No. 123 also permits the continued measurement of stock based compensation under provisions of the Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). As permitted under FAS No. 123, the Corporation has elected to use the intrinsic value method to measure stock based compensation under APB 25 and to disclose in a footnote to the financial statements, net income and earnings per share determined as if the fair value methodology of FAS No. 123 was implemented (see NOTE 22). Derivative Instruments and Hedging Activities In June 1998, the 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 fiscal 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") 36 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 NOTE 1--Statement of Accounting Policies (Continued) Derivative Instruments and Hedging Activities (Continued) process. The DIG was created by the FASB to facilitate 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 has reviewed contracts from various functional areas of the Corporation to identify potential derivatives embedded within selected contracts. In accordance with the guidance provided in DIG Issue 11-4, management had identified embedded derivatives in some loan commitments for residential mortgages where the Corporation has intent to sell to an investor such as the Federal Home Loan Mortgage Corporation ("Freddie Mac") or the Federal National Mortgage Association ("Fannie Mae"). Due to the short-term nature of these loan commitments (30 days or less) and the historical dollar amount of commitments outstanding at period end, the adoption of FAS No. 133 will not have a material impact on the Corporation's financial condition or results of operations. Earnings Per Common Share Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders less unallocated ESOP shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For all periods presented the dilutive effect on average shares outstanding is the result of compensatory stock options outstanding. New Accounting Pronouncements In September 2000, the FASB issued statement No. 140, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments 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 will not have a material impact on the Corporation's financial condition or results of operations. 37 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands, except per share data) NOTE 2--Supplemental Comprehensive Income Disclosures The following table identifies the related tax effects allocated to each component of other comprehensive income in the Statements of Changes in Shareholders' Equity:
December 31, 2000 December 31, 1999 December 31, 1998 Tax Net of Tax Net of Tax Net of Pre-tax (Expense) Tax Pre-tax (Expense) Tax Pre-tax (Expense) Tax Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period $ 51,739 $(18,109) $33,630 $(64,826) $22,689 $(42,137) $1,495 $(524) $971 Less: reclassification adjustment for gains realized in net income (1,745) 611 (1,134) (563) 197 (366) (1,428) 500 (928) Net unrealized gains (losses) 49,994 (17,498) 32,496 (65,389) 22,886 (42,503) 67 (24) 43 Other comprehensive income $ 49,994 $(17,498) $32,496 $(65,389) $22,886 $(42,503) $ 67 $ (24) $ 43
NOTE 3--Supplemental Cash Flow Disclosures 2000 1999 1998 Cash paid during the year for: Interest $166,919 $150,839 $147,123 Income taxes $ 12,842 $ 18,832 $ 14,200 Noncash investing and financing activities: ESOP borrowings $ -0- $ -0- $ 6,000 ESOP loan reductions $ 906 $ 1,814 $ 429 Loans transferred to other real estate owned and repossessed assets $ 6,405 $ 4,936 $ 6,624 Gross increase (decrease) in market value adjustment to securities available for sale $ 49,994 $(65,389) $ 67 Treasury stock reissued for insurance agency interest acquired $ 852 $ -0- $ -0- 38 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 4--Joint Venture Buy-Out of 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. NOTE 5--Sale of Subsidiary Effective April 1, 1999, the Corporation sold all of the outstanding common stock of BSI Financial Services Inc. ("BSI"), a wholly-owned subsidiary of the Corporation, to a bank headquartered in Richmond, Indiana. Cash proceeds in the amount of $1,709 were received, resulting in a loss on sale of $202 which has been reflected in the financial statements. BSI provided mortgage banking, loan servicing and collection services to the Corporation's subsidiary banks and unaffiliated organizations. Services performed by BSI for the subsidiary banks have been transferred to the subsidiary banks or other nonbank subsidiaries of the Corporation. NOTE 6--Business Combination Effective December 31, 1998, the Corporation acquired all of the outstanding shares of Southwest National Corporation ("Southwest"), a Pennsylvania- chartered bank holding company headquartered in Greensburg, Pennsylvania. Each of the 3,043,738 outstanding shares of Southwest National Corporation were exchanged for 5.8 shares of the Corporation's common stock. The aggregate number of shares issued by the Corporation, excluding partial shares was 17,652,156. Related share amounts have been restated for the stock split described in NOTE 1. The merger was accounted for as a pooling of interests, and accordingly, all financial statements were restated as though the merger had occurred at the beginning of the earliest period presented. NOTE 7--Cash and Due From Banks on Demand Regulations of the Board of Governors of the Federal Reserve System impose uniform reserve requirements on all depository institutions with transaction accounts (checking accounts, NOW accounts, etc.). Reserves are maintained in the form of vault cash or a noninterest-bearing balance held with the Federal Reserve Bank. The subsidiary banks maintained with the Federal Reserve Bank average balances of $3,075 during 2000 and $3,807 during 1999. 39 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 8--Securities Available For Sale Below is an analysis of the amortized cost and approximate fair values of securities available for sale at December 31, 2000 and 1999:
2000 1999 Gross Gross Approximate Gross Gross Approximate Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value U.S. Treasury Securities $ 9,972 $ 77 $ -0- $ 10,049 $ 4,970 $-0- $ (27) $ 4,943 Obligations of U.S. Government Corporations and Agencies: Mortgage Backed Securities 752,481 1,636 (7,126) 746,991 781,690 104 (38,777) 743,017 Other 117,585 125 (370) 117,340 123,436 -0- (4,068) 119,368 Obligations of States and Political Subdivisions 76,066 606 (1,376) 75,296 75,348 210 (5,940) 69,618 Debt Securities Issued by Foreign Governments 425 -0- -0- 425 430 -0- -0- 430 Corporate Securities 142,933 1,814 (6,271) 138,476 70,252 11 (5,812) 64,451 Other Mortgage Backed Securities 97,922 336 (418) 97,840 85,521 -0- (4,413) 81,108 Total Debt Securities 1,197,384 4,594 (15,561) 1,186,417 1,141,647 325 (59,037) 1,082,935 Equities 52,824 -0- (1,011) 51,813 64,330 3 (3,226) 61,107 Total Securities Available for Sale $1,250,208 $4,594 $(16,572) $1,238,230 $1,205,977 $328 $(62,263) $1,144,042
Mortgage backed securities include mortgage backed obligations of U.S. Government agencies and corporations, mortgage backed securities issued by other organizations and other asset backed securities. These obligations have contractual maturities ranging from less than one year to 30 years and have an anticipated average life to maturity ranging from less than one year to 21 years. All mortgage backed securities contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact upon prepayment speeds, therefore the Corporation uses computer simulation models to test the average life and yield volatility of all mortgage backed securities under various interest rate scenarios to insure that volatility falls within acceptable limits. At December 31, 2000 and 1999, the Corporation owned no high risk mortgage backed securities as defined by the Federal Financial Institutions Examination Council's Supervisory Policy Statement on Securities Activities. 40 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 8--Securities Available For Sale (Continued) The amortized cost and estimated market value of debt securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties. Approximate Amortized Fair Cost Value Due within 1 year $ 12,227 $ 12,247 Due after 1 but within 5 years 212,239 213,924 Due after 5 but within 10 years 11,828 11,824 Due after 10 years 110,687 103,591 346,981 341,586 Mortgage Backed Securities 850,403 844,831 Total Debt Securities $1,197,384 $1,186,417 Proceeds from the sales of securities available for sale were $22,391, $39,282 and $171,891 during 2000, 1999 and 1998 respectively. Gross gains of $1,752, $541 and $2,817 and gross losses of $18, $0 and $1,284 were realized on those sales during 2000, 1999 and 1998 respectively. Securities available for sale with an approximate fair value of $626,719 and $463,004 were pledged at December 31, 2000 and 1999, respectively, to secure public deposits and for other purposes required or permitted by law. NOTE 9--Securities Held to Maturity Below is an analysis of the amortized cost and approximate fair values of debt securities held to maturity at December 31, 2000 and 1999:
2000 1999 Gross Gross Approximate Gross Gross Approximate Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value Obligations of U.S. Government Corporations and Agencies: Mortgage Backed Securities $148,522 $ 635 $ (604) $148,553 $183,926 $ 60 $ (4,231) $179,755 Other 99,844 194 (129) 99,909 104,790 -0- (2,436) 102,354 Obligations of States and Political Subdivisions 126,514 1,355 (807) 127,062 134,770 176 (6,204) 128,742 Debt Securities Issued by Foreign Governments 357 -0- -0- 357 358 -0- -0- 358 Corporate Securities 22,154 140 (227) 22,067 22,212 -0- (711) 21,501 Other Mortgage Backed Securities 716 -0- (3) 713 2,291 -0- (1) 2,290 Total Securities Held to Maturity $398,107 $2,324 $(1,770) $398,661 $448,347 $236 $(13,583) $435,000
