-----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, HNf7jivDOAdPtRIIoqKtcUjLk4etNRHGQMkxgnpF6ZY4oo0+GpUgxW4sL6kejp+a H/g0iSlPkEiGdT11ZqdeZA== 0000712537-01-500014.txt : 20010816 0000712537-01-500014.hdr.sgml : 20010816 ACCESSION NUMBER: 0000712537-01-500014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251428528 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11138 FILM NUMBER: 1714227 BUSINESS ADDRESS: STREET 1: OLD COURTHOUSE SQUARE STREET 2: 22 N SIXTH ST CITY: INDIANA STATE: PA ZIP: 15701 BUSINESS PHONE: 7243497220 MAIL ADDRESS: STREET 1: 22 NORTH SIXTH STREET STREET 2: P.O. BOX 400 CITY: INDIANA STATE: PA ZIP: 15701 10-Q 1 tenqedg2.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 For the quarterly period ended June 30, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 For the transition period from to Commission File Number 0-11242 First Commonwealth Financial Corporation (Exact name of registrant as specified in its charter) Pennsylvania 25-1428528 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 22 North Sixth Street Indiana, PA 15701 (Address of principal executive offices) (Zip Code) 724-349-7220 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report.) Indicate a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Number of shares outstanding of issuer's common stock, $1.00 Par Value as of August 13, 2001 was 58,429,035. FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Included in Part I of this report: Page First Commonwealth Financial Corporation and Subsidiaries Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Changes in Shareholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25 PART II - OTHER INFORMATION Other Information 26 Signatures Signature Page FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands)
June 30, December 31, 2001 2000 ASSETS Cash and due from banks on demand $ $ 87,062 90,723 Interest-bearing deposits with banks 500 427 Federal funds sold 3,000 11,125 Securities available for sale, at market 1,427,784 1,238,230 Securities held to maturity, at cost, (Market value 310,207 398,107 $314,464 in 2001 and $398,662 in 2000) Loans 2,549,160 2,492,874 Unearned income (1,620) (2,047) Allowance for credit losses (33,885) (33,601) Net loans 2,513,655 2,457,226 Property and equipment 44,920 44,671 Other real estate owned 1,786 1,661 Other assets 142,773 130,142 TOTAL ASSETS $4,531,68 $4,372,312 7 LIABILITIES Deposits (all domestic): Noninterest-bearing $ $ 255,868 244,010 Interest-bearing 2,958,749 2,820,136 3,214,617 3,064,146 Total deposits Short-term borrowings 272,031 272,171 Other liabilities 27,499 44,984 Company obligated mandatorily redeemable capital securities of subsidiary 35,000 35,000 trust Other long-term debt 621,855 630,354 656,855 Total long-term debt 665,354 4,179,501 4,038,156 Total liabilities SHAREHOLDERS' EQUITY Preferred stock, $1 par value per share, 3,000,000 shares -0- -0- authorized, none issued Common stock $1 par value per share, 100,000,000 shares authorized; 62,525,412 shares issued; 58,308,256 and 62,525 62,525 58,195,450 shares outstanding at June 30, 2001 and December 31, 2000, respectively Additional paid-in capital 66,546 67,223 Retained earnings 279,329 272,169 Accumulated other comprehensive income 1,689 (7,808) Treasury stock (4,217,156 shares at June 30, 2001, and (53,241) (54,666) 4,329,962 at December 31, 2000, at cost) Unearned ESOP shares (4,662) (5,287) Total shareholders' equity 352,186 334,156 $4,531,68 $4,372,312 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 7 The accompanying notes are an integral part of these consolidated financial statements.
3 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands except per share data)
For the For the 6 Quarter Months Ended June 30, Ended June 30, Ended June 30, Ended June 30, 2001 2000 2001 2000 Interest Income Interest and fees on loans $50,755 $51,95 $102 $103,0 5 ,977 65 Interest and dividends on investments: Taxable interest 23,443 21,941 46,77 44,333 4 Interest exempt from Federal 2,374 2,421 4,745 4,865 income taxes Dividends 575 904 1,429 1,834 Interest on Federal funds sold 206 74 488 123 Interest on bank deposits 18 22 38 40 Total interest income 77,371 77,317 156,4 154,260 51 Interest Expense Interest on deposits 31,243 27,544 63,30 53,709 0 Interest on short-term 2,709 5,612 6,233 11,774 borrowings Interest on company obligated mandatorily 832 831 1,663 1,662 redeemable capital securities of subsidiary trust mandatorily redeemable capital securities of subsidiary trust Interest on other long-term debt 8,629 8,456 7,065 16,802 Total interest on long-term debt 9,461 9,287 18,72 18,464 8 Total interest expense 43,413 42,443 88,26 83,947 1 Net Interest Income 33,958 34,874 68,19 70,313 0 Provision for credit losses 2,557 2,415 4,964 4,920 Net interest income after 31,401 32,459 63,22 65,393 provision for credit losses 6 for credit losses Other Income Securities gains 1,790 1,686 1,995 1,686 Trust income 1,256 1,402 2,550 2,764 Service charges on deposit 2,707 2,622 5,288 5,136 accounts Other income 4,620 4,230 9,807 7,712 Total other income 10,373 9,940 19,64 17,298 0 Other Expenses Salaries and employee benefits 13,401 12,930 27,07 26,841 0 Net occupancy expense 1,623 1,606 3,400 3,320 Furniture and equipment expense 2,254 1,948 4,380 3,808 Data processing expense 821 924 1,588 1,691 Pennsylvania shares tax expense 970 916 1,911 1,810 Other operating expenses 6,934 6,724 13,11 12,728 0 Total other expenses 26,003 25,048 51,45 50,198 9 Income before income taxes 15,771 17,351 31,40 32,493 7 Applicable income taxes 3,737 4,261 7,350 7,952 Net income $12,034 $13,090 $24,0 $24,541 57 Average Shares Outstanding 57,799, 57,515, 57,76 57,510, 443 772 0,915 617 Average Shares Outstanding 58,035, 57,566, 57,91 57,586, Assuming Dilution 585 079 9,444 513 Assuming Dilution Per Share Data: Basic earnings per share $ $ $ $ 0.430 0.210 0.230 0.420 Diluted earnings per share $ $ $ $ 0.430 0.210 0.230 0.420 Cash dividends per share $ $ $ $ 0.280 0.145 0.140 0.290 The accompanying notes are an integral part of these consolidated financial statements.
