-----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, PMCInd69+NojkDm9QUmrxaWXaQoNuT4n87NaF84rEhrJl1sH4oCRPmS9m04MFYLQ tG52Xu46A5TGeahKjN16Bg== 0000712537-98-000004.txt : 19980327 0000712537-98-000004.hdr.sgml : 19980327 ACCESSION NUMBER: 0000712537-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 241428528 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11138 FILM NUMBER: 98573510 BUSINESS ADDRESS: STREET 1: OLD COURTHOUSE SQUARE STREET 2: 22 N SIXTH ST CITY: INDIANA STATE: PA ZIP: 15701 BUSINESS PHONE: 4123497220 MAIL ADDRESS: STREET 1: 22 NORTH SIXTH STREET STREET 2: P.O. BOS 400 CITY: INDIANA STATE: PA ZIP: 15701 10-K 1 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, 1997 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 23, 1998 Common Stock, $1 Par Value 22,261,060 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 23, 1998), was approximately $583,503,976. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement related to the annual meeting of security holders to be held April 27, 1998 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....................... 4 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 8. Financial Statements and Supplementary Data...... 27 ITEM 9. Disagreements on Accounting and Financial Disclosures..................................... 58 PART III ITEM 10. Directors and Executive Officers of the Registrant..................................... 58 ITEM 11. Management Renumeration and Transactions........ 59 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................. 59 ITEM 13. Certain Relationships and Related Transactions.. 59 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 60 Signatures..................................... 62 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. After its incorporation it became affiliated as a result of statutory mergers with the following: On April 29, 1983 it affiliated with National Bank of the Commonwealth ("NBOC"), a national bank in Indiana, Indiana County; on March 19, 1984 with Deposit Bank ("Deposit"), a Pennsylvania-chartered bank and trust company in DuBois, Clearfield County; on August 16, 1985 with Dale, a national bank in Dale (Johnstown), Cambria County; and on December 14, 1985 with the First National Bank of Leechburg ("Leechburg"), a national bank in Leechburg, Armstrong County; December 31, 1986 with CNB CORP, Inc. ("CNB"), a one-bank holding company and its wholly-owned subsidiary, Citizens National Bank in Windber ("Citizens"). CNB was then combined with the Corporation. Immediately thereafter, and on the same day, Citizens was combined with Dale and the resulting entity was named Cenwest National Bank ("Cenwest"). On May 31, 1990 the Corporation affiliated with Peoples Bank and Trust Company ("PBT"), a Pennsylvania-chartered bank and trust company in Jennerstown, Somerset County. On April 30, 1992 the Corporation affiliated with Central Bank ("Central"), a Pennsylvania-chartered bank in Hollidaysburg, Blair County. On December 31, 1993 the Corporation affiliated with Peoples Bank of Western Pennsylvania ("PBWPA"), a Pennsylvania-chartered commercial bank in New Castle, Lawrence County. On September 27, 1994 the Corporation affiliated with United National Bancorporation, ("United"), a bank holding company, and its wholly-owned subsidiaries. Unitas National Bank ("Unitas Bank") a national bank headquartered in Chambersburg, Franklin County, Pennsylvania and Unitas Mortgage Corporation ("Unitas Mortgage") were the only active subsidiaries of United. Unitas Mortgage engaged in the origination of mortgages for sale in the secondary mortgage market and is headquartered in Carlisle, Pennsylvania. Upon merger, United was combined with the Corporation and its subsidiaries became subsidiaries of the Corporation. On September 29, 1994 the Corporation affiliated with Reliable Financial Corporation ("RFC"), a savings and loan holding company and its wholly-owned subsidiary, Reliable Savings Bank, PaSA ("RSB"), a state-chartered, federally insured savings bank headquartered in Bridgeville, Pennsylvania. As a result of the merger, RFC became a wholly-owned subsidiary of the Corporation, with its principal places of business in Allegheny and Washington Counties in western Pennsylvania. Effective at the close of business November 13, 1995 seven wholly-owned subsidiary banks of the Corporation including NBOC, Cenwest, Leechburg, PBT, Central, PBWPA and Unitas Bank merged into Deposit, also a wholly-owned subsidiary, under the Deposit charter. The name of the surviving bank was immediately changed to First Commonwealth Bank ("FCB"); and the principal place of business was moved to Indiana, Indiana County, Pennsylvania. Effective at the close of business September 26, 1997, Reliable Savings Bank PaSA, an indirect wholly-owned subsidiary of the Corporation merged into First Commonwealth Bank. The subsidiary banks continue to operate in their local communities in central and western Pennsylvania, as divisions of First Commonwealth Bank, 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. 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 of NBOC. 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. On April 1, 1996 the Corporation affiliated with BSI Financial Services Inc. ("BSI") a Pennsylvania business corporation headquartered in Titusville, Crawford County. BSI provides mortgage banking loan servicing and collection services to the Corporation's subsidiary banks 2 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) as well as unaffiliated organizations. 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. The Corporation and its subsidiaries employed approximately 1,158 persons (full-time equivalents) at December 31, 1997. Through FCB, the Corporation traces its banking origins to 1866. FCB conducts business through 83 community banking offices in 54 communities in the counties of Adams (1 office), Allegheny (2), Armstrong (3), Beaver (1), Bedford (4), Blair (8), Cambria (11), Centre (4), Clearfield (6), Elk (3), Franklin (2), Huntingdon (7), Indiana (9), Jefferson (4), Lawrence (6), Somerset (5), Washington (1) and Westmoreland (6). FCB engages in general banking business and offers a full range of financial services. FCB offers such general retail banking services as demand, savings and time deposits; mortgage, consumer installment and commercial loans; and credit card loans through MasterCard and VISA. FCB operates a network of 63 automated teller machines ("ATMs") which permits customers to conduct routine banking transactions 24 hours a day. Of the ATMS, 51 are located on the premises of their main or branch offices and 12 are in