41 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) Note 9--Securities Held to Maturity (Continued) The amortized cost and estimated market value of debt securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties. Approximate Amortized Fair Cost Value Due within 1 year $ 15,956 $ 15,935 Due after 1 but within 5 years 129,737 129,848 Due after 5 but within 10 years 28,994 29,640 Due after 10 years 74,182 73,972 248,869 249,395 Mortgage Backed Securities 149,238 149,266 Total Debt Securities $398,107 $398,661 There were no sales of securities held to maturity in 2000, 1999 or 1998. Securities held to maturity with an amortized cost of $245,908 and $282,388 were pledged at December 31, 2000 and 1999, respectively, to secure public deposits and for other purposes required or permitted by law. NOTE 10--Loans (all domestic) Loans at year end were divided among these general categories: December 31, 2000 1999 Commercial, financial, agricultural and other $ 443,618 $ 417,300 Real estate loans: Construction and land development 37,146 41,734 1-4 Family dwellings 932,915 980,506 Other real estate loans 560,066 495,789 Loans to individuals for household, family and other personal expenditures 450,154 502,465 Leases, net of unearned income 68,975 65,893 Subtotal 2,492,874 2,503,687 Unearned income (2,047) (3,628) Total loans and leases $2,490,827 $2,500,059 Most of the Corporation's business activity was with customers located within Pennsylvania. The portfolio is well diversified, and as of December 31, 2000 and 1999, there were no significant concentrations of credit. NOTE 11--Allowance for Credit Losses Description of changes: 2000 1999 1998 Allowance at January 1 $33,539 $32,304 $25,932 Additions: Recoveries of previously charged off loans 1,299 1,381 1,950 Provision charged to operating expense 10,030 9,450 15,049 Deductions: Loans charged off 11,267 9,596 10,627 Allowance at December 31 $33,601 $33,539 $32,304 42 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 11--Allowance for Credit Losses (Continued) Relationship to impaired loans: 2000 1999 Recorded investment in impaired loans at end of period $12,961 $12,827 Average balance of impaired loans for the year $13,154 $10,808 Allowance for credit losses related to impaired loans $ 2,187 $ 3,082 Impaired loans with an allocation of the allowance for credit losses $ 4,679 $ 7,471 Impaired loans with no allocation of the allowance for credit losses $ 8,282 $ 5,356 Income recorded on impaired loans on a cash basis $ 333 $ 458 NOTE 12--Financial Instruments with Off-Balance-Sheet Risk The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amount of those instruments reflects the extent of involvement the Corporation has in particular classes of financial instruments. As of December 31, 2000 and 1999, the Corporation did not own or trade any other financial instruments with significant off-balance-sheet risk including derivatives such as futures, forwards, interest rate swaps, option contracts and the like, although such instruments may be appropriate to use in the future to manage interest rate risk. The Corporation's exposure to credit loss in the event of nonperformance by the other party of the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit written is represented by the contract or notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The following table identifies the notional amount of those instruments at December 31, 2000 and 1999. 2000 1999 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $445,200 $421,871 Standby letters of credit $ 37,787 $ 39,847 Commercial letters of credit $ 471 $ 514 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, residential and income-producing commercial properties. 43 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 12--Financial Instruments with Off-Balance-Sheet Risk (Continued) Standby letters of credit and commercial letters of credit written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. NOTE 13--Premises and Equipment Premises and equipment are described as follows: Estimated Useful Life 2000 1999 Land Indefinite $ 5,336 $ 5,425 Buildings and improvements 5 - 50 Years 45,296 44,582 Leasehold improvements 7 - 39 Years 9,839 9,930 Furniture and equipment 3 - 25 Years 48,643 46,177 Software 3 - 7 Years 9,926 6,160 Subtotal 119,040 112,274 Less accumulated depreciation and amortization 74,369 68,894 Total premises and equipment $44,671 $43,380 Depreciation and amortization related to premises and equipment was $5,996 in 2000, $5,790 and $6,265 in 1999 and 1998, respectively. NOTE 14--Interest-Bearing Deposits Components of interest-bearing deposits at December 31 were as follows: 2000 1999 NOW and Super NOW accounts $ 98,552 $ 98,545 Savings and MMDA accounts 1,025,447 1,073,789 Time deposits 1,696,137 1,525,091 Total interest-bearing deposits $2,820,136 $2,697,425 Interest-bearing deposits at December 31, 2000 and 1999, include reallocations from demand deposits of $105,795 and $97,883 and reallocations from NOW and Super NOW accounts of $279,779 and $294,943 respectively into Savings and MMDA accounts. These reallocations are based on a formula and have been made to reduce the Corporation's reserve requirement in compliance with regulatory guidelines. Included in time deposits at December 31, 2000 and 1999, were certificates of deposit in denominations of $100 or more of $455,382 and $358,261 respectively. Interest expense related to $100 or greater certificates of deposit amounted to $22,639 in 2000, $18,103 in 1999, and $16,921 in 1998. Included in time deposits at December 31, 2000, were certificates of deposit with the following scheduled maturities: 2001 $ 981,884 2002 465,459 2003 179,499 2004 30,190 2005 and thereafter 36,622 $1,693,654 44 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 15--Short-term Borrowings Short-term borrowings at December 31 were as follows:
2000 1999 Ending Average Average Ending Average Average Balance Balance Rate Balance Balance Rate Federal funds purchased $ 16,825 $ 49,990 6.28% $ 2,950 $ 94,161 5.22% Borrowings from FHLB -0- 20,814 6.03% 100,000 49,037 5.21% Securities sold under agreements to repurchase 237,806 275,839 5.92% 262,301 124,904 4.66% Treasury, tax and loan note option 17,540 24,643 6.04% 59,576 11,167 4.81% Total $272,171 $371,286 5.98% $424,827 $279,269 4.95% Maximum total at any month-end $455,285 $424,960
Interest expense on short-term borrowings for the years ended December 31 is detailed below:
2000 1999 1998 Federal funds purchased $ 3,138 $ 4,913 $ 4,119 Borrowings from FHLB 1,256 2,557 1,051 Securities sold under agreements to repurchase 16,335 5,825 4,305 Treasury, tax and loan note option 1,489 537 739 Total interest on short-term borrowings $22,218 $13,832 $10,214
NOTE 16--Company Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust The Corporation established First Commonwealth Capital Trust I ("the Trust"), a Delaware business trust and the Trust issued 35,000 capital securities (liquidation amount of $35,000) during September 1999, through a private offering to qualified investors. Additionally, the Trust issued common securities to the Corporation. The Trust used the proceeds from the sale to buy a series of 9.50% junior subordinated deferrable interest debentures due 2029 from the Corporation with the same economic terms as the capital securities. The sole asset of the Trust is the $36,083 aggregate liquidation amount of the junior subordinated debentures. The Trust will distribute the cash payments it receives from the Corporation on the debentures to the holders of the capital securities and the common securities. The original series A capital securities and series A junior subordinated deferrable interest debentures have since been exchanged for registered series B capital securities and registered series B junior subordinated deferrable interest debentures having the same economic terms as the original series A securities. The Trust will redeem all of the outstanding capital securities when the debentures are paid at maturity on September 1, 2029. Subject to receiving prior approval of the Board of Governors of the Federal Reserve System the Corporation may redeem the debentures, in whole or in part, at any time on or after September 1, 2009, at a redemption price equal to 104.750% of the principal amount of the debentures on September 1, 2009, declining ratably on each September 1 thereafter to 100% on or after September 1, 2019, plus accrued and unpaid interest to the date of redemption. The Corporation may 45 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 16--Company Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust (Continued) also redeem the debentures prior to September 1, 2009, upon the occurrence of certain tax and bank regulatory events, subject to receiving prior approval of the Board of Governors of the Federal Reserve System. If the Corporation redeems any debentures before their maturity, the Trust will use the cash it receives on the redemption of the debentures to redeem, on a pro rata basis, capital securities and common securities having an aggregate liquidation amount equal to the aggregate principal amount of the debentures redeemed. The net proceeds (after deduction of offering expenses and the initial purchaser's commission) from the sale of the debentures to the Trust were approximately $34,200. The Corporation used the net proceeds from the issuance of the debentures to partially finance the purchase of 3,819,420 shares of its outstanding common stock (approximately 6.5% of its outstanding shares of common stock) pursuant to a "modified Dutch Auction" tender offer. Unamortized deferred issuance costs associated with the capital securities amounted to $909 as of December 31, 1999 and are being amortized on a straight-line basis over the term of the capital securities. The outstanding balance of the capital securities are included as a separate component of long-term debt on the Consolidated Balance Sheets while interest on the capital securities is included as a separate component of interest expense on the Consolidated Statements of Income. The amortization of the deferred issuance costs is included in interest expense from the capital securities on the Consolidated Statements of Income. NOTE 17--Other Long-term Debt Other Long-term debt at December 31, follows:
2000 1999 Amount Rate Amount Rate ESOP loan due December, 2005 $ 5,287 Libor +1% $ 6,193 Libor +1% Bank loan due July, 2003 -0- 16,000 FF + 1.25% Borrowings from FHLB due: February, 2000 -0- 25,000 4.72% July, 2000 -0- 25,000 4.72% November, 2002 50,000 5.82% 50,000 5.82% December, 2002 50,000 5.71% 50,000 5.71% September, 2007 5,000 6.94% -0- February, 2008 100,000 5.45% 100,000 5.45% February, 2008 100,000 5.48% 100,000 5.48% May, 2008 100,000 5.67% 100,000 5.67% November, 2008 50,000 5.03% 50,000 5.03% December, 2008 65,000 4.96% 65,000 4.96% February, 2010 25,000 6.12% -0- December, 2010 55,000 4.70% -0- December, 2017 7,038 6.17% 7,264 6.17% June, 2019 8,644 5.72% 8,898 5.72% April, 2020 886 7.37% -0- $621,855 $603,355
All Federal Home Loan Bank stock, along with an interest in unspecified mortgage loans and mortgage-backed securities, with an aggregate statutory value equal to the amount of the preceding advances, have been pledged as collateral with the Federal Home Loan Bank of Pittsburgh. Capital securities included in total long-term debt on the Consolidated Balance Sheets are excluded from NOTE 17, but are described in NOTE 16. 46 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands, except per share data) NOTE 17--Other Long-term Debt (Continued) In October 1999, the parent company entered into an agreement with an unrelated financial institution which enabled the parent company to borrow up to $20,000 through October 2000. As of December 31, 1999, $16,000 was outstanding and $4,000 remained available on this line of credit. During the first and second quarters of 2000 the parent company borrowed the remaining $4,000 available and during the fourth quarter of 2000 repaid the entire $20,000 amount outstanding. Scheduled loan payments for other long-term debt are summarized below: 2001 2002 2003 2004 2005 Thereafter Loan payments $1,691 $101,634 $1,659 $1,492 $1,810 $513,569 During 1998, the Corporation incurred a cost of $960 for the prepayment of FHLB term borrowings with original maturities scheduled for 2007. This amount was recorded on the Consolidated Statements of Income as an extraordinary item, net of $336 of applicable income taxes. NOTE 18--Common Share Commitments At December 31, 2000 and 1999, the Corporation had 100,000,000 common shares authorized and 62,525,412 shares outstanding. Outstanding shares were reduced by 4,329,962 shares of treasury stock at December 31, 2000 and 4,382,564 shares at December 31, 1999. The Corporation may be required to issue additional shares to satisfy common share purchases related to the employee stock ownership plan described in NOTE 21. The dilutive effect of stock options outstanding on average shares outstanding in the diluted earnings per share reported on the income statement were 59,742, 236,230 and 332,454 shares at December 31, 2000, 1999 and 1998 respectively. During 2000 and 1999, 78,380 and 3,921,668 shares of treasury stock were acquired at an average price of $11.14 and $13.09, respectively. Treasury shares consisting of 41,240 and 188,570 were reissued during 2000 and 1999 upon exercise of stock options. During 2000, 89,742 shares of treasury stock were reissued to fund the buy- out of the insurance agency's joint-venture partner, as described in NOTE 4. NOTE 19--Income Taxes The income tax provision consists of: 2000 1999 1998 Current tax provision for income exclusive of securities transactions: Federal $12,155 $19,111 $13,097 State (10) 16 (11) Securities transactions 611 198 547 Total current tax provision 12,756 19,325 13,633 Deferred tax provision (benefit) 1,533 287 (1,404) Total tax provision $14,289 $19,612 $12,229 47 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands, except per share data) NOTE 19--Income Taxes (Continued) Temporary differences between financial statement carrying amounts and tax bases of assets and liabilities that represent significant portions of the deferred tax assets (liabilities) at December 31, 2000 and 1999, were as follows: 2000 1999 Deferred tax assets: Allowance for credit losses $11,765 $11,641 Postretirement benefits other than pensions 996 985 Accumulated depreciation 439 242 Unrealized loss on securities available for sale 4,204 21,702 Other 894 827 Total deferred tax assets 18,298 35,397 Deferred tax liabilities: Accumulated accretion of bond discount (389) (250) Lease financing deduction (10,643) (9,372) Loan origination fees and costs (1,319) (628) Basis difference in assets acquired (674) (892) Pension expense (231) (200) Other (280) (262) Total deferred tax liabilities (13,536) (11,604) Net deferred tax asset $ 4,762 $23,793 The total tax provision for financial reporting purposes differs from the amount computed by applying the statutory income tax rate to income before income taxes. The differences are as follows:
2000 1999 1998 % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income Tax at statutory rate $21,537 35.0 $25,425 35.0 $16,179 35.0 Increase (decrease) resulting from: Effect of nontaxable income (6,595)(10.7) (5,247) (7.2) (3,894) (8.4) Merger expenses -0- 0.0 0 0.0 542 1.2 State income taxes (10) (0.0) 16 0.0 (11) (0.0) Other (643) (1.1) (582) (0.8) (587) (1.3) Total tax provision $14,289 23.2 $19,612 27.0 $12,229 26.5
48 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 20--Retirement Plans All employees with at least one year of service are eligible to participate in the employee stock ownership plan ("ESOP"). Contributions to the plan are determined by the board of directors, and are based upon a prescribed percentage of the annual compensation of all participants. The ESOP acquired 484,178 shares of the Corporation's common stock in 1998 at a corresponding cost of $6,000, which the Corporation borrowed and concurrently loaned this amount to the ESOP. This amount represents leveraged and unallocated shares, and accordingly has been recorded as long- term debt and the offset as a reduction of common shareholders' equity. Compensation costs related to the plan were $1,005 in 2000, $1,555 in 1999 and $1,068 in 1998. (See NOTE 21). The Corporation also has a savings plan pursuant to the provisions of section 401(k) of the Internal Revenue Code. Under the terms of the plan, each participant will receive an automatic employer contribution to the plan in an amount equal to 3% of compensation. Each participating employee may contribute up to 10% of compensation to the plan of which up to 4% is matched 100% by the employer's contribution. Prior to 1999, each participant could contribute up to 5% of compensation to the plan, which was matched by the employer's contribution equal to 80% of the employee's contribution. The 401(k) plan expense was $2,444 in 2000, $2,328 in 1999 and $2,261 in 1998. Upon shareholder approval at the regular 1998 meeting the Corporation established a "Supplemental Executive Retirement Plan" ("SERP") to provide deferred compensation for a select group of management. The purpose of this plan is to restore some of the benefits lost to the highly compensated employees compared to other employees due to limits and restrictions incorporated into the Corporation's 401(k) and ESOP plans. The Corporation's 401(k) and ESOP plans include restrictions on maximum compensation, actual deferral percentage, actual contribution, maximum contribution and maximum salary reduction which are required in order to meet specific legal requirements. Participants in the SERP may elect to contribute up to 10% of plan compensation (compensation in excess of limits of the Corporation's 401(k) and ESOP plans) into the SERP, through salary reduction. The Corporation will make an elective contribution to the SERP equal to the elective contribution of the participant. Each participant of the SERP will also receive a matching contribution equal to 100% of the employee's elective contribution up to 4%, and an additional non-elective contribution from the employer equal to 8% of plan compensation. For 1998, each participant could make an elective contribution for up to 5% of plan compensation which was matched by an employers' contribution equal to 80% of the employee's contribution. The SERP will continue to supplement the Corporation's 401(k) and ESOP plans and will therefore be modified at the same time and in the same respect as the basic plans are modified in future periods. The SERP plan expense was $182 in 2000, $153 in 1999, and $62 in 1998. Pension Plan of Acquired Subsidiary Southwest's noncontributory defined benefit pension plan covers all eligible employees and provides benefits that are based on each employee's years of service and compensation. 