4 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands)
Accumula Addit ted Unear Total Commo ional Other Trea ned Shareho n Paid- RetainedComprehe sury ESOP lders' Stock in Earn nsive Stoc Share Equity Capit ings Income k s al Balance at December 31, $62,5 $68,3 $257 $(40,304 $(55 $(6,1 $286,68 1999 25 30 ,773 ) ,448 93) 3 ) Comprehensive income Net income 0 0 24,5 0 0 0 24,541 41 Other comprehensive income, net of tax: Unrealized holding gains on 0 0 0 986 0 0 986 securities arising during the period Less: reclassification 0 adjustment for gains 0 0 0 (1,096) 0 (1,096) On securities included in net income Total other comprehensive income 0 0 0 (110) 0 0 (110) Total comprehensive 0 0 24,5 (110) 0 0 24,431 income 41 Cash dividends 0 0 (16, 0 0 0 (16,267 declared 267) ) Decrease in unearned 0 0 0 0 0 286 286 ESOP shares Discount on dividend reinvestment plan 0 (294) 0 0 0 0 (294) Purchases Treasury stock 0 0 0 0 (873 0 (873) acquired ) Treasury stock 0 (88) 0 0 387 0 299 reissued Tax benefit of stock options 0 75 0 0 0 0 75 Balance at June 30, 2000 $62,5 $68,0 $266 $(40,414 $(55 $(5,9 $294,34 25 23 ,047 ) ,934 07) 0 ) Balance at December 31, $62,5 $67,2 $272 $(7,808) $(54 $(5,2 $334,15 2000 25 23 ,169 ,666 87) 6 ) Comprehensive income Net income 0 0 24,0 0 0 0 24,057 57 Other comprehensive income, net of tax: Unrealized 0 0 0 10,765 0 0 10,765 holding gains on securities arising during the period Less: reclassification adjustment for gains 0 0 0 (1,268) 0 0 (1,268) On securities included in net income Total other comprehensive income 0 0 0 9,497 0 0 9,497 Total comprehensive 0 0 24,0 9,497 0 0 33,554 income 57 Cash dividends 0 0 (16, 0 0 0 (16,897 declared 897) ) Decrease in unearned 0 0 0 0 0 625 625 ESOP shares Discount on dividend reinvestment plan 0 (306) 0 0 0 0 (306) Purchases Treasury stock 0 0 0 0 0 0 0 acquired Treasury stock reissued 0 (371) 0 0 1,42 0 1,054 5 Balance at June 30, 2001 $62,5 $66,5 $279 $1,689 $(53 $(4,6 $352,18 25 46 ,329 ,241 62) 6 ) The accompanying notes are an integral part of these consolidated financial statements.
5 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
For the 6 Months Ended June 30, 2001 2000 Operating Activities Net income $ $ 24,057 24,541 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 4,964 4,920 Depreciation and amortization 3,783 3,558 Net gains on sales of assets (2,942 (1,933 ) ) Income from increase in cash surrender value of (2,060 (1,732 bank owned life insurance ) ) Decrease in interest receivable 1,434 615 Increase (decrease) in interest payable (16,85 683 8) Increase (decrease) in income taxes payable (184) 201 Change in deferred taxes (148) 30 Other-net (3,011 (1,150 ) ) Net cash provided (used) by operating activities 9,035 29,733 Investing activities Transactions with securities held to maturity: Proceeds from sales 0 0 Proceeds from maturities and redemptions 87,957 40,000 Purchases 0 (4,931 ) Transactions with securities available for sale: Proceeds from sales 71,431 16,358 Proceeds from maturities and redemptions 199,94 44,315 3 Purchases (444,3 (46,88 79) 7) Proceeds from sales of loans and other assets 46,679 13,520 Investment in bank owned life insurance (15,00 (15,00 0) 0) Net decrease (increase) in time deposits with banks (72) 491 Net increase in loans (108,2 (18,41 46) 5) Purchases of premises and equipment (3,245 (3,944 ) ) Net cash provided (used) by investing activities (164,9 25,507 32) Financing Activities Repayments of other long-term debt (376) (25,24 0) Proceeds from issuance of other long-term debt 9,500 29,900 Discount on dividend reinvestment plan purchases (306) (294) Dividends paid (16,88 (16,27 2) 3) Net increase (decrease) in Federal funds purchased (3,900 4,875 ) Net increase (decrease) in other short-term 3,760 (121,2 borrowings 06) Sale of branch and deposits, net of cash received (9,591 0 ) Net increase (decrease) in deposits 160,85 61,543 2 Stock option tax benefit 0 75 Purchase of treasury stock 0 (873) Proceeds from sale of treasury stock 1,054 298 Net cash provided (used) by financing activities 144,11 (67,19 1 5) Net increase (decrease) in cash and cash (11,78 (11,95 equivalents 6) 5) Cash and cash equivalents at January 1 101,84 101,37 8 3 Cash and cash equivalents at June 30 $90,06 $89,41 2 8 The accompanying notes are an integral part of these consolidated financial statements.