remote locations. All the ATMs are part of the MAC network which consist of over 23,000 ATMs owned by numerous banks, savings and loan associations and credit unions located throughout 45 states. The ATM's operated by FCB 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 FCB's 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 FCB's 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. CSC is the data processing subsidiary of the Corporation. It provides on- line general ledger accounting services and bookkeeping services for deposit and loan accounts to the Corporation, First Commonwealth Bank and three 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. FCTC has five branch offices in the service areas of FCB 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. On June 1, 1989 Commonwealth Trust Credit Life Insurance Company began operations. The Corporation owns 50% of the voting common stock of the new company. Commonwealth Trust provides reinsurance for credit life and credit and health insurance activities 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) 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 FCB, FCTC, BSI and FCIA face intense competition, both from within and without their service areas, in all aspects of business. FCB competes 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 its service area. With respect to loans to larger businesses FCB also competes with much larger banks located outside of its service area. FCB also competes, primarily in making consumer loans and for deposits, with state and federally chartered savings and loan associations and with credit unions. In recent years FCB has encountered significant competition for deposits from money market 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 FCB. 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, FCB also competes 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. FCB believes that the principal means by which it competes for deposits and consumer and smaller commercial loans are the number and desirability of the locations of its offices and ATMs, the sophistication and quality of its services and the prices (primarily interest rates) of its services. Additionally, FCB intends to remain competitive by offering financial services that target specific customer needs. Examples of such specialized products include the "Sentry CD Watch" which provides certificate of deposit rates of competitors to members of FCB's "Senior Accent" club, available to customers age 50 or better, and introduction of the "Too Good To Be True" mortgage product, available to first time home buyers. 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 FCB's branch offices. 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, 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. 4 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Supervision and Regulation (Continued) 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 FCFC 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. First Commonwealth Bank FCB is a Pennsylvania-chartered bank and is not a member of the Federal Reserve System. FCB is 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. 5 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) 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, 1997 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, but the law has increased, and as reciprocity becomes effective will increase further, the number of potential buyers for Pennsylvania banks and bank holding companies. The law also will permit 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 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 the Corporation or its subsidiaries. 6 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Effects of Governmental Policies (Continued) 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 and CSC 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 which contains a renewal option. 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 and FCIA. FCB has 83 banking facilities of which 24 are leased and 59 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 The information appearing in NOTE 18 of the Notes to the Consolidated Financial Statements included in Item 8 of this filing is incorporated by reference. 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 9,500. 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 1997 First Quarter $18.875 $17.125 $0.200 Second Quarter $23.000 $17.500 $0.200 Third Quarter $22.000 $19.563 $0.200 Fourth Quarter $35.063 $21.625 $0.220 Cash Dividends Period High Sale Low Sale Per Share 1996 First Quarter $19.500 $17.750 $0.180 Second Quarter $19.625 $17.750 $0.180 Third Quarter $19.125 $17.000 $0.180 Fourth Quarter $19.000 $17.500 $0.200 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.
Years Ended December 31, 1997 1996 1995 1994 1993 Interest income....................... $199,811 $182,329 $175,701 $159,644 $154,990 Interest expense...................... 102,753 88,325 82,418 69,102 67,164 Net interest income................. 97,058 94,004 93,283 90,542 87,826 Provision for possible credit losses.. 6,929 4,501 4,125 2,896 2,920 Net interest income after provision for possible credit losses........ 90,129 89,503 89,158 87,646 84,906 Securities gains (losses)............. 6,686 1,403 (603) 5,536 3,528 Other operating income................ 13,157 12,338 11,007 10,635 10,960 Other operating expenses.............. 65,909 63,589 62,062 60,855 59,405 Income before taxes and cumulative effect of change in accounting method......................... 44,063 39,655 37,500 42,962 39,989 Applicable income taxes............... 13,529 12,072 11,974 14,226 12,444 Income before cumulative effect of change in accounting method. 30,534 27,583 25,526 28,736 27,545 Cumulative effect of change in accounting method................... -0- -0- -0- -0- 865 Net income............................ $ 30,534 $ 27,583 $ 25,526 $ 28,736 $ 28,410 Per Share Data Net income before cumulative effect of change in accounting method..... $1.40 $1.26 $1.16 $1.28 $1.23 Cumulative effect of change in accounting method.................. 0.00 0.00 0.00 0.00 0.04 Net income.......................... $1.40 $1.26 $1.16 $1.28 $1.27 Dividends declared.................. $0.82 $0.74 $0.66 $0.58 $0.51 Average shares outstanding.......... 21,878,945 21,954,111 22,005,427 22,432,062 22,416,360 Per Share Data Assuming Dilution Net income before cumulative effect of change in accounting method..... $1.39 $1.25 $1.16 $1.28 $1.22 Cumulative effect of change in accounting method.................. 