49 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 20--Retirement Plans (Continued) Pension Plan of Acquired Subsidiary (Continued) Effective December 31, 1998, participants' accrued benefit in the Southwest Bank Pension Plan was frozen. Participants became participants in the First Commonwealth Financial Corporation ESOP Plan with no lapse in credited service, and no loss of accrued benefits. The Southwest Bank Plan is expected to be terminated at some future date, with distribution made in accordance with Plan provisions and applicable regulations. Net periodic pension cost of this plan for each of the last three years was as follows: 2000 1999 1998 Service cost $ -0- $ -0- $ 365 Interest cost on projected benefit obligation 343 394 469 Actual return on plan assets (542) (261) (425) Net amortization and deferral 93 (153) (179) Net periodic pension cost (benefit) $(106) $ (20) $ 230 The following table sets forth the plan's funded status and the amounts recognized on the Corporation's Consolidated Balance Sheet as of December 31: 2000 1999 Market value of plan assets, primarily registered investment companies, U.S. government and agency obligations and money markets $6,785 $6,485 Projected benefit obligation 5,822 5,765 Plan assets greater than projected benefit obligation 963 720 Unrecognized net transition asset (62) (92) Unrecognized net loss (gain) (223) (56) Prepaid pension expense recognized on the balance sheet $ 678 $ 572 Actuarial present value of accumulated benefits, including vested benefits of $5,665 and $5,588 $5,822 $5,765 The following table sets forth the change in benefit obligation: 2000 1999 Benefit obligation at beginning of year $5,765 $7,926 Service cost -0- -0- Interest cost 343 394 Benefit payment (242) (908) Actuarial loss (gain) (44) (1,647) Benefit obligation at end of year $5,822 $5,765 The following table sets forth the change in plan assets: 2000 1999 Fair value of plan assets at beginning of year $6,485 $7,132 Return on plan assets 542 261 Employer contribution -0- -0- Benefits paid (242) (908) Fair value of plan assets at end of year $6,785 $6,485 50 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 20--Retirement Plans (Continued) Pension Plan of Acquired Subsidiary (Continued) Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows at December 31: 2000 1999 Discount rates 6.0% 6.0% Rates of increase in compensation levels N/A N/A Expected long-term rate of return on assets 6.5 6.5 Postretirement Benefits other than Pensions for Acquired Subsidiary Employees of Southwest were covered by a postretirement benefit plan. Net periodic benefit cost of this plan was as follows: 2000 1999 1998 Service cost $ 7 $ 13 $ 61 Interest cost on projected benefit obligation 190 197 259 Amortization of transition obligation 2 2 55 Loss amortization -0- 48 82 Net periodic benefit cost $199 $260 $457 The following table sets forth the plan's funded status and the amounts recognized on the Corporation's Consolidated Balance Sheet as of December 31: 2000 1999 Accumulated postretirement benefit obligation: Retirees $3,413 $2,762 Fully eligible active plan participants 14 14 Other plan participants 163 183 Total accumulated postretirement benefit obligation 3,590 2,959 Plan assets at fair value -0- -0- Accumulated postretirement benefit obligation in excess of plan assets 3,590 2,959 Unrecognized transition obligation (19) (21) Unrecognized net loss (729) (56) Accrued benefit liability recognized on the balance sheet $2,842 $2,882 The following table sets forth the change in benefit obligation: 2000 1999 Benefit obligation at beginning of year $2,959 $3,414 Service cost 7 13 Interest cost 190 197 Benefit payments (239) (225) Actuarial loss (gain) 673 (440) Benefit obligation at end of year $3,590 $2,959 51 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 20--Retirement Plans (Continued) Postretirement Benefits other than Pensions for Acquired Subsidiary (Continued) The discount rates used in determining the actuarial present value of the accumulated postretirement benefit obligation were 6.75% for 2000 and 1999. The health care cost trend rates used for 2000 were projected at an initial rate of 6.75% decreasing over time to an annual rate of 4.25% for grandfathered participants and an initial rate of 6.00% decreasing over time to an annual rate of 4.25% for non-grandfathered participants. The health care cost trend rates used for 1999 were projected at an initial rate of 5.75% decreasing over time to an annual rate of 4.50% for grandfathered participants and an initial rate of 5.00% decreasing over time to an annual rate of 4.50% for non-grandfathered participants. This grandfathering is related to cost sharing requirements for different groups of participants for these benefits. The health care cost trend rate assumption can have a significant impact on the amounts reported for this plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects: 1-Percentage- 1-Percentage- Point Increase Point Decrease Effect on total of service and interest cost components $ 15 $ (13) Effect on postretirement benefit obligation $219 $(196) Southwest amended this plan to discontinue participation for active employees December 31, 1998 and to limit participation to employees retiring before January 1, 2002. As the result of this plan curtailment, an additional expense of $1,129 was recorded for 1998. In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS No. 132") which is effective for years beginning after December 15, 1997. FAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. The adoption of FAS No. 132 did not have a material impact on the Corporation's financial condition or results of operations. NOTE 21--Unearned ESOP Shares The Corporation had borrowed amounts which were concurrently loaned to the First Commonwealth Financial Corporation Employee Stock Ownership Plan Trust ("ESOP") on the same terms. The combined balances of the ESOP related loans were $5,287 at December 31, 2000 and $6,193 at December 31, 1999. The loans have been recorded as long-term debt on the Corporation's Consolidated Balance Sheets. A like amount of unearned ESOP shares was recorded as a reduction of common shareholders' equity. Unearned ESOP shares, included as a component of shareholders' equity, represents the Corporation's prepayment of future compensation expense. The shares acquired by the ESOP are held in a suspense account and will be released to the ESOP for allocation to the plan participants as the loan is reduced. Repayment of the loans are scheduled to occur over a five year period from contributions to the ESOP by the Corporation and dividends on unallocated ESOP shares. 52 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands, except per share data) NOTE 21--Unearned ESOP Shares (Continued) The following is an analysis of ESOP shares held in suspense: (See NOTE 1 for the definition of "old" and "new shares"). Old New Total Shares Shares Shares in suspense December 31, 1998 730,614 178,878 551,736 Shares allocated during 1999 (131,927) (32,300) (99,627) Shares in suspense December 31, 1999 598,687 146,578 452,109 Shares allocated during 2000 (105,166) (25,748) (79,418) Shares in suspense December 31, 2000 493,521 120,830 372,691 The fair market value of the new shares remaining in suspense was approximately $3,727 and $5,425 at December 31, 2000 and 1999 respectively. Interest on ESOP loans was $446 in 2000, $460 in 1999 and $255 in 1998. During 2000, 1999 and 1998, dividends on unallocated shares in the amount of $354, $369 and $196 respectively were used for debt service while all dividends on allocated shares were allocated to the participants. NOTE 22--Stock Option Plan At December 31, 2000, the Corporation had a stock-based compensation plan, which is described below. All of the exercise prices and related number of shares have been restated to reflect the previously described stock split. The plan permits the executive compensation committee to grant options for up to 4.5 million shares of the Corporation's common stock through October 15, 2005. Although the vesting requirements and terms of future options granted are at the discretion of the executive compensation committee, all options granted during 1997 became vested at December 31, 1997 and expire ten years from the grant date, all options granted during 1998 became vested at December 31, 1998 and expire ten years from the grant date, all options granted during 1999 became vested on December 31, 1999 and expire ten years from the grant date and all options granted during 2000 became vested on or before December 31, 2000 and expire ten years from the grant date. The Corporation has elected, as permitted by FAS No. 123, to apply APB Opinion 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock options outstanding. Had compensation cost for the Corporation's stock option plan been determined based upon the fair value at the grant dates for awards under the plan consistent with the method of FASB Statement 123, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts shown below:
2000 1999 1998 As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma Net Income $47,246 $47,130 $53,030 $52,197 $33,374 $33,374 Basic earnings per share $ 0.82 $ 0.82 $ 0.88 $ 0.87 $ 0.54 $ 0.54 Diluted earnings per share $ 0.82 $ 0.82 $ 0.88 $ 0.86 $ 0.54 $ 0.54
53 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands, except per share data) NOTE 22--Stock Option Plan (Continued) The fair value of each option granted is estimated on the date of the grant using the Black-Scholes options pricing model with the following weighted average assumptions used: 2000 1999 1998 Dividend yield 5.65% per annum 4.29% per annum 3.75% per annum Expected volatility 61.7% 31.4% 90.0% Risk-free interest rate 5.3% 6.3% 5.1% Expected option life 9.1 years 9.1 years 9.1 years A summary of the status of the Corporation's outstanding stock options as of December 31, 2000, 1999 and 1998 and changes for the years ending on those dates is presented below:
2000 1999 1998 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 1,680,178 $11.07 1,306,346 $10.53 1,052,548 $ 8.75 Granted 705,429 $11.06 610,416 $11.56 404,016 $14.69 Exercised (41,240) $ 7.93 (188,570) $ 8.66 (131,138) $ 8.72 Forfeited (133,716) $11.63 (48,014) $12.08 (19,080) $ 9.81 Outstanding at end of year 2,210,651 $11.12 1,680,178 $11.07 1,306,346 $10.53 Exercisable at end of year 2,210,651 $11.12 1,680,178 $11.07 956,058 $11.06
The following table summarizes information about the stock options outstanding at December 31, 2000.