6 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Unaudited) NOTE 1 Management Representation In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of financial position as of June 30, 2001 and the results of operations for the three month and six month periods ended June 30, 2001 and 2000, and statements of cash flows and changes in shareholders' equity for the six month periods ended June 30, 2001 and 2000. The results of the three and six months ended June 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the entire year. The interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements of First Commonwealth Financial Corporation and Subsidiaries, including the notes thereto. NOTE 2 Cash Flow Disclosures (dollar amounts in thousands) 2001 2000 Cash paid during the first six months of the year for: Interest $105,119 $83,264 Income Taxes $ 7,650 $ 7,725 Noncash investing and financing activities: ESOP loan reductions $ 625 $ 286 Loans transferred to other real estate owned and Repossessed assets $ 2,777 $ 3,649 Gross increase (decrease) in market value adjustment To securities available for sale $ 14,611 $ (169) 7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSID IARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Unaudited) NOTE 3 Comprehensive Income Disclosures The following table identifies the related tax effects allocated to each component of other comprehensive income in the Statements of Changes in Shareholders' Equity: (dollar amounts in thousands)
June 30, 2001 June 30, 2000 Tax Net of Tax Net of Pre-Tax (Expense) Tax Pre-tax (Expense) Tax Amount Benefit Amount Amount Benefit Amount Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period $16,561 $(5,796) $10,765 $ 1,517 $(531) $ 986 Less: reclassification adjustment for gains realized in net income (1,950) 682 (1,268) (1,686) 590 (1,096) Net unrealized gains (losses) 14,611 (5,114) 9,497 (169) 59 (110) Other comprehensive income $14,611 $(5,114) $ 9,497 $ (169) $ 59 $ (110)
NOTE 4 New Accounting Pronouncements Effective January 1, 2001, the Corporation adopted the Financial Accounting Standards Board ("FASB") Statement No. 133, "Accounting for Derivative Instruments Hedging Activities" ("FAS No. 133") as amended. 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 on 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 delayed 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 by FAS No. 138 which addresses and clarifies issues causing implementation difficulties for numerous entities applying FAS No. 133. FAS No. 138 includes amendments to FAS No. 133 which resulted from decisions made by the FASB related to the Derivatives Implementation Group ("DIG") process. The DIG was created by the FASB to facilitate 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 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 C13, management 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"). 8 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Unaudited) NOTE 4 New Accounting Pronouncements (continued) 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 did not have a material impact on the Corporation's financial condition or results of operations. In September 2000, the FASB issued statement No. 140, "Accounting for Transfers 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 did not have a material impact on the Corporation's financial condition or results of operations. In July 2001, the FASB issued statement No. 141, "Business Combinations". FAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of interest method. FAS No. 141 also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. Additional provisions of FAS No.141 include the reclassification of certain existing recognized intangibles to goodwill and reclassification of certain intangibles out of previously reported goodwill upon adoption. Implementation of FAS No. 141 is not expected to have a material impact on the Corporation's financial condition or results of operations. In July 2001, the FASB issued statement No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001. FAS 142 requires that goodwill and other intangible assets with indefinite useful lives, including goodwill recorded in past business combinations, no longer be amortized, but instead be tested for impairment at least annually and written down and charged to results of operations only in the periods in which the recorded value is more than the estimated fair value. The statement also requires the Corporation to complete a transitional goodwill impairment test six months from the date of adoption including the identification of reporting units for the purpose of assessing potential future impairments of goodwill. After identifying its reporting units, the Corporation must determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets to those reporting units and then determine the fair value of each reporting unit. If the carrying value of any reporting unit exceeds its fair value, then detailed fair values for each of the assigned assets (excluding goodwill) and liabilities will be determined to calculate the amount of goodwill impairment, if any. Any transitional impairment loss resulting from the adoption of FAS No. 142 will be recognized as the 9 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Unaudited) NOTE 4 New Accounting Pronouncements (continued) effect of a change in accounting principle in the Corporation's income statement. As of June 30, 2001, the Corporation had goodwill, net of accumulated amortization, of approximately $6.4 million, which would be subject to the transitional assessment provisions of FAS No. 142. Goodwill amortization expense was $838 thousand during fiscal 2000, or $0.014 per share. The elimination of goodwill amortization is expected to reduce other operating expenses in periods beginning after December 31, 2001, by $838 thousand annually. Management is currently assessing but has not yet determined the full impact of FAS No. 142 on the Corporation's financial condition or results of operations. NOTE 5 Legal Proceedings In 1994 a subsidiary Bank and its President at that time, were named as defendants in a lender liability action. The plaintiff seeks damages in excess of $375 thousand, plus punitive damages. Although the Company intends to vigorously defend itself, it is not possible to evaluate the likelihood of an unfavorable outcome or the amount or range of potential loss. A jury trial has been scheduled for the first quarter 2002. ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS First Six Months of 2001 as Compared to the First Six Months of 2000 This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and results of operations of First Commonwealth Financial Corporation (the "Corporation") including its subsidiaries. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to those discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Net income for the first six months of 2001 was $24.1 million reflecting a decrease of $484 thousand compared to 2000 results of $24.5 million. The decrease in net income for the 2001 period was primarily the result of decreases in net interest income which were partially offset by increases in non-interest income. Non-interest income, excluding 10 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Continued) First Six Months of 2001 as Compared to the First Six Months of 2000 (Continued) gains on asset sales, increased $1.3 million for the six months of 2001 compared to 2000. Basic earnings per share and diluted earnings per share were $0.42 for the six months of 2001 compared to basic earnings per share and diluted earnings per share of $0.43 for the six months of 2000. Basic earnings per share excluding gains on sale of assets was $0.38 for the 2001 period compared to $0.40 for the 2000 period. Return on average assets was 1.09% and return on average equity was 13.91% during the 2001 period, compared to 1.15% and 17.00%, respectively during the same period of 2000. 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 $68.2 million for the six months of 2001 compared to $70.3 million for the same period of 2000. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) was 3.49% for the six months of 2001 compared to 3.70% for the six months of 2000. The reduction in net interest margin for the 2001 period compared to 2000 resulted primarily from deposit rate increases combined with declining investment yields compared to the 2000 period. The cost of deposits increased by 37 basis points (0.37%) for the first half of 2001 compared to the first half of 2000, while investment yields decreased by 26 basis points (0.26%) over the same time period. The Corporation continues to expand its fee-based services to offset persistent pressure on net interest income. The following table shows the effect of changes in volumes and rates on interest income and interest expense.