0.00 0.00 0.00 0.00 0.04 Net income.......................... $1.39 $1.25 $1.16 $1.28 $1.26 Dividends declared.................. $0.82 $0.74 $0.66 $0.58 $0.51 Average shares outstanding.......... 21,965,833 21,989,963 22,051,185 22,505,908 22,484,172 At End of Period Total assets........................ $2,929,315 $2,584,638 $2,364,307 $2,334,921 $2,252,836 Investment securities............... 856,694 704,161 748,702 813,687 909,166 Loans and leases, net of unearned income............................ 1,920,903 1,747,335 1,487,542 1,377,794 1,211,109 Allowance for possible credit losses 19,766 19,324 18,152 17,337 16,483 Deposits............................ 2,242,478 2,104,783 1,962,760 1,881,060 1,822,085 Long-term debt...................... 193,054 40,880 5,261 7,596 7,363 Shareholders' equity................ 271,834 261,358 252,276 225,135 228,910 Key Ratios Return on average assets............ 1.13% 1.12% 1.10% 1.26% 1.32% Return on average equity............ 11.34% 10.69% 10.55% 12.55% 12.86% Net loans to deposit ratio.......... 84.78% 82.10% 74.86% 72.32% 65.56% Dividends per share as a percent of net income per share.............. 58.57% 58.73% 56.90% 45.31% 40.16% Average equity to average assets ratio............................. 9.98% 10.47% 10.39% 10.01% 10.23%
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, 1997, 1996 and 1995 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. During the fourth quarter of 1997 the Corporation formed First Commonwealth Insurance Agency ("FCIA") as a subsidiary of the Corporation's commercial banking subsidiary. This new company will market a wide range of insurance and annuity products to the Corporation's retail and commercial customers beginning January 1, 1998. The Corporation acquired BSI Financial Services Inc. ("BSI") effective April 1, 1996. The BSI merger was accounted for as a purchase transaction, whereby the results of operations of BSI from the date of acquisition are included in the Corporation's financial statements. Results of Operations Net income in 1997 was $30.5 million, an increase of $3.0 million from the 1996 level of $27.6 million and compared to $25.5 million reported in 1995. Basic earnings per share increased $0.14 per share in 1997 to $1.40. The increase in net income and basic earnings per share for 1997 was primarily the result of increases in net interest income and securities gains which were partially offset by increases in the provision for possible credit losses and employee costs when compared to 1996 levels. The increase in basic earnings per share of $0.10 generated during 1996 reflected increases in net interest income and securities gains as well as increases due to the inclusion of BSI income in loan origination and servicing revenue and increases in charge card user fees. Net income and basic earnings per share for 1996 were negatively impacted by increases in occupancy and furniture and equipment costs and equipment maintenance and repairs. Return on average assets was 1.13% and return on average equity was 11.34% during 1997 compared to 1.12% and 10.69%, respectively for 1996. Return on average assets was 1.10% during 1995 while return on average equity was 10.55%. 10 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is an analysis of the impact of changes in net income on earnings per share: 1997 1996 vs. vs. 1996 1995 Net income per share, prior year $1.26 $1.16 Increase (decrease) from changes in: Net interest income 0.15 0.04 Provision for possible credit losses (0.11) (0.02) Security transactions 0.24 0.09 Other income 0.04 0.06 Salaries and employee benefits (0.12) (0.01) Occupancy and equipment costs (0.03) (0.04) FDIC expense 0.03 0.06 Other expenses 0.01 (0.07) Provision for income taxes (0.07) (0.01) Net income per share $1.40 $1.26 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 $97.1 million in 1997 compared to $94.0 million in 1996 and $93.3 million in 1995. 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, 1997. 11 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis
Average Balance Sheets and Net Interest Analysis (Dollar Amounts in Thousands) 1997 1996 1995 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 $ 4,569 $ 230 5.02% $ 7,378 $ 413 5.59% $ 8,552 $ 486 5.69% Investment securities 736,974 43,893 6.23 738,916 43,177 6.10 769,006 45,600 6.12 Federal funds sold 201 12 6.15 1,712 85 4.97 17,712 1,033 5.83 Loans (b) (c), net of unearned income 1,830,039 155,676 8.60 1,601,747 138,654 8.74 1,421,004 128,582 9.11 Total interest- earning assets 2,571,783 199,811 7.92 2,349,753 182,329 7.89 2,216,274 175,701 8.04 Noninterest-earning assets: Cash 56,092 57,717 53,752 Allowance for credit losses (19,635) (18,951) (17,584) Other assets 89,509 75,156 77,843 Total noninterest- earning assets 125,966 113,922 114,011 Total Assets $2,697,749 $2,463,675 $2,330,285 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits (d) $ 230,628 $ 4,553 1.97% $ 212,269 $ 3,434 1.62% $ 208,330 $ 3,108 1.49% Savings deposits (d) 494,957 15,439 3.12 481,608 13,392 2.78 464,021 11,858 2.56 Time deposits 1,261,461 71,494 5.67 1,145,592 63,886 5.58 1,060,070 58,855 5.55 Short-term borrowings 144,987 7,548 5.21 127,150 6,550 5.15 141,474 8,013 5.66 Long-term debt 65,820 3,719 5.65 18,170 1,063 5.85 7,010 584 8.33 Total interest- bearing liabilities 2,197,853 102,753 4.68 1,984,789 88,325 4.45 1,880,905 82,418 4.38 Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits (d) 205,704 197,899 185,889 Other liabilities 24,948 23,033 21,429 Shareholders' equity 269,244 257,954 242,062 Total noninterest- bearing funding sources 499,896 478,886 449,380 Total Liabilities and Shareholders' Equity $2,697,749 $2,463,675 $2,330,285 Net Interest Income and Net Yield On Interest- earning Assets $ 97,058 3.92% $ 94,004 4.14% $ 93,283 4.32% (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 for 1997 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 Both interest income and interest expense increased over 1996 levels as volumes increased. Average interest-earning assets increased $222.0 million while average interest-bearing liabilities increased $213.1 million in 1997. Average loans increased $228.3 million in 1997 and were supported by deposit growth and maturities of investment securities. Asset yields, on a tax-equivalent basis, increased 3 basis points (0.03%) during 1997 while asset yields decreased 15 basis points (0.15%) during 1996. The decline in loan yields which began in the fourth quarter of 1995 has continued throughout 1996 and 1997. Loan yields declined 14 basis points (0.14%) during 1997 to 8.60% from 8.74% reported for 1996 and compared to 9.11% during 1995. The 1997 period reflected decreased yields in all loan categories except revolving credit