Options Outstanding Options Exercisable Weighted-Average Range of Number Outstanding Remaining Contract Weighted-Average Number Exercisable Weighted-Average Exercise Prices at 12/31/00 Life Exercise Price at 12/31/00 Exercise Price $2.79 9,680 1.3 $ 2.79 9,680 $ 2.79 $4.035 8,800 2.2 $ 4.04 8,800 $ 4.04 $9.1875-9.25 649,364 6.0 $ 9.22 649,364 $ 9.22 $11.0625 658,709 9.1 $11.06 658,709 $11.06 $11.1825-11.5625 553,902 8.1 $11.56 553,902 $11.56 $14.6875 330,196 7.2 $14.69 330,196 $14.69 Total 2,210,651 $11.12 2,210,651 $11.12
54 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 23--Commitments and Contingent Liabilities There are no material legal proceedings to which the Corporation or its subsidiaries are a party, or of which any of their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have any material adverse effect on the consolidated operations or financial position of the Corporation and its subsidiaries. NOTE 24--Related Party Transactions Some of the Corporation's or its subsidiaries' directors, executive officers, principal shareholders and their related interests, had transactions with the subsidiary banks in the ordinary course of business. All loans and commitments to loans in such transactions were made on substantially the same terms, including collateral and interest rates, as those prevailing at the time for comparable transactions. In the opinion of management, these transactions do not involve more than the normal risk of collectibility nor do they present other unfavorable features. It is anticipated that further such extensions of credit will be made in the future. The following is an analysis of loans to those parties whose aggregate loan balances exceeded $60 during 2000. Balances December 31, 1999 $8,404 Advances 8,394 Repayments (7,114) Other (268) Balances December 31, 2000 $ 9,416 "Other" primarily reflects the change in those classified as a "related party" as a result of mergers, resignations and retirements. NOTE 25--Regulatory Restrictions and Capital Adequacy The amount of funds available to the parent from its subsidiary banks is limited by restrictions imposed on all financial institutions by banking regulators. At December 31, 2000, dividends from subsidiary banks were restricted not to exceed $91,344. These restrictions have not had, and are not expected to have, a significant impact on the Corporation's ability to meet its cash obligations. The Corporation is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of total and Tier I capital (common and certain other "core" equity capital) to risk weighted assets, and of Tier I capital to average assets. As of December 31, 2000, the Corporation and its banking subsidiaries meet all capital adequacy requirements to which they are subject. 55 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 25--Regulatory Restrictions and Capital Adequacy (Continued) As of December 31, 2000, the most recent notifications from the Federal Reserve Board and Federal Deposit Insurance Corporation categorized First Commonwealth Bank and Southwest Bank as well capitalized under the regulatory framework for prompt corrective action. To be considered as well capitalized, the banks must maintain minimum total risk-based capital, Tier I risk-based capital and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institutions' category.
To Be Well Capitalized Under Prompt Corrective Actual Regulatory Minimum Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2000 Total Capital to Risk Weighted Assets First Commonwealth Financial Corporation $401,516 14.5% $221,294 8.0% Not Applicable Not Applicable First Commonwealth Bank $283,624 12.9% $175,783 8.0% $219,728 10.0% Southwest Bank $ 91,416 16.9% $ 43,261 8.0% $ 54,077 10.0% Tier I Capital to Risk Weighted Assets First Commonwealth Financial Corporation $367,915 13.3% $110,647 4.0% Not Applicable Not Applicable First Commonwealth Bank $257,789 11.7% $ 87,891 4.0% $131,837 6.0% Southwest Bank $ 84,656 15.7% $ 21,631 4.0% $ 32,446 6.0% Tier I Capital to Average Assets First Commonwealth Financial Corporation $367,915 8.5% $129,749 3.0% Not Applicable Not Applicable First Commonwealth Bank $257,789 7.8% $ 98,994 3.0% $164,990 5.0% Southwest Bank $ 84,656 8.5% $ 29,758 3.0% $ 49,596 5.0% As of December 31, 1999 Total Capital to Risk Weighted Assets First Commonwealth Financial Corporation $384,368 14.4% $213,009 8.0% Not Applicable Not Applicable First Commonwealth Bank $287,968 13.7% $168,687 8.0% $210,859 10.0% Southwest Bank $ 92,933 17.6% $ 42,308 8.0% $ 52,886 10.0% Tier I Capital to Risk Weighted Assets First Commonwealth Financial Corporation $351,085 13.2% $106,504 4.0% Not Applicable Not Applicable First Commonwealth Bank $261,744 12.4% $ 84,344 4.0% $126,515 6.0% Southwest Bank $ 86,322 16.3% $ 21,154 4.0% $ 31,731 6.0% Tier I Capital to Average Assets First Commonwealth Financial Corporation $351,085 7.4% $141,488 3.0% Not Applicable Not Applicable First Commonwealth Bank $261,744 7.2% $108,724 3.0% $181,207 5.0% Southwest Bank $ 86,322 8.2% $ 31,790 3.0% $ 52,983 5.0%
56 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 26--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) Balance Sheets December 31, 2000 1999 Assets Cash $ 6,169 $ 5,122 Securities available for sale 81 103 Loans to affiliated parties 479 480 Investment in subsidiaries 355,680 330,400 Investment in jointly-owned company 3,980 3,477 Premises and equipment 6,813 7,064 Dividends receivable from subsidiaries 3,757 2,786 Receivable from subsidiaries 7,325 3,574 Other assets 2,174 2,639 Total assets $386,458 $355,645 Liabilities and Shareholders' Equity Accrued expenses and other liabilities $ 2,493 $ 2,544 Dividends payable 8,439 8,141 Loans payable 5,287 22,193 Subordinated debentures payable 36,083 36,083 Shareholders' equity 334,156 286,684 Total liabilities and shareholders' equity $386,458 $355,645 Statements of Income Years Ended December 31, 2000 1999 1998 Interest and dividends $ 41 $ 149 $ 251 Dividends from subsidiaries 61,664 36,506 28,559 Interest expense (5,335) (1,758) (255) Net securities gains -0- 57 203 Other revenue 31 15 1,008 Operating expenses (7,451) (11,476) (8,111) Income before taxes and equity in undistributed earnings of subsidiaries 48,950 23,493 21,655 Applicable income tax benefits 4,340 4,421 2,348 Income before equity in undistributed earnings of subsidiaries 53,290 27,914 24,003 Equity in undistributed earnings of subsidiaries (6,044) 25,116 9,371 Net income $47,246 $53,030 $33,374 57 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 26--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) (Continued) Statements of Cash Flows Years Ended December 31, 2000 1999 1998 Operating Activities Net income $ 47,246 $ 53,030 $ 33,374 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,263 1,655 1,470 Net (gains) losses on sale of assets -0- 144 (203) Decrease (increase) in prepaid income taxes 212 (242) 13 Undistributed equity in subsidiaries 6,044 (25,116) (9,371) Other - net 97 (803) (1,627) Net cash provided by operating activities 54,862 28,668 23,656 Investing Activities Transactions with securities available for sale: Purchases of investment securities -0- -0- (10,091) Sales of investment securities -0- 102 13,709 Net change in loans to affiliated parties 1 17 (28) Purchases of premises and equipment (337) (1,491) (2,051) Additional net investment in subsidiary (3,861) (2,406) (1,770) Sale of subsidiary -0- 1,709 -0- Net cash used by investing activities (4,197) (2,069) (231) Financing Activities Issuance of subordinated debentures -0- 36,083 -0- Issuance of other long-term debt 4,000 16,000 -0- Repayment of other long-term debt (20,000) -0- -0- Discount on dividend reinvestment plan purchases (593) (358) (1,016) Treasury stock acquired (873) (51,331) (2,123) Treasury stock reissued 326 1,453 2,217 Cash dividends paid (32,553) (27,825) (25,746) Stock option tax benefit 75 -0- -0- Net cash used by financing activities (49,618) (25,978) (26,668) Net increase (decrease) in cash 1,047 621 (3,243) Cash at beginning of year 5,122 4,501 7,744 Cash at end of year $ 6,169 $ 5,122 $ 4,501 58 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 26--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) (Continued) Supplemental disclosures Proceeds from the issuance of subordinated debentures and other long-term debt during 1999 were used primarily to fund the purchase of 3,819,420 shares of the Corporation's common stock pursuant to a "modified Dutch Auction" tender offer. Noncash investing and financing activities: 2000 1999 1998 ESOP borrowings $-0- $ -0- $6,000 ESOP loan reductions $906 $1,814 $ 429 The Corporation borrowed $6,000 in 1998 and concurrently loaned this amount to the ESOP on identical terms. The loan was recorded as long-term debt and the offset was recorded as a reduction of common shareholders' equity. Loan payments in the amount of $906 in 2000, $1,814 in 1999 and $429 in 1998 were made by the ESOP thereby reducing the outstanding amount related to unearned ESOP shares to $5,287 at December 31, 2000. NOTE 27--Fair Values of Financial Instruments Below are various estimated fair values at December 31, 2000 and 1999, as required by Statement of Financial Accounting Standards No. 107 ("FAS No. 107"). Such information, which pertains to the Corporation's financial instruments, is based on the requirements set forth in FAS No. 107 and does not purport to represent the aggregate net fair value of the Corporation. It is the Corporation's general practice and intent to hold its financial instruments to maturity, except for certain securities designated as securities available for sale, and not to engage in trading activities. Many of the financial instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Therefore, the Corporation had to use significant estimations and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and the methodologies in absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. The following methods and assumptions were used by the Corporation in estimating financial instrument fair values: Cash and short-term instruments: The balance sheet carrying amounts for cash and short-term instruments approximate the estimated fair values of such assets. Securities: Fair values for securities held to maturity and securities available for sale are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of nonmarketable equity securities, such as Federal Home Loan Bank stock, is considered a reasonable estimate of fair value. 59 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (Dollar Amounts in Thousands) NOTE 27--Fair Values of Financial Instruments (Continued) Loans receivable: Fair values of variable rate loans subject to frequent repricing and which entail no significant credit risk are based on the carrying values. The estimated fair values of other loans are estimated by discounting the future cash flows using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest is considered a reasonable estimate of fair value. Off-balance-sheet instruments: Many of the Corporation's off-balance-sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon, therefore the commitment amounts do not necessarily represent future cash requirements. Management has determined that due to the uncertainties of cash flows and difficulty in predicting the timing of such cash flows, fair values were not estimated for these instruments. Deposit liabilities: For deposits which are payable on demand at the reporting date, representing all deposits other than time deposits, management estimates that the carrying value of such deposits is a reasonable estimate of fair value. The carrying amounts of variable rate time deposit accounts and certificates of deposit approximate their fair values at the report date. Fair values of fixed rate time deposits are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregated expected maturities. The carrying amount of accrued interest approximates its fair value. Short-term borrowings: The carrying amounts of short-term borrowings such as Federal funds purchased, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and treasury, tax and loan notes approximate their fair values. Long-term debt: The carrying amounts of variable rate debt approximate their fair values at the report date. Fair values of fixed rate debt are estimated by discounting the future cash flows using the Corporation's estimated incremental borrowing rate for similar types of borrowing arrangements. The following table presents carrying amounts and estimated fair values of the Corporation's financial instruments at December 31, 2000 and 1999. 2000 1999 Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value Financial assets Cash and due from banks $ 90,723 $ 90,723 $ 92,673 $ 92,673 Interest-bearing deposits with banks $ 427 $ 427 $ 1,218 $ 1,218 Federal funds sold $ 11,125 $ 11,125 $ 8,700 $ 8,700 Securities available for sale $1,238,230 $1,238,230 $1,144,042 $1,144,042 Investments held to maturity $ 398,107 $ 398,661 $ 448,347 $ 435,000 Loans, net of allowance $2,457,226 $2,530,430 $2,466,520 $2,547,096 Financial liabilities Deposits $3,064,146 $3,047,713 $2,948,829 $2,913,140 Short-term borrowings $ 272,171 $ 272,171 $ 424,827 $ 424,827 Long-term debt $ 656,855 $ 630,511 $ 638,355 $ 581,254 60 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of First Commonwealth Financial Corporation: We have audited the accompanying consolidated balance sheets of First Commonwealth Financial Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. The 1998 consolidated financial statements give retroactive effect to the merger of First Commonwealth Financial Corporation and Southwest National Corporation on December 31, 1998, which has been accounted for as a pooling of interests as described in Note 6 to the consolidated financial statements. We did not audit the statements of income, shareholders' equity, and cash flows of Southwest National Corporation for the year ended December 31, 1998, which statements reflect net interest income of 25% of the related consolidated total for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Southwest National Corporation for 1998, is based solely on the report of such other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of First Commonwealth Financial Corporation and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /S/Deloitte & Touche, LLP Pittsburgh, Pennsylvania January 25, 2001 61 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data INDEPENDENT AUDITORS' REPORT To the Board of Directors Southwest National Corporation: We have audited the consolidated statements of income, changes in shareholders' equity and cash flows of Southwest National Corporation and subsidiary for the year ended December 31, 1998 (not presented separately herein). These consolidated financial statements are the responsibility of Southwest National Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, Southwest National Corporation and subsidiary's results of operations and their cash flows for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. /S/KPMG LLP Pittsburgh, Pennsylvania February 17, 1999 62 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Quarterly Summary of Financial Data - Unaudited (Dollar Amounts in Thousands, except per share data) The unaudited quarterly results of operations for the years ended December 31, 2000 and 1999 are as follows (amounts in prior periods have been reclassified to conform to the presentation format used at December 31, 2000. The reclassifications had no effect on net income or earnings per share.):
2000 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income................................................. $76,943 $77,317 $78,471 $79,151 Interest expense................................................ 41,504 42,443 44,734 45,858 Net interest income........................................ 35,439 34,874 33,737 33,293 Provision for credit losses..................................... 2,505 2,415 2,505 2,605 Net interest income after provision for credit losses........... 32,934 32,459 31,232 30,688 Securities gains................................................ -0- 1,686 -0- 59 Other operating income.......................................... 7,358 8,254 8,242 8,084 Other operating expenses........................................ 25,150 25,048 24,709 24,554 Income before income taxes................................. 15,142 17,351 14,765 14,277 Applicable income taxes......................................... 3,691 4,261 3,209 3,128 Net income................................................. $11,451 $13,090 $11,556 $11,149 Basic earnings per share........................................ $ 0.20 $ 0.23 $ 0.20 $ 0.19 Diluted earnings per share...................................... $ 0.20 $ 0.23 $ 0.20 $ 0.19 Average shares outstanding......................................57,505,462 57,515,772 57,565,411 57,648,021 Average shares outstanding assuming dilution....................57,606,948 57,566,079 57,601,162 57,699,795
1999 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income................................................. $71,463 $73,266 $74,939 $76,421 Interest expense................................................ 36,740 36,989 38,154 40,770 Net interest income........................................ 34,723 36,277 36,785 35,651 Provision for credit losses..................................... 2,213 2,337 2,363 2,537 Net interest income after provision for credit losses........... 32,510 33,940 34,422 33,114 Securities gains................................................ 563 -0- 2 -0- Other operating income.......................................... 8,140 10,834 7,476 7,210 Other operating expenses........................................ 24,674 24,010 23,344 23,541 Income before income taxes................................. 16,539 20,764 18,556 16,783 Applicable income taxes......................................... 4,534 5,938 4,804 4,336 Net income................................................. $12,005 $14,826 $13,752 $12,447 Basic earnings per share (a).................................... $ 0.20 $ 0.24 $ 0.22 $ 0.22 Diluted earnings per share (a).................................. $ 0.20 $ 0.24 $ 0.22 $ 0.21 Average shares outstanding (a)..................................61,152,708 61,203,388 61,290,374 57,713,182 Average shares outstanding assuming dilution (a)................61,432,570 61,376,932 61,491,946 58,003,391 (a) Where applicable, per share amounts have been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on October 19, 1999.
63 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 23, 2001 is incorporated herein by reference in response to the listing of directors. The table below lists the current executive officers of the Corporation. Name Age Positions Held During the Past Five Years E. James Trimarchi 78 Chairman of the Board of the Corporation, Chairman of the Board of CSC, FCB and FCIA; Director of CTCLIC, FCPRI and FCTC; Former President and Chief Executive Officer of the Corporation Joseph E. O'Dell 55 President, Chief Executive Officer and director of the Corporation; Director of FCB, FCTC, Southwest Bank and FCIA; Vice Chairman of the Board of CSC and FCPRI; Former Senior Executive Vice President and Chief Operating Officer of the Corporation; former President and Chief Executive Officer of FCB David S. Dahlmann 51 Vice Chairman of the Corporation; President and Chief Executive Officer of Southwest Bank; Former President and Chief Executive Officer of Southwest National; Director of Southwest Bank and FCPRI Johnston A. Glass 51 Vice Chairman, Growth of the Corporation; President and Chief Executive Officer of FCB; Director of FCB, FCTC, FCIA and FCPRI Gerard M. Thomchick 45 Senior Executive Vice President and Chief Operating Officer of the Corporation; President, Chief Executive Officer and Director of CTCLIC; President and Director of FCPRI; Director of FCB, FCTC and FCIA John J. Dolan 44 Executive Vice President and Chief Financial Officer of the Corporation; Chief Financial Officer of FCB; Comptroller and Chief Financial Officer of CTCLIC; Treasurer and Assistant Secretary of FCTC; Chief Financial Officer of FCPRI; Treasurer of FCIA; Administrative Trustee of First Commonwealth Capital Trust I David R. Tomb, Jr. 69 Senior Vice President, Secretary, Treasurer and Director of the Corporation; Secretary and Cashier of FCB; Secretary of FCIA, FCTC, FCPRI and CSC; Director of FCB, CSC, FCTC, FCPRI, FCIA and CTCLIC 64 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) Thaddeus J. Clements 44 Senior Vice President, Human Resources of the Corporation William R. Jarrett 66 Senior Vice President, Risk Management of the Corporation Sue McMurdy 44 Senior Vice President and Chief Information Officer of the Corporation; President, Chief Executive Officer and Director of CSC; Director of FCPRI; former Senior Vice President, Technical Services of Commonwealth Systems Corporation R. John Previte 51 Senior Vice President, Investments of the Corporation; Investment Officer of FCB and Southwest; Senior Vice President of FCPRI Each of the officers identified above has held the position indicated above or other executive positions with the same entity (or a subsidiary thereof) for at least the past five years except where noted. Executive officers of the Corporation serve at the pleasure of the Board of Directors of the Corporation and for a term of office extending through the election and qualification of their successors. ITEM 11 - MANAGEMENT RENUMERATION Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 23, 2001 is incorporated herein by reference in response to this item. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 23, 2001 is incorporated herein by reference in response to this item. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 23, 2001 is incorporated herein by reference in response to this item. 65 FIRST COMMONWEALTH FINANCIAL CORPORATION PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K (A) Documents Filed as Part of this Report 1) Financial Statements All financial statements of the registrant as set forth under Item 8 of this Report on Form 10-K. 2) Financial Statement Schedules Schedule Number Description Page I Indebtedness to Related Parties N/A II Guarantees of Securities of Other Issuers N/A Page Number or Exhibit Incorporated by 3) Number Description Reference to 3.1 Articles of Incorporation Exhibit 3(i) to the Corporation's quarterly report on Form 10Q for the quarter ended March 31, 1994 3.2 By-Laws of Registrant Exhibit 3.2 to Form S-4 filed October 15, 1993 10.1 Change in Control Exhibit 10.4 to Form 10-K Agreement dated filed March 21, 1996 October 27, 1995 Joseph E. O'Dell 10.2 Change in Control Exhibit 10.5 to Form 10-K Agreement dated filed March 21, 1996 October 27, 1995 Gerard M. Thomchick 10.3 Change in Control Exhibit 10.6 to Form 10-K Agreement dated filed March 21, 1996 October 30, 1995, entered into between First Commonwealth Financial Corporation and John J. Dolan, together with a schedule listing substantially identical Change in Control Agreements with the following individuals: William R. Jarrett, R. John Previte, David L. Dawson, Johnston A. Glass, Domenic P. Rocco and Robert C. Wagner. 10.4 Employment Contract Exhibit 10.4 to Form S-4 David S. Dahlmann filed November 2, 1998 10.5 Supplemental Executive Exhibit 10.7 to Form 10-K Retirement Plan filed March 31, 1999 10.6 Deferred Compensation Exhibit 10.8 to Form 10-K Plan filed March 31, 1999 10.7 Cash Incentive Bonus Exhibit 10.9 to Form 10-K Program filed March 31, 1999 66 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K PART IV (Continued) 10.8 Change in Control Page 69 Agreement dated November 22, 2000, entered into between First Commonwealth Financial Corporation and Sue McMurdy 21.1 Subsidiaries of the Page 75 Registrant 23.1 Consent of Deloitte & Page 76 Touche LLP Certified Public Accountants 23.2 Consent of KPMG LLP Page 77 Certified Public Accountants 24.1 Power of Attorney Page 78 (B) Report on Form 8-k None 67 FIRST COMMONWEALTH FINANCIAL CORPORATION SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Indiana, Pennsylvania, on the 29th day of March 2001. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) /S/JOSEPH E. O'DELL Joseph E. O'Dell, President and Chief Executive Officer 68 EX-10 2 0002.txt FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - CHANGE IN CONTROL AGREEMENT - SUE MCMURDY AGREEMENT FOR SEVERANCE PAYMENTS IN THE EVENT OF TERMINATION OF EMPLOYMENT UNDER CERTAIN CIRCUMSTANCES THIS AGREEMENT, by and between First Commonwealth Financial Corporation, a bank holding company organized and existing under the laws of the Commonwealth of Pennsylvania and with its principal place of business in Indiana, Pennsylvania (the "Employer") and SueAnn McMurdy (the "Executrix") made this 22nd day of November, 2000; WITNESSETH WHEREAS, the Executive is presently employed by a subsidiary of the Employer as President of Commonwealth Systems Corporation; WHEREAS, the Employer wishes to induce the President of its subsidiary, Commonwealth Systems Corporation and, accordingly, to provide certain employment security to said Executive in the event of a "change in control" (as hereinafter defined); WHEREAS, the Employer believes that it is in the best interest of its shareholders for the Executive to continue in his position on an objective and impartial basis and without distraction or conflict of interest as a result of a possible, or actual, "change in control" (as hereinafter defined); and WHEREAS, in consideration, inter alia, of this Agreement the Executive is willing to continue as President of it subsidiary, Commonwealth Systems Corporation; NOW, THEREFORE, IN CONSIDERATION OF THE EXECUTIVE CONTINUING AS THE PRESIDENT OF COMMONWEALTH SYSTEMS CORPORATION, AND OF THE MUTUAL PREMISES HEREIN CONTAINED, THE EXECUTIVE AND THE EMPLOYER, INTENDING TO BE LEGALLY BOUND, HEREBY AGREE AS FOLLOWS, TO WIT: ARTICLE I DEFINITIONS 1. A "Change In Control" for the purpose of this Agreement shall be deemed to have occurred if, at any time, any person or group of persons acting in concert (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the regulations of the Securities and Exchange Commission promulgated thereunder) shall acquire legal or beneficial ownership interest, or voting rights, in twenty-five percent (25%) or more of the common voting stock of First Commonwealth Financial Corporation. 2. A "Triggering Event" for the purpose of this Agreement shall be deemed to have occurred if, on or after the occurrence of a Change in Control, any of the following shall occur, viz: Within one (1) year from the date on which the Change In Control occurred, the Employer shall terminate the employment of the Executive, other than in the case of a Termination For Cause, as herein defined; FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - CHANGE IN CONTROL AGREEMENT - SUE MCMURDY (CONTINUED) Within one (1) year from the date on which the Change In Control occurred, the Employer shall reduce the Executive's title, responsibilities, power or authority in comparison with his title, responsibilities, power or authority at the time of the Change In Control; Within one (1) year from the date on which the Change In Control occurred, the Employer shall assign the Executive duties which are inconsistent with the duties assigned to the Executive on the date on which the Change In Control occurred and which duties the Employer persists in assigning to the Executive despite the prior written objection of the Executive; Within one (1) year from the date in which the Change In Control occurred, the Employer shall reduce the Executive's base compensation, his group health, life, disability or other insurance programs (including any such benefits provided to the Executive's family), his pension, retirement or profit-sharing benefits or any benefits provided by the Employer's Employee Stock Ownership Plan, or any substitute therefor, or shall exclude him from any plan, program or arrangement in which other comparable officers of the Employer are included. 3. A "Termination For Cause" for the purpose of this Agreement shall be deemed to have occurred if: The Executive shall have committed a felony under the laws of the United States of America, or of any state or territory thereof, and shall have been convicted of the same, or shall have pled guilty or nolo contendere with respect to said charge, and the commission of said felony resulted in, or was intended to result in, a loss (monetary or otherwise) to the Employer or its clients, customers, directors, officers or employees, or The Executive shall have deliberately and intentionally failed and refused to perform his duties to the Employer (other than during such time as the Executive shall be incapacitated due to accident or illness or during his regularly scheduled vacation periods) for a period of thirty (30) consecutive days following the receipt by him of a notice from the Employer sent by certified mail, return receipt requested, setting forth in detail the facts upon which the Employer relies in concluding that the Executive has deliberately and intentionally refused to perform his duties and indicating with specificity the duties that the Employer demands that the Executive perform forthwith. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - CHANGE IN CONTROL AGREEMENT - SUE MCMURDY (CONTINUED) ARTICLE II SEVERANCE PAYMENT Upon the occurrence of a Triggering Event, the Employer shall pay to the Executive a severance benefit which shall be in addition to any other compensation or remuneration to which the Executive is, or shall become, entitled to receive from the Employer. Each severance payment shall be paid by the Employer to the Executive on the first day of each calendar month commencing on the first day of the month next following the month in which the Triggering Event occurred, and be payable to the Executive or his beneficiary (as hereinafter provided) for eleven (11) consecutive months thereafter, so that a total of twelve (12) consecutive monthly payments shall be made. The amount of each such payment shall be equal to one- twelfth (1/12) of the Executive's annual base salary on the date of the Change In Control. In addition thereto, the Employer shall, at its expense, provide the Executive, and his family, with life, health, disability and accidental death and dismemberment insurance in an amount not less than that provided on the date on which the Change In Control occurred, for the period during which the monthly payments provided above are to be made. ARTICLE III LIMITATION ON PAYMENT OF BENEFITS Notwithstanding anything to the contrary herein contained, in no event shall any amount of severance payments be paid to the extent that such amount constitutes "excess parachute payments" to a "disqualified individual," as such terms are defined by Section 280G of the Internal Revenue Code of 1986, as amended (26 USC 280G) and the regulations of the Secretary of the Treasury or his delegate issued pursuant thereto. ARTICLE IV PAYMENTS ON DEATH If the Executive shall die after the occurrence of a Triggering Event, but prior to the payment of all of the monthly severance payments required by Article II hereof, then all remaining severance payments shall be paid to the beneficiary herein provided at the same time, and in the same amount, as would have been payable to the Executive (in accordance with Article II hereof) had he survived. For this purpose, the Executive's beneficiary shall mean the person or persons designated by the Executive in a notice to the Employer, provided, however than any such designation shall be revocable during the lifetime of the Executive, and in the event that the Executive shall have given more than one such notice during his lifetime, the beneficiary designated in the last such notice shall govern. If the Executive shall not have given such a notice prior to his death, the beneficiary shall be deemed to be the same person that the Executive designated with respect to his group life insurance program maintained by the Employer. ARTICLE V COMPETITIVE EMPLOYMENT If during the period that the Executive is receiving severance payments as herein provided, he shall become an officer, director, employee or consultant to a bank or bank holding company which provides (or whose subsidiaries or affiliates provide) trust, loan or retail banking facilities in the same county as such facilities are provided by any subsidiary or affiliate of the Employer, and which is in direct competition with the Employer, then the Employer may elect to notify the Executive by certified mail, return receipt requested, that it considers the employment of the Executive as competitive employment in accordance with this Article of this Agreement. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - CHANGE IN CONTROL AGREEMENT - SUE MCMURDY (CONTINUED) The Executive may, within thirty (30) days of receipt of such notice from the Employer, terminate such competitive employment and certify the same to the Employer by certified mail, return receipt requested. However, if he shall fail to so terminate his employment and certify the same to the Employer within thirty (30) days of receipt of the notice as herein provided, no subsequent severance payments shall be due or payable following such thirtieth day, notwithstanding any other provision of this Agreement. However, this provision shall in no event affect Executive's entitlement to receive all severance payments due prior to the thirtieth day after receipt by the Executive of such notice, nor shall it in any way require Executive not to engage in such competitive employment. ARTICLE VI SETOFF No amounts otherwise due or payable under this Agreement shall be subject to setoff or counterclaim by either party hereto. ARTICLE VII ATTORNEY'S FEES All attorney's fees and related expenses incurred by Executive in connection with or relating to the enforcement by him of his rights under this Agreement shall be paid for by the Employer. ARTICLE VIII SUCCESSORS AND PARTIES IN INTEREST This Agreement shall be binding upon and shall inure to the benefit of the Employer and its successors and assigns, including, without limitation, any corporation which acquires, directly or indirectly, by purchase, merger, consolidation or otherwise, all or substantially all of the business or assets of the Employer. Without limitation of the foregoing, the Employer shall require any such successor, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that it is required to be performed by the Employer. This Agreement shall be binding upon and shall inure to the benefit of the Executive, his heirs at law and his personal representatives. ARTICLE IX ATTACHMENT Neither this Agreement nor any benefits payable hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge or to execution, attachment, levy or similar process at law, whether voluntary or involuntary. ARTICLE X EMPLOYMENT CONTRACT This Agreement shall not in any way constitute an employment agreement between the Employer and the Executive and it shall not oblige the Executive to continue in the employ of Employer, nor shall it oblige the Employer to continue to employ the Executive, but it shall merely require the Employer to pay severance benefits to the Executive under certain circumstances, as aforesaid. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - CHANGE IN CONTROL AGREEMENT - SUE MCMURDY (CONTINUED) ARTICLE XI RIGHTS UNDER OTHER PLANS AND AGREEMENTS The severance benefits herein provided shall be in addition to, and is not intended to reduce, restrict or eliminate any benefit to which the Executive may otherwise be entitled by virtue of his termination of employment or otherwise. ARTICLE XII NOTICES All notices and other communications required to be given hereunder shall be in writing and shall be deemed to have been delivered or made when mailed, by certified mail, return receipt requested, if to the Executive, to the last address which the Executive shall provide to the Employer, in writing, for this purpose, but if the Executive has not then provided such an address, then to the last address of the Executive then on file with the Employer; and if to the Employer, then to the last address which the Employer shall provide to the Executive, in writing, for this purpose, but if the Employer has not then provided the Executive with such an address, then to: President and Chief Executive Officer First Commonwealth Financial Corporation Old Courthouse Square 22 North Sixth Street Indiana, Pennsylvania 15701 ARTICLE XIII GOVERNING LAW AND JURISDICTION This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Pennsylvania, except for the laws governing conflict of laws. In the event that either party shall institute suit or other legal proceeding, whether in law or equity, the Courts of the Commonwealth of Pennsylvania shall have exclusive jurisdiction with respect thereto. ARTICLE XIV ENTIRE AGREEMENT This Agreement constitutes the entire understanding between the Employer and the Executive concerning the subject matter hereof and supersedes all prior written or oral agreements or understandings between the parties hereto. No term or provision of this Agreement may be changed, waived, amended or terminated except by a written instrument of equal formality to this Agreement. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - CHANGE IN CONTROL AGREEMENT - SUE MCMURDY (CONTINUED) IN WITNESS WHEREOF, and as conclusive evidence of the adoption of this Agreement, the parties have hereunto set their hands and seals as of the date and your first above written. (Corporate Seal) FIRST COMMONWEALTH FINANCIAL CORPORATION Attest: /S/ David R. Tomb. Jr. By:/S/ Joseph E. O'Dell Corporate Secretary Joseph E. O'Dell President and Chief Executive Officer /S/ Thaddeus J. Clements /S/ Sue Ann McMurdy Witness SueAnn McMurdy EX-21 3 0003.txt FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 21.1 - SUBSIDIARIES OF FIRST COMMONWEALTH FINANCIAL CORPORATION Percent Ownership By Registrant First Commonwealth Bank 100% 22 North Sixth Street Indiana, PA 15701 Southwest Bank 100% 111 South Main Street Greensburg, PA 15601 Unitas Mortgage Corporation 100% 17 East High Street Carlisle, PA 17013 Unitas Financial Corporation 100% PO Box 777 Chambersburg, PA 17201 Commonwealth Systems Corporation 100% 22 North Sixth Street Indiana, PA 15701 Incorporated under the laws of Pennsylvania First Commonwealth Trust Company 100% 614 Philadelphia Street Indiana, PA 15701 Incorporated under the laws of Pennsylvania First Commonwealth Professional Resources Incorporated 100% 22 North Sixth Street Indiana, PA 15701 First Commonwealth Capital Trust I 100% 22 North Sixth Street Indiana, PA 15701 Commonwealth Trust Credit Life Insurance Company 50% 2700 North Third Street, Suite 2000 Phoenix, AZ 85004 EX-23 4 0004.txt FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 23.1 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in Registration Statement No. 33-55687 of First Commonwealth Financial Corporation on Form S-8 of our report dated January 25, 2001, appearing in this Annual Report on Form 10-K of First Commonwealth Financial Corporation for the year ended December 31, 2000. /S/Deloitte & Touche LLP Pittsburgh, Pennsylvania March 29, 2001 EX-23 5 0005.txt FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 23.2 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors First Commonwealth Financial Corporation: We consent to incorporation by reference in the registration statement (No. 33-55687) on Form S-8 of First Commonwealth Financial Corporation of our report dated February 17, 1999, relating to the consolidated balance sheet of Southwest National Corporation and subsidiary as of December 31, 1998, the related consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1998, which report appears in the December 31, 2000, annual report on Form 10-K of First Commonwealth Financial Corporation. /S/KPMG LLP Pittsburgh, Pennsylvania March 29, 2001 EX-24 6 0006.txt FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 24.1 - POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENT - that each person whose signature appears below constitutes and appoints Joseph E. O'Dell and David R. Tomb, Jr., and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to do done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE AND CAPACITY DATE /S/E. H. BRUBAKER March 13, 2001 E. H. Brubaker, Director /S/SUMNER E. BRUMBAUGH March 13, 2001 Sumner E. Brumbaugh, Director /S/DAVID S. DAHLMANN March 13, 2001 David S. Dahlmann, Director /S/JOHN A. ROBERTSHAW, JR. March 13, 2001 John A. Robertshaw, Jr., Director /S/DALE P. LATIMER March 13, 2001 Dale P. Latimer, Director /S/RONALD C. GEISER March 13, 2001 Ronald C. Geiser, Director /S/JOSEPH E. O'DELL March 13, 2001 Joseph E. O'Dell, President and CEO and Director /S/DAVID R. TOMB, JR. March 13, 2001 David R. Tomb, Jr., Sr. Vice President, Secretary and Treasurer and Director /S/JOSEPH W. PROSKE March 20, 2001 Joseph W. Proske, Director /S/EDWARD T. COTE March 20, 2001 Edward T. Cote, Director /S/JOHNSTON A. GLASS March 21, 2001 Johnston A. Glass, Director /S/ROBERT C. WILLIAMS March 21, 2001 Robert C. Williams, Director /S/JOHN J. DOLAN March 29, 2001 (1)John J. Dolan, Executive Vice President and Chief Financial Officer /S/JANICE PATTI March 29, 2001 (2)Janice Patti, Comptroller (1) Also Chief Accounting Officer (2) Also Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----