Analysis of Changes in Net Interest Income (dollar amounts in thousands) 2001 Change from 2000 Total Change Due Change Change To Volume Due To Rate Interest-earning assets: Time deposits with banks $ $ $ (2) 10 (12) Securities 1,916 4,502 (2,586) Federal funds sold 365 437 (72) Loans (88) 395 (483) Total interest income 2,191 5,344 (3,153) Interest-bearing liabilities: Deposits 9,591 5,050 4,541 Short-term debt (5,541) (4,639) (902) Long-term debt 264 562 (298) Total interest expense 4,314 973 3,341 Net interest income $ $ 4,371 $ (2,123) (6,494)
11 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Six Months of 2001 as Compared to the First Six Months of 2000 (Continued) Interest and fees on loans decreased $88 thousand for 2001 over 2000 levels as volume increases were offset by rate decreases. The total yield on loans for the first six months of 2001 was 8.41%, compared to loan yields of 8.40% for the first six months of 2000. Average loans for the six months of 2001 increased $5.0 million compared to averages for the six months of 2000 as increases in commercial loans and municipal loans were partially offset by reductions in average consumer loans. Interest income on investments increased $1.9 million for the first half of 2001 compared to the corresponding period of 2000 and included increases due to volume for asset backed securities and corporate bonds. Average balances of corporate bonds and asset backed securities increased $101.4 million and $26.3 million, respectively for the first six months of 2001 compared to 2000 averages. Increases in investment income due to volume were partially offset by decreases in investment income due to rate as yields on investments for the first six months of 2001 were 6.63% compared to investment yields of 6.89% for the first six months of 2000. Interest on deposits increased $9.6 million for the 2001 period compared to 2000, as interest on time deposits increased $9.8 million for the six months of 2001 compared to 2000. Average time deposits increased $216.7 million for the six months of 2001 compared to 2000 averages, resulting in an increase in interest expense due to volume of $5.1 million. The cost of time deposits for the six months of 2001 increased by 48 basis points (0.48%) compared to 2000 costs of 5.34% resulting in an increase in interest expense due to rate of $4.7 million. Interest expense on short-term borrowings decreased $5.5 million for the six months of 2001 compared to the six months of 2000 as the average balance of short-term borrowings decreased by $151.0 million over 2000 averages. The cost of short-term borrowings for the 2001 period also decreased by 90 basis points (0.90%) compared to 2000 costs of 5.74%. Interest expense on long-term debt increased $264 thousand for the six months of 2001 compared to the 2000 period as increases in interest expense due to volume were partially offset by decreases in interest expense due to rate. Average long-term debt for the first half of 2001 increased by $19.5 million compared to 2000 averages as maturities were extended for short term borrowings from the Federal Home Loan Bank, to take advantage of declining interest rates. The provision for credit losses was $5.0 million for the six months of 2001 compared to $4.9 million during the six months of 2000. Net charge-offs against the allowance for credit losses were $4.7 million in the 2001 period, reflecting a decrease of $58 thousand compared to 2000 levels. The 2001 period included decreases in net charge-offs for commercial loans not secured by real estate of $1.1 million and decreases in net charge-offs for loans to individuals of $452 thousand compared to 2000 net charge- offs. 12 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Six Months of 2001 as Compared to the First Six Months of 2000 (Continued) The aforementioned decreases in net charge-offs during the first half of 2001 were partially offset by increases in net charge- offs for loans secured by residential real estate of $745 thousand and loans secured by commercial real estate of $625 thousand compared to 2000 net charge-offs. The provision for credit losses as a percent of net charge-offs was 106.07% at June 30, 2001 compared to 103.84% at June 30, 2000. See the "Credit Review" section for an analysis of the quality of the loan portfolio. Below is an analysis of the consolidated allowance for credit losses for the six month periods ended June 30, 2001 and 2000.
2001 2000 (Amounts in thousands) Balance January 1, $ 33,601 $ 33,539 Loans charged off: Commercial, financial and agricultural 2,027 860 Real estate-construction 0 0 Real estate-commercial 625 0 Real estate-residential 1,110 338 Loans to individuals 2,344 2,812 Lease financing receivables 306 226 Total loans charged off 5,245 5,403 Recoveries of previously charged off loans: Commercial, financial and agricultural 101 192 Real estate-construction 0 0 Real estate-commercial 0 0 Real estate-residential 42 15 Loans to individuals 417 433 Lease financing receivables 5 25 Total recoveries 565 665 Net charge offs 4,680 4,738 Provision charged to operations 4,964 4,920 Balance, June 30, $ 33,885 $ 33,721
13 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Six Months of 2001 as Compared to the First Six Months of 2000 (Continued) Net securities gains were $2.0 million during the first half of 2001 compared to $1.7 million for the first half of 2000. Securities gains during the six months of 2001 resulted primarily from the sales of fixed rate corporate bonds and U.S. government agency securities classified as securities "Available for sale" with book values of $37.4 and $54.9 million, respectively. The securities gains during 2000 resulted primarily from the sale of Pennsylvania bank stocks with a book value of $14.2 million. Service charges on deposits for the first six months of 2001 increased $152 thousand compared to the first six months of 2000 primarily as a result of increases in NSF and account analysis fees. Other income for the first half of 2001 was $9.8 million representing an increase of $2.1 million compared to $7.7 million reported for the first half of 2000. Gains on the sale of loans were $568 thousand for the six months of 2001 compared to gains on sale of loans of $73 thousand for the six months of 2000. Gains on sale of loans for the 2001 period resulted primarily from the sale of $12.9 million of 30 year residential mortgage loans with significant prepayment exposure during falling interest rates. 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 one of its branches located in Bethel Park, Pennsylvania during 2001. The premium on the sale of $10.4 million of deposits from the branch resulted in a gain of $767 thousand, while an additional gain of $10 thousand resulted from the sale of office furniture and equipment. Other income from the six months of 2001 also reflected increases in income from bank owned life insurance, debit and credit card interchange, merchant discount and utility processing fees of $328 thousand, $153 thousand, $109 thousand and $132 thousand, respectively over 2000 revenues. The first half of 2001 also included increases in insurance commissions of $225 thousand over the first half of 2000. Fee based revenue, such as insurance commissions, has been positively impacted by implementation of an integrated advisory sales model to integrate products between the Corporation's bank, insurance and trust subsidiaries as well as utilization of an employee team to deliver products and services to commercial customers through our "Total Solutions Financial Management" approach. Non-interest expense was $51.5 million for the six months of 2001 reflecting an increase of $1.3 million over the 2000 level of $50.2 million. Total non-interest expense as a percent of average assets was 2.34% for both the 2001 and 2000 periods. Employee costs were $27.1 million for the first half of 2001, representing 1.25% of average assets on an annualized basis compared to $26.8 million or 1.23% of average assets on an annualized basis for 2000. Salary costs for the first half of 2001 increased $496 thousand or 2.39% compared to 2000 levels of $20.8 million. Employee benefit costs for the first six months of 2001 reflected decreases of $267 thousand over the first six months of 2000 and included decreases in health insurance costs and the Corporation's employee stock ownership plan when compared to the first six months of 2000. 14 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Six Months of 2001 as Compared to the First Six Months of 2000 (Continued) Furniture and equipment expenses of $4.4 million for the first six months of 2001 reflected increases of $572 thousand over 2000 levels and included increases in computer software depreciation and software maintenance, primarily related to the upgrade of the core banking software. Other operating expenses for the 2001 period were $14.7 million reflecting an increase of $279 thousand over the 2000 amount of $14.4 million. The first six months of 2001 included increases in collection and repossession expenses, legal fees, express freight, postage and telephone expense when compared to 2000 levels. The first half of 2001 also included increases in losses on sale of leased vehicles as the used auto market continues to be weak compared to published residual values in prior periods. The operating expenses for the first six months of 2001 reflected decreases in advertising and promotions, outside data processing expenses and other professional fees when compared to the first six months of 2000. Income tax expense was $7.4 million for the six months of 2001 compared to $8.0 million for the same period of 2000. The Corporation's effective tax rate was 23.40% for the 2001 period compared to 24.47% for the corresponding period of 2000. The reduction of the Corporation's effective tax rate for 2001 was primarily the result of increased tax-free income from municipal loans and bank owned life insurance during 2001 compared to the 2000 period. Three Months ended June 30, 2001 as Compared to the Three Months Ended June 30, 2000 Net income was $12.0 million for the second quarter of 2001, a decrease of $1.1 million compared to 2000 results of $13.1 million. Basic and diluted earnings per share was $0.21 during the 2001 quarter compared to $0.23 for the same period of 2000. Return on average assets was 1.08% and return on average equity was 13.69% during the 2001 quarter, compared to 1.22% and 18.03% respectively, during the 2000 quarter. Net interest income for the second quarter of 2001 of $34.0 million represented a decrease of $916 thousand compared to the second quarter of 2000 as loan and investment yields fell faster than the cost of funds. Although average deposits for the second quarter of 2001 reflected strong growth compared to average deposits for the second quarter of 2000, as the Corporation as well as the banking industry in general saw the migration of funds from the stock and bond markets, growth was primarily in higher cost deposits. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) for the 2001 period was 3.44%, reflecting a decrease of 24 basis points (0.24%) from 3.68% reported in 2000. 15 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) Three Months ended June 30, 2001 as Compared to the Three Months Ended June 30, 2000 (Continued) Interest and fees on loans for the three months ended June 30, 2001 decreased $1.2 million compared to the three months ended June 30, 2000, primarily as a result of rate decreases. The total yields on loans for the second quarter of 2001 was 8.22% representing a decrease of 24 basis points (0.24%) compared to yields for the second quarter of 2000. Decreases in interest and fees on loans due to rate for the second quarter of 2001 compared to the second quarter of 2000 were partially offset by increases in interest income due to volume for commercial loans. Average loans for the second quarter of 2001 increased $14.3 million compared to averages for the second quarter of 2000 and included increases in commercial loans and municipal loans which were partially offset by decreases in consumer loans. Interest income on investments for the three months ended June 30, 2001 was $26.4 million, reflecting an increase of $1.1 million compared to the three months ended June 30, 2000. Volume increases for corporate bonds and asset backed securities increased interest income by $2.3 million and $451 thousand, respectively compared to interest income for the second quarter of 2000. Average corporate bonds for the second quarter of 2001 increased $117.0 million compared to 2000 averages while average asset backed securities increased by $26.3 million over the same time period. Yields on investments for the three months ended June 30, 2001 were 6.56% compared to 6.90% for the same period of 2000 reflecting a decrease of 34 basis points (0.34%) which resulted in a decrease in interest income due to rate of $1.7 million for the second quarter of 2001 compared to the second quarter of 2000. Interest on deposits for the second quarter of 2001 was $31.2 million reflecting an increase of $3.7 million compared to the second quarter of 2000 as both volumes and rates increased over 2000 levels. Average time deposits increased $210.4 million for the three months ended June 30, 2001 compared to 2000 averages, resulting in an increase in interest expense due to volume of $2.6 million. The cost of time deposits for the second quarter of 2001 increased by 25 basis points (0.25%) compared to 2000 costs of 5.46%, resulting in an increase in interest expense due to rate of $1.4 million for the 2001 quarter compared to 2000. Deposit costs for the second quarter of 2001 were positively impacted by rate decreases in total savings deposits as these deposits repriced to reflect lower market interest rates. The cost of total savings deposits was 2.31% for the second quarter of 2001 compared to 2.47% for the second quarter of 2000. Interest on short-term borrowings for the second quarter of 2001 decreased $2.1 million due to volume compared to the second quarter of 2000 as average short-term borrowings decreased $127.0 million over the same time period. Interest on short-term borrowings during the second quarter of 2001 also reflected rate increases in all categories. The cost of short-term borrowings for the second quarter of 2001 was 16 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) Three Months ended June 30, 2001 as Compared to the Three Months Ended June 30, 2000 (Continued) 4.32% compared to 5.94% for the second quarter of 2000. Interest on long-term debt for the three months ended June 30, 2001 increased $174 thousand over the three months ended June 30, 2000. Long term debt increases during 2001 were primarily the result of extending the maturity of borrowings from the Federal Home Loan Bank. Provision for credit losses was $2.6 million for the three months ended June 30, 2001 compared to $2.4 million for the three months ended June 30, 2000. Net charge-offs for the second quarter of 2001 were $3.0 million, compared to net charge-offs of $2.5 million for the second quarter of 2000. Net charge-offs for the second quarter of 2001 included increases in net charge-offs of residential mortgage loans and commercial loans not secured by real estate of $628 thousand and $387 thousand respectively, compared to 2000 levels. Net securities gains were $1.8 million for the three months ended June 30, 2001 compared to $1.7 million for the three months ended June 30, 2000. Securities gains during the second quarter of 2001 resulted primarily from sales of fixed rate corporate bonds classified as securities "available for sale" with book values of $37.4 million. The securities gains during 2000 resulted primarily from the sale of Pennsylvania bank stocks with a book value of $14.2 million. Service charges on deposits were $2.7 million for the second quarter of 2001 compared to $2.6 million for the second quarter of 2000. The 2001 period includes increases in NSF and account analysis fees compared to 2000 levels. Other income for the three months ended June 30, 2001 was $4.6 million, an increase of $390 thousand over $4.2 million reported for the three months ended June 30, 2000. Gains on the sale of loans were $232 thousand for the second quarter of 2001 compared to gains on sales of loans of $70 thousand for the second quarter of 2000. Other income for the second quarter of 2001 also reflected increases in letter of credit fees, utility processing fees, ATM interchange and mutual fund revenue compared to amounts reported for the second quarter of 2000. Total noninterest expense for the three months ended June 30, 2001 was $26.0 million reflecting an increase of $955 thousand over the $25.0 million that was reported for the corresponding period of 2000. Employee costs were $13.4 million during the second quarter of 2001 reflecting an increase of $471 thousand over 2000 levels. Salaries increased by $480 thousand for the second quarter of 2001 compared to second quarter of 2000, while employee benefit costs remained flat over the same time period. Furniture and equipment expenses increased $306 thousand for the second quarter of 2001 compared to the second quarter of 2000, primarily as a result of increases in software depreciation and software maintenance costs. Other operating expenses for 17 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) Three Months ended June 30, 2001 as Compared to the Three Months Ended June 30, 2000 (Continued) the three months ended June 30, 2001 were $6.9 million compared to $6.7 million for the corresponding period of 2000. Collection and repo expenses, postage and telephone costs reflected increases for the three months ended June 30, 2001 compared to the three months ended June 30, 2000. Cost decreases for the second quarter of 2001 included a reduction in outside data processing expenses, other professional fees and deferred loan origination costs compared to the second quarter of 2000. Income taxes were $3.7 million for the second quarter of 2001 compared to $4.3 million for the second quarter of 2000. The Corporation's effective tax rate was 23.70% for the 2001 period compared to 24.56% for the corresponding period of 2000. The Corporation's effective tax rate for 2001 reflects the effect of tax credits and increased municipal loan income compared to 2000 levels. LIQUIDITY Liquidity is a measure of the Corporation's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from deposits (primary source) and the maturity or repayment of earning assets, such as securities and loans. As an additional secondary source, short-term liquidity needs may be provided through the use of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements, and borrowings from the Federal Reserve Bank. Additionally, the banking subsidiaries are members of the Federal Home Loan Bank and may borrow under overnight and term borrowing arrangements. The sale of earning assets may also provide an additional source of liquidity. The Corporation monitors liquidity through regular computations of prescribed liquidity ratios. The Corporation actively manages liquidity within a defined range and has developed liquidity contingency plans, including ensuring availability of alternate funding sources to maintain liquidity under a variety of business conditions. In addition to the previously described funding sources the Corporation's ability to access the capital markets was demonstrated during 1999 through the issuance of $35 million of capital securities. Net loans increased $56.4 million in the first six months of 2001 as increases in commercial loans, municipal loans and loans to individuals were partially offset by decreases in residential real estate loans. The decrease in residential real estate loans was partially the result of the previously discussed residential mortgage sale during the first quarter of 2001. Total deposits increased $150.5 million for the six months of 2001 18 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY (Continued) and included increases in demand deposits of $11.9 million, total savings deposits of $95.8 million and time deposits of $42.8 million. The increase in total savings deposits during 2001 resulted primarily from increases in a high yield money market deposit product. Time deposits for the six months of 2001 reflects a decrease of $21.1 million in brokered time deposits. Strong deposit growth during 2001 continues as customers return to the safety of traditional banking products due to the uncertainties of the stock and bond markets. Marketable securities that the Corporation holds in its investment portfolio are an additional source of liquidity. These securities are classified as "securities available for sale" and while the Corporation does not have specific intentions to sell these securities they have been designated as "available for sale" because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of June 30, 2001 securities available for sale had an amortized cost of $1,425.2 million and an approximate fair value of $1,427.8 million. Interest Sensitivity The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances. While no single number can accurately describe the impact of changes in interest rates on net interest income, interest rate sensitivity positions, or "gaps", when measured over a variety of time periods, may be helpful. An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period. If interest-sensitive assets ("ISA") exceed interest-sensitive liabilities ("ISL") during the prescribed time period, a positive gap results. Conversely, when ISL exceed ISA during a time period, a negative gap results. A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively when interest rates fall during the time period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes. In other words, as interest rates fall, a negative gap should tend to produce a positive effect on earnings, and when interest rates rise, a negative gap should tend to affect earnings negatively. The primary components of ISA include adjustable rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and short-term borrowings. 19 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Sensitivity (Continued) The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated as of June 30, 2001 and December 31, 2000 (Dollar amounts in thousands):
June 30, 2001 0-90 91-180 181-365 Cumulativ Days Days Days e 0-365 Days Loans $ $ $ $1,118,32 732,470 143,417 242,438 5 Investments 109,404 60,896 150,694 320,994 Other interest-earning assets 3,500 -0- -0- 3,500 Total interest- 393,132 sensitive assets 845,374 204,313 1,442,819 Certificates of deposits 441,593 297,778 394,815 1,134,186 Other deposits 1,108,4 -0- -0- 1,108,429 29 Borrowings 275,441 677 2,850 278,968 Total interest- 397,665 sensitive liabilities 1,825,4 298,455 2,521,583 63 GAP $(980,0 $(94,14 $(4,533) $(1,078,7 89) 2) 64) ISA/ISL 0.46 0.68 0.99 0.57 Gap/Total assets 21.63% 2.08% 0.10% 23.80%
December 31, 2000 0-90 91-180 181-365 Cumulativ Days Days Days e 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 deposits 274,963 264,805 470,828 1,010,596 Other deposits 1,018,2 -0- -0- 1,018,205 05 Borrowings 274,673 884 457 276,014 Total interest- sensitive liabilities 1,567,8 265,689 471,285 2,304,815 41 GAP $(804,5 $(88,03 $(121,25 $(1,013,8 33) 6) 7) 26) ISA/ISL 0.49 0.67 0.74 0.56 Gap/Total assets 18.40% 2.01% 2.77% 23.19%
20 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Sensitivity (Continued) Although the periodic gap analysis provides management with a method of measuring current interest rate risk, it only measures rate sensitivity at a specific point in time. Therefore, to more precisely measure the impact of interest rate changes on the Corporation's net interest income, management simulates the potential effects of changing interest rates through computer modeling. The income simulation model used by the Corporation captures all assets, liabilities, and off-balance sheet financial instruments, accounting for significant variables that are believed to be affected by interest rates. These variables include prepayment speeds on mortgage loans and mortgage backed securities, cash flows from loans, deposits and investments and balance sheet growth assumptions. The model also captures embedded options, such as interest rate caps/floors or call options, and accounts for changes in rate relationships as various rate indices lead or lag changes in market rates. The Corporation is then better able to implement strategies which would include an acceleration of a deposit rate reduction or lag in a deposit rate increase. The repricing strategies for loans would be inversely related. The Corporation's asset/liability management policy guidelines limit interest rate risk exposure for the succeeding 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 June 30, 2001, indicated that a 300 basis point (3.00%) movement in interest rates in either direction over the next twelve months would not have a significant impact on the Corporation's anticipated net interest income over that time frame and the Corporation's position would remain well within current policy guidelines. The Corporation's "Asset/Liability Management Committee" ("ALCO") is responsible for the identification, assessment and management of interest rate risk exposure, liquidity, capital adequacy and investment portfolio position. The primary objective of the ALCO process is to ensure that the Corporation's balance sheet structure maintains prudent levels of risk within the context of currently known and forecasted economic conditions and to establish strategies which provide the Corporation with appropriate compensation for the assumption of those risks. The ALCO attempts to mitigate interest rate risk through the use of strategies such as asset disposition, asset and liability pricing and matched maturity funding. The ALCO strategies are established by the Corporation's senior management and are approved by the Corporation's board of directors. 21 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW The following table identifies amounts of loan losses and nonperforming loans. Past due loans are those which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower and are in compliance with the restructured terms.
At June 30, 2001 2000 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ $ 8,937 11,427 Past due loans 20,500 15,360 Renegotiated loans 2,237 1,638 Total Nonperforming Loans $ $ 31,674 28,425 Other real estate owned $ $ 1,786 1,752 Loans outstanding at end of period $2,547,5 $2,500,42 40 2 Average loans outstanding (year-to-date) $2,515,9 $2,511,02 91 0 Nonperforming loans as percent of total 1.24% 1.14% loans Provision for credit losses $ $ 4,964 4,920 Net charge-offs $ $ 4,680 4,738 Net charge-offs as percent of average 0.19% 0.19% loans outstanding Provision for credit losses as percent of 106.07% 103.84% net charge-offs Allowance for credit losses as percent of 1.35% 1.34% average loans outstanding Allowance for credit losses as percent of 1.33% 1.35% end-of-period loans outstanding Allowance for credit losses as percent of 106.98% 118.63% nonperforming loans
22 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW (Continued) The Corporation considers a loan to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect principal or interest due according to the contractual terms of the loan. Loan impairment is measured based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Payments received on impaired loans are applied against the recorded investment in the loan. For loans other than those that the Corporation expects repayment through liquidation of the collateral, when the remaining recorded investment in the impaired loan is less than or equal to the present value of the expected cash flows, income is recorded on a cash basis. Impaired loans include loans on a nonaccrual basis and renegotiated loans. The following table identifies impaired loans, and information regarding the relationship of impaired loans to the reserve for credit losses at June 30, 2001 and June 30, 2000:
2001 2000 (amounts in thousands) Recorded investment in impaired loans at $11,174 $13,065 end of period Year to date average balance of impaired $12,052 $13,023 loans Allowance for credit losses related to $ 1,669 $ 2,696 impaired loans Impaired loans with an allocation of the $ 3,661 $ 5,192 allowance for credit losses Impaired loans with no allocation of the $ 7,513 $ 7,873 allowance for credit losses Year to date income recorded on impaired $ $ loans on a cash basis 233 277
Other than those described above, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. Additionally, the portfolio is well diversified and as of June 30, 2001, there were no significant concentrations of credit. Nonperforming loans at June 30, 2001 increased $3.2 million compared to 2000 levels and included increases in past due loans of $5.1 million and increases in renegotiated loans of $599 thousand which were partially offset by decreases in nonaccrual loans of $2.5 million. Past due loans reflected increases in past due loans secured by residential real estate of $1.0 million and past due commercial loans of $4.6 million compared to 2000 levels. Past due loans at June 30, 2001 reflected a decrease of past due loans 23 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW (Continued) and leases to individuals of $552 thousand. The increase in renegotiated loans at June 30, 2001 compared to the corresponding period of 2000 was the result of the modification of loan terms for one commercial borrower during the third quarter of 2000. Nonaccrual loans reflected decreases in nonaccrual commercial loans of $3.3 million which were partially offset by increases in nonaccrual loans secured by residential real estate of $849 thousand compared to the same period of 2000. Nonperforming loan levels have decreased for the first two quarters of 2001 compared to year-end 2000 amounts of $35.0 million. Nonperforming loans as a percent of total loans has also decreased for the first two quarters of 2001 compared to year-end 2000, while the allowance for credit losses as a percent of nonperforming loans has increased over the same time frame. Nonperforming loans as a percent of total loans was 1.24% at June 30, 2001 compared to 1.41% at December 31, 2000 and 1.14% at June 30, 2000, while the allowance for credit losses as a percent of nonperforming loans was 106.98%, 95.87% and 118.63%, respectively for the same periods. 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. 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. Management attempts to minimize loan losses by analyzing and modifying collection techniques on a periodic basis. Despite the uncertainty of the economy and the potential for additional charge offs, management believes that the allowance for credit losses and nonperforming loans remain safely within acceptable levels. CAPITAL RESOURCES Equity capital increased $18.0 million in the first six months of 2001. Dividends declared reduced equity by $16.9 million during the 2001 period, while earnings retention was $7.2 million, representing an earnings retention rate of 29.76%. The retained net income remains in permanent capital to fund future growth and expansion. Payments by the Corporation's Employee Stock Ownership Plan ("ESOP") to reduce debt it incurred to acquire the Corporation's common stock for future distribution as employee compensation, net of fair value adjustments to Unearned ESOP shares, increased equity by $625 thousand. Amounts paid to fund the discount on reinvested dividends reduced equity by $306 thousand. The market value adjustment to securities available for sale increased equity by $9.5 million. Proceeds from the reissuance of treasury shares to fund stock options exercised increased equity by $1.1 million during 2001. 24 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CAPITAL RESOURCES (Continued) 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. The Federal Reserve Board has issued risk-based capital adequacy guidelines which are designed principally as a measure of credit risk. These guidelines require: (1) at least 50% of a banking organization's total capital be common and other "core" equity capital ("Tier I Capital"); (2) assets and off-balance-sheet items be weighted according to risk; (3) the total capital to risk-weighted assets ratio be at least 8%; and (4) a minimum leverage ratio of Tier I capital to average total assets. The minimum leverage ratio is not specifically defined, but is generally expected to be 3-5 percent for all but the most highly rated banks, as determined by a regulatory rating system. The table below presents the Corporation's capital position at June 30, 2001:
Percent Amount Of Adjusted (in Assets thousands) Tier I Capital $377,914 12.8% Risk-Based Requirement 117,962 4.0 Total Capital 411,799 14.0 Risk-Based Requirement 235,924 8.0 Minimum Leverage Capital 377,914 8.5 Minimum Leverage Requirement 134,128 3.0
At June 30, 2001 the Corporation's banking subsidiaries are considered well capitalized as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information appearing in Item 2 of this report under the caption "Interest Sensitivity" is incorporated herein by reference in response to this item. 25 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There were no material legal proceedings to which the Corporation or its subsidiaries are a party, or of which any of their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have a material adverse effect on the consolidated operations or financial position of the Corporation and its subsidiaries. See NOTE 5 to the consolidated financial statements for additional information. ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 23, 2001, the Corporation held its regularly scheduled annual meeting of shareholders. The following proposal was considered and acted upon. Proposal 1 The following directors were elected for terms to expire in 2004: David S. Dahlmann Ronald C. Geiser Johnston A. Glass Robert F. Koslow Joseph W. Proske E. James Trimarchi ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) DATED: AUGUST 13, 2001 /S/ Joseph E. O'Dell Joseph E. O'Dell, President and Chief Executive Officer DATED: AUGUST 13, 2001 /S/ John J. Dolan John J. Dolan, Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----