loans which reflected an increase of 56 basis points (0.56%) over 1996 levels. The 1997 decline in loan yields included declines of 30 basis points (0.30%) for mortgage loans, 26 basis points (0.26%) for installment loans and 74 basis points (0.74%) for municipal loans. Municipal loan yields declined as most of the municipal growth for 1997 was in short-term tax anticipation notes. The mortgage portfolio continues to be impacted by loans maturing at higher interest rates than current market rates and innovative loan product offerings which bear lower introductory interest rates. These loan products are designed to initiate relationships in the early stages of a customer's financial life cycle so they may be developed thereafter with more traditional banking products and services. Any initial earnings reduction related to new products are expected to produce long-term profitable relationships and loan yields. Loan yields on products introduced during the fourth quarter of 1995 began improving in the fourth quarter of 1997 and are expected to continue improving during 1998. Although loan yields declined during 1997, interest income on loans increased $17.0 million over 1996 levels as a result of increases due to volume of $19.9 million which were partially offset by decreases due to rate of $2.9 million. Interest income on investments increased $716 thousand during 1997 and reflected increases due to rate of $834 thousand which were partially offset by decreases due to volume of $118 thousand. The yield on investments of 6.23% for 1997 was an increase of 13 basis point (0.13%) over 1996 yields of 6.10%. The investment rate increases for 1997 occurred primarily in investments of U.S. Government agency securities. Although prepayments of mortgage backed securities ("MBS") increased during 1997 over 1996 levels, these prepayments have not increased beyond acceptable levels. 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 MBS's under various interest rate scenarios on a continuing 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. The cost of funds for 1997 increased 23 basis points (0.23%) over 1996 costs of 4.45% and compared to costs of 4.38% for 1995. Interest on deposits increased $10.8 million in 1997 and included increases due to volume of $7.1 million and increases due to rate of $3.6 million. The cost of deposits increased 21 basis points (0.21%) during 1997, including increases on total savings deposits of 33 basis points (0.33%) which can primarily be attributable to increased utilization by customers of new savings products bearing higher interest rates than standard savings accounts. These new savings products have been designed to build long-term customer relationships and are intended to produce a favorable impact on the Corporation's net interest margin over the long-term. Interest expense on time deposits increased $7.6 million during 1997 primarily as a result of volume increases in time deposits with maturities of 2 to 5 years and time deposits greater than $100 thousand which increased $123.9 million and $76.9 million, respectively over 1996 averages. 13 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Increases in interest expense on short-term borrowings of $998 thousand and interest expense on long-term debt of $2.7 million during 1997 were primarily a result of increases in average borrowings of $17.8 million and $47.7 million respectively over 1996 averages. Borrowings during 1997 were part of a leveraging strategy intended to create an increase to net interest margin over the life of the investments. Net interest margin (net interest income, on a tax-equivalent basis as a percentage of average earning assets), was 3.92% during 1997 compared to 4.14% in 1996 and 4.32% in 1995. 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) 1997 Change from 1996 1996 Change from 1995 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 $ (183) $ (157) $ (26) $ (73) $ (67) $ (6) Securities 716 (118) 834 (2,423) (1,843) (580) Federal funds sold (73) (75) 2 (948) (933) (15) Loans 17,022 19,943 (2,921) 10,072 16,473 (6,401) Total interest income 17,482 19,593 (2,111) 6,628 13,630 (7,002) Interest-bearing liabilities: Deposits 10,774 7,130 3,644 6,891 5,256 1,635 Short-term borrowings 998 919 79 (1,463) (811) (652) Long-term debt 2,656 2,789 (133) 479 929 (450) Total interest expense 14,428 10,838 3,590 5,907 5,374 533 Net interest income $ 3,054 $ 8,755 $(5,701) $ 721 $ 8,256 $(7,535)
The provision for possible 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 possible credit losses was $6.9 million in 1997 compared to $4.5 million in 1996 and $4.1 million in 1995. The provision for possible credit losses increased in 1997 as a result of an increase in charge-offs, combined with growth in the portfolio as a whole during 1997. Net charge-offs for 1997 reflected increases in consumer installment and revolving credit loans of $1.6 million, loans secured by residential real estate of $605 thousand and commercial loans not secured by real estate of $701 thousand. Major components of the increase in net charge-offs of loans to individuals were increases in charge-offs of indirect auto loans and unsecured loans. It is anticipated that charge-offs for these categories will decline in future periods, but remain above historic levels because of continued growth in these areas. Net charge-offs against the allowance for possible credit losses were $6.5 million, or 0.35% of average total loans in 1997. This compared to $3.3 million in 1996 and 1995. Net charge-offs were 0.21% and 0.23% of average total loans during 1996 and 1995, respectively. Although the allowance for possible credit losses as a percentage of average loans outstanding is below peer averages net charge-offs as a percentage of average loans outstanding has historically been at, or below peer averages. The peer group was defined using the Uniform Bank Performance Report published by the Federal Financial Institutions Examination Council. For an analysis of credit quality, see the "Credit Review" section of this discussion. 14 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis The following table presents an analysis of the consolidated allowance for possible credit losses for the five years ended December 31, 1997 (dollars in thousands):
Summary of Loan Loss Experience 1997 1996 1995 1994 1993 Loans outstanding at end of year $1,920,903 $1,747,335 $1,487,542 $1,377,794 $1,211,109 Average loans outstanding $1,830,039 $1,601,747 $1,421,004 $1,283,866 $1,187,236 Allowance for possible credit losses: Balance, beginning of year $ 19,324 $ 18,152 $ 17,337 $ 16,483 $ 15,828 Loans charged off: Commercial, financial and agricultural 1,166 571 1,161 1,246 774 Loans to individuals 4,737 3,023 2,316 1,676 1,825 Real estate-construction -0- -0- -0- -0- -0- Real estate-commercial 664 440 218 23 791 Real estate-residential 751 174 423 179 357 Lease financing receivables -0- 26 52 52 106 Total loans charged off 7,318 4,234 4,170 3,176 3,853 Recoveries of loans previously charged off: Commercial, financial and agricultural 148 254 132 254 563 Loans to individuals 604 482 518 563 565 Real estate-construction -0- -0- -0- -0- -0- Real estate-commercial 13 83 56 249 276 Real estate-residential 53 81 55 61 177 Lease financing receivables 13 5 99 7 7 Total recoveries 831 905 860 1,134 1,588 Net loans charged off 6,487 3,329 3,310 2,042 2,265 Provision charged to expense 6,929 4,501 4,125 2,896 2,920 Balance, end of year $ 19,766 $ 19,324 $ 18,152 $ 17,337 $ 16,483 Ratios: Net charge-offs as a percentage of average loans outstanding 0.35% 0.21% 0.23% 0.16% 0.19% Allowance for possible credit losses as a percentage of average loans outstanding 1.08% 1.21% 1.28% 1.35% 1.39%
Total other operating income increased $6.1 million in 1997 to $19.8 million from $13.7 million reported in 1996 compared to $10.4 million in 1995. Net securities gains were $6.7 million in 1997 compared to securities gains of $1.4 million during 1996 and securities losses of $603 thousand in 1995. The securities gains during 1997 and 1996 resulted primarily from the sale of investments in Pennsylvania bank stocks classified as equity securities "available for sale." These equity securities had book values of $17.4 million and $6.8 million and were sold for gains of $6.7 million and $1.5 million during 1997 and 1996 respectively. The securities losses during 1995 resulted from the sale of $77.6 million of securities, primarily U.S. Treasury securities classified as "available for sale" having an average yield of 4.91% and an average remaining life of about 17 months. The proceeds from the sale of these U.S. Treasury securities were used to pay off short-term borrowings costing 6.00%. This transaction resulted in a net improvement in net interest income over the remaining life of the securities in excess of the net loss on the sale. Trust income reflected an increase in 1997 of $506 thousand over 1996 levels as the book value of assets managed continued to increase. The 1997 increase in trust income occurred primarily in fees from employee benefit accounts, estates and agency/custodial accounts. Service charges on deposits decreased by $51 thousand during 1997 but are expected to increase during 1998 as standardized fee schedules implemented during 1997 generate results. Service charges on deposits increased during 1996, primarily as a result of increased average total deposits. 15 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Other income increased $364 thousand in 1997 to $4.7 million from $4.4 million reported in 1996 and can be compared to $3.2 million in 1995. Other revenue continued to be favorably impacted by charge card user fees which increased $298 thousand during 1997 and $607 thousand during 1996. These fee increases resulted from the introduction of redesigned charge card products during 1996 which generated over a fifty percent increase in the number of accounts and balances outstanding during 1996 and continued to show strong growth during 1997. Charges for non-customer use of the Corporation's ATMs instituted in November of 1997 increased other income for 1997 by $91 thousand and are anticipated to generate additional increases for 1998. Other income for 1997 also included an increase in the cash surrender value of bank owned life insurance of $204 thousand related to the last two months of the year. Other revenue for 1998 will reflect increases from insurance commissions as FCIA begins operations in January. Other revenue for 1997 included decreases of $167 thousand in gains on sale of assets. The inclusion of BSI income on loan origination and servicing for 1996, increased other income by $527 thousand. Total other operating expenses increased $2.3 million to $65.9 million in 1997 and compared to $63.6 million and $62.1 million in 1996 and 1995, respectively. Employee costs during 1997 were $35.8 million, an increase of $2.5 million over the 1996 level of $33.3 million. Decreases in deferred loan origination costs increased employee costs for 1997 by $339 thousand while changes in unemployment compensation resulted in increases of $97 thousand. Inclusion of BSI for twelve months of 1997 increased employee costs by $261 thousand during 1997 while inclusion of BSI for eight months in the 1996 period resulted in an increase of $602 thousand during 1996. Included in employee costs for 1995 were early retirement settlements and other benefit adjustments of $1.3 million. The 1996 period also reflected an increase in the employer's matching contribution for the Corporation's 401(k) plan to 80% of the amount contributed by the employee, up from 60% in 1995. Conversion to a managed health care plan effective January 1, 1996 resulted in decreases of $375 thousand for 1996 compared to 1995 levels and reflected minimal increases for 1997 of 2% after excluding the effect of BSI on the 1997 period. Health insurance costs are expected to experience a rate increase during 1998. Although employee costs in dollars increased, employee costs as a percentage of average assets declined to 1.33% for 1997 from 1.35% in 1996 and 1.42% in 1995. Salary levels are generally maintained through attrition management programs. Net occupancy and furniture and equipment costs increased $657 thousand during 1997 and $786 thousand during 1996. Net occupancy and furniture and equipment expense reflected increases in building rental expense, building repairs, and depreciation during 1997. These increases were primarily the result of the construction of new branches during 1996 and 1997 as well as remodeling of existing branches. The cost of equipment maintenance contracts and equipment repairs decreased $178 thousand during 1997 and increased $485 thousand during 1996. Net occupancy expense and furniture and equipment increased $360 thousand in 1995 as a result of increased utilization of leased equipment during the redesign of various operational areas of the organization such as loan processing. FDIC expenses decreased for all periods presented including decreases of $740 thousand for 1997 and $1.3 million for 1996. Both the 1996 and 1995 periods include adjustments to the Corporation's Federal Deposit Insurance costs. The 1996 period includes an additional one-time assessment against the Corporation's thrift deposits of $768 thousand to replenish the Savings and Loan Insurance Fund (SAIF). The 1995 related period includes a rebate of $1.1 million of deposit insurance costs to the Corporation's commercial banking subsidiaries as a result of the Federal Deposit Insurance Corporation's Bank Insurance Fund (BIF) reaching its regulatory cap. The merger of Corporation's thrift subsidiary and the Corporation's commercial banking subsidiary during 1997 will result in a tiered FDIC rate for deposits in future periods, as the SAIF rate will apply to deposits of the savings bank at the merger date and BIF rates will apply to new deposits of all partner banks. It is anticipated that beginning in the year 2000 that the tiered rate structure will disappear when banks and thrifts pay on equal rate. 16 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Other operating expenses remained stable for 1997 with a reduction of $134 thousand from $20.0 million reported in 1996 and can be compared to $18.2 million in 1995. The inclusion of BSI accounted for $296 thousand of the increase for 1996. Telephone costs continued to increase reflecting increases of $142 thousand for 1997 and $392 thousand for 1996. These cost increases may continue as high speed data lines are installed to facilitate efficient access to centralized information by the Corporation's partner banks. Centralized cost control efforts during 1997 were partially responsible for the reduction in outside data processing, printing and insurance costs of $262 thousand, $117 thousand and $259 thousand respectively. Continued strong growth in the loan portfolio during 1997 was the primary cause of increases in filing and recording fees of $73 thousand, charge card interchange fees of $170 thousand and collection and repossession expenses of $117 thousand. Marketing expenses remained stable for 1997 while aggressive marketing of innovative new products and services resulted in increases of $274 thousand in advertising expenses during 1996. Additional cost increases during 1996 occurred in stationery and supplies, filing and recording fees and Pennsylvania shares tax expenses which incurred increases of $187 thousand, $226 thousand and $337 thousand respectively. Other professional fees decreased $406 thousand during 1997 after an increase of $277 thousand for 1996 as a result of the use of outside consultants to help analyze and implement standardized fee schedules in the 1996 period. Income tax expense was $13.5 million during 1997 representing an increase of $1.4 million over the 1996 total of $12.1 million and compared to $12.0 million in 1995. Taxable income increased $3.3 million and $772 thousand during 1997 and 1996 respectively, while taxable income decreased $6.4 million during 1995. The Corporation's effective tax rate increased to 30.7% in 1997 from 30.4% in 1996 and compares to 31.9% in 1995. 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 subsidiary is a member 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. 17 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis 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. Increased competition from nonbanking sources such as mutual funds may require banks to shift to alternative funding from other borrowings. Although this is not significant at the end of 1997, it could become more consequential in the future. Deposits increased $137.7 million in 1997 and included $96.6 million in core deposits. Non-core deposits, which are time deposits in denominations of $100 thousand or more represented 13.46% of total deposits at December 31, 1997, up from 12.39% of total deposits at December 31, 1996. Non-core deposits increased by $41.1 million in 1997 and $93.4 million in 1996 primarily as a result of an increase in public funds. Time deposits of $100 thousand or more at December 31, 1997, 1996 and 1995 had remaining maturities as follows:
Maturity Distribution of Large Certificates of Deposit (Dollar Amounts in Thousands) 1997 1996 1995 Amount Percent Amount Percent Amount Percent Remaining Maturity: 3 months or less $ 80,446 27% $ 87,467 33% $ 40,377 24% Over 3 months through 6 months 62,397 21 38,714 15 26,331 16 Over 6 months through 12 months 46,368 15 43,115 17 32,357 19 Over 12 months 112,660 37 91,447 35 68,241 41 Total $301,871 100% $260,743 100% $167,306 100%
Net loans increased $173.1 million during 1997 primarily in the categories of commercial and industrial loans secured by real estate, consumer leases and real estate loans secured by residential properties. In combination these categories represented over 78% of the loan growth during 1997 with 59% of the total loan growth being generated in residential real estate loans. The growth in residential mortgages can partially be attributed to the outstanding customer response to the Corporation's innovative mortgage product designed for first time home buyers which was introduced during the fourth quarter of 1995. The growth in consumer leases during 1997 can partially be attributed to continued growth in the Corporation's Dealer Services Programs which began in May 1996 and offers in addition to indirect loans, a competitive FlexLease product. Below is a schedule of loans by classification for the five years ended December 31, 1997.
Loans by Classification (Dollar Amounts in Thousands) 1997 1996 1995 1994 1993 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Commercial, financial, agricultural and other $ 290,298 15% $ 252,798 14% $ 192,530 13% $ 180,373 13% $ 179,227 14% Real estate-construction 17,873 1 24,111 2 22,969 1 23,131 2 12,980 1 Real estate-commercial 305,887 16 287,318 16 293,095 19 268,417 19 238,864 19 Real estate-residential 854,894 44 752,562 42 616,661 40 587,734 41 511,889 41 Loans to individuals 417,547 21 425,012 24 381,729 25 332,167 23 279,357 23 Net leases 51,245 3 36,329 2 24,190 2 30,498 2 26,617 2 Gross loans and leases 1,937,744 100% 1,778,130 100% 1,531,174 100% 1,422,320 100% 1,248,934 100% Unearned income (16,841) (30,795) (43,632) (44,526) (37,825) Total loans, and leases net of unearned income $1,920,903 $1,747,335 $1,487,542 $1,377,794 $1,211,109
An additional source of liquidity are 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, 1997, securities available for sale had an amortized cost of $393.9 million 18 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis and an approximate fair value of $396.6 million. Gross unrealized gains were $3.4 million and gross unrealized losses were $715 thousand. Based upon the Corporation's historical ability to fund liquidity needs from other sources, the current available for sale portfolio is deemed 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, 1997.
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 $ 48,913 $ 3,345 $ 60 $ 52,318 5.41% After 1 but within 5 years 50,664 16,820 2,097 69,581 3.20 After 5 but within 10 years 206,372 30,403 358 237,133 6.27 After 10 years 64,766 36,265 -0- 101,031 6.43 Total $370,715 $86,833 $ 2,515 $460,063 6.22%
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 $ 42,615 $ 387 $ -0- $ 43,002 5.62% After 1 but within 5 years 67,696 -0- 532 68,228 6.10 After 5 but within 10 years 24,510 -0- -0- 24,510 6.93 After 10 years 238,303 -0- 19,858 258,161 6.96 Total $373,124 $ 387 $20,390 $393,901 6.66% *Yields are calculated on a tax-equivalent basis.
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. 19 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis 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 December 31, 1997 and 1996 (Dollar Amounts in Thousands):
1997 Cumulative 0-90 Days 91-180 Days 181-365 Days 0-365 Days Loans $ 799,956 $125,950 $250,725 $1,176,631 Investments 51,528 63,717 102,631 217,876 Other interest-earning assets 130,666 5,214 10,043 145,923 Total interest-sensitive assets 982,150 194,881 363,399 1,540,430 Certificates of deposit 252,652 161,264 225,113 639,029 Other deposits 804,672 -0- -0- 804,672 Borrowings 207,190 1,441 1,725 210,356 Total interest-sensitive liabilities 1,264,514 162,705 226,838 1,654,057 Gap $ (282,364) $ 32,176 $136,561 $ (113,627) ISA/ISL 0.78 1.20 1.60 0.93 Gap/Total assets 9.64% 1.10% 4.66% 3.88%
1996 Cumulative 0-90 Days 91-180 Days 181-365 Days 0-365 Days Loans $ 669,043 $102,628 $190,064 $ 961,735 Investments 17,574 37,133 84,794 139,501 Other interest-earning assets 97,201 7,346 11,361 115,908 Total interest-sensitive assets 783,818 147,107 286,219 1,217,144 Certificates of deposit 269,090 154,045 227,381 650,516 Other deposits 700,445 -0- -0- 700,445 Borrowings 179,308 5,621 4,946 189,875 Total interest-sensitive liabilities 1,148,843 159,666 232,327 1,540,836 Gap $ (365,025) $(12,559) $ 53,892 $ (323,692) ISA/ISL 0.68 0.92 1.23 0.79 Gap/Total assets 14.12% 0.49% 2.09% 12.52%
20 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Final loan maturities and rate sensitivity of the loan portfolio excluding consumer installment and mortgage loans and before unearned income at December 31, 1997 were as follows (Dollar Amounts in Thousands): Within One One to After Year 5 Years 5 Years Total Commercial and industrial $125,521 $44,273 $ 37,831 $207,625 Financial institutions -0- 77 -0- 77 Real estate-construction 12,514 3,248 2,111 17,873 Real estate-commercial 95,842 41,593 168,452 305,887 Other 37,907 8,463 36,226 82,596 Totals $271,784 $97,654 $244,620 $614,058 Loans at fixed interest rates 77,337 123,292 Loans at variable interest rates 20,317 121,328 Totals $97,654 $244,620 The Corporation has not experienced the kind of earnings volatility indicated from the gap analysis. This is because assets and liabilities with similar contractual repricing characteristics may not reprice at the same time or to the same degree. Therefore, to more precisely measure the impact of interest rate changes on the Corporation's net interest margin, management simulates the potential effects of changing interest rates through computer modeling. Assumptions regarding the replacement of maturing assets and liabilities are made to simulate the impact of future changes in rates and/or changes in balance sheet composition. The Corporation is then better able to implement strategies which would include an acceleration of a deposit rate reduction or a lag in a deposit rate increase. The repricing strategies for loans would be inversely related. The effect of changes in future interest rates on the mix of assets and liabilities may cause actual results to differ from simulated results. In addition, certain financial instruments provide customers with a certain degree of flexibility to respond to economic changes. This flexibility would enable customers to shift from lower cost deposit products to higher cost products or to refinance loans as interest rates decrease. While the Corporation's simulation analysis considers these factors, the extent to which customers utilize their investment and borrowing options may cause actual results to differ from the simulation. The analysis at December 31, 1997, indicated that a 300 basis point movement in interest rates in either direction would not have a significant impact on the Corporation's anticipated net interest income over the next twelve months. 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 possible credit losses that may exist in the portfolio at a point in time, but have not been specifically identified. 21 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis 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. 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. 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. 22 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Since all identified losses are immediately charged off, no portion of the allowance for possible 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 possible credit losses at December 31 according to the categories indicated:
Allocation of the Allowance for Possible Credit Losses (Dollar Amounts in Thousands) 1997 1996 1995 1994 1993 Commercial, industrial, financial, agricultural and other $ 2,880 $ 2,901 $ 1,800 $ 2,443 $ 2,541 Real estate-construction 214 290 220 215 146 Real estate-commercial 3,882 3,747 3,253 3,328 3,389 Real estate-residential 6,361 5,972 4,334 4,532 4,151 Loans to individuals 2,827 3,188 2,377 2,417 1,978 Lease financing receivables 393 285 162 243 552 Unallocated 3,209 2,941 6,006 4,159 3,726 Total $19,766 $19,324 $18,152 $17,337 $16,483 Allowance as percentage of average total loans 1.08% 1.21% 1.28% 1.35% 1.39%
The unallocated portion of the allowance for possible credit losses increased slightly during 1997 to 16.2% of the total allowance from 15.2% of the total allowance for 1996. The Corporation has continued to allocate an amount to provide for loan growth and to adjust the allowance for possible credit losses based on comparative peer analysis. The Corporation has defined an adequate base allowance for possible credit losses by comparing the Corporation's allowance for possible credit losses as a percentage of average loans outstanding to the peer average and has allocated a portion of the allowance to reduce the variance to peer. Net charge-offs in both dollars and as a percentage of average loans has increased on an annual basis since December 31, 1993, but historically remain below peer averages. Although the Corporation's historic net charge-offs as a percentage of average loans remain lower than peer averages, management has deemed it appropriate to allocate a portion of the allowance for possible credit losses to provide for a potential change in the Corporation's trend in credit loss experience equal to peers, rather than continuation of the historic trend which has been favorable in comparison to peers. 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 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. 23 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis
Nonperforming and Impaired Assets and Effect on Interest Income Due to Nonaccrual (Dollar Amounts in Thousands) 1997 1996 1995 1994 1993 Loans on nonaccrual basis $ 7,952 $ 7,906 $ 7,419 $ 9,575 $ 9,672 Past due loans 12,097 12,044 7,881 6,936 9,106 Renegotiated loans 67 280 803 733 1,413 Total nonperforming loans $20,116 $20,230 $16,103 $17,244 $20,191 Nonperforming loans as a percentage of total loans 1.05% 1.16% 1.08% 1.25% 1.67% Allowance as percentage of nonperforming loans 98.26% 95.52% 112.72% 100.54% 81.64% Other real estate owned $ 1,788 $ 1,647 $ 1,408 $ 2,269 $ 5,590 Gross income that would have been recorded at original rates $ 809 $ 726 $ 857 $ 1,085 $ 929 Interest that was reflected in income 124 112 161 164 204 Net reduction to interest income due to nonaccrual $ 685 $ 614 $ 696 $ 921 $ 725
The reduction of income due to renegotiated loans was less than $50 thousand in any year presented. The Corporation's loan portfolio continues to reflect strong growth during 1997 while the level of nonperforming loans remains stable in dollar amount when compared to 1996 levels. Nonperforming loans as a percentage of total loans is currently at its lowest year-end level in over seven years. At December 31, 1997 the ratio of the reserve for possible credit losses as a percentage of nonperforming loans remains lower than the Corporation's peers and although this ratio is an indicator of the strength of the reserve for possible credit losses it does not in itself measure reserve adequacy. Other factors to be considered include historical credit losses and nonperforming loan levels. These measurements were favorable when compared to peer group levels over the past five years. Management believes that the reserve for possible credit losses and nonperforming loans remained safely within acceptable levels. Capital Resources Equity capital increased $10.5 million in 1997 to $271.8 million. Dividends declared decreased equity by $18.1 million, an increase over the 1996 period as the dividend rate was increased. 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 additional advances, and fair value adjustments to unearned ESOP shares, increased equity capital by $1.2 million. The market value adjustment to securities available for sale increased capital by $323 thousand. Amounts paid to fund the discount on reinvested dividends and optional cash payments reduced equity by $630 thousand. The cost of purchasing treasury shares decreased equity by $2.9 million while proceeds from the reissuance of treasury shares to provide for stock options exercised increased equity capital by $16 thousand during 1997. 24 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis 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. See NOTE 20 for an analysis of regulatory capital guidelines and the Corporation's capital ratios relative to these measurement standards. Year 2000 Analysis The year 2000 issue is the result of computer programs being written whereby dates have been abbreviated by eliminating the first two digits of the year under the assumption that these two digits would always be 19. Any computer systems that have date sensitive programs may recognize a date using "00" as the year 1900 rather than the year 2000. As the year 2000 approaches such systems will be unable to accurately process certain date-based information resulting in potential system failure or miscalculations. The Corporation's data processing subsidiary, Commonwealth Systems Corporation, is its greatest asset in minimizing both risks and costs associated with the year 2000 issue. The technical staff began assessing the size and complexity of the problem and identifying hardware and software systems affected by the year 2000 issue in 1995. Based upon this assessment, the Corporation has determined that it will be required to modify or replace portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. In 1997 the Corporation began an awareness effort to inform the board of directors, senior management and other staff of the year 2000 problem and its significance. During 1997 the Corporation also began an inventory process and developed a plan for addressing the year 2000 issue. Formal communications have been initiated with software vendors to request year 2000 compliance certification. Where noncompliant systems are identified the Corporation has identified the cost of replacement or modification of these softwares. Some testing or validation began in 1997, however the bulk of the validation will occur in 1998. Mainframe software systems will be renovated or replaced throughout 1998 as the systems are successfully tested. The Corporation has a certification date of December 31, 1998, therefore the majority of the critical mainframe software systems will be implemented by then. Other areas of the Corporation utilize a similar framework for evaluating software systems which are unique as well as evaluating significant suppliers and outside professional service contractors to determine the extent to which the Corporation is vulnerable to those parties failure to remediate their own year 2000 issues. The Corporation's estimate of total year 2000 project costs and estimated times for completion are based on presently available information and are therefore subject to certain risks and uncertainties. The Corporation will utilize internal resources to reprogram and test software for year 2000 modifications to the extent possible. Internal incremental costs will be expensed as incurred but are not expected to be material. In addition certain software and hardware has been identified for replacement. In most cases the new software and hardware will offer additional benefits in processing capability or efficiencies gained from modernization in addition to achieving year 2000 compliance. Spreadsheet and loan origination 25 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Year 2000 Analysis (Continued) software will be upgraded to more recent software versions and personal computers will be converted to windows operating systems as part of making local area networks year 2000 compliant. Mainframe software and hardware replaced will result in enhancements or features of potential benefit in serving banking customers or processing financial transactions. These expenditures will be capitalized as software and hardware is put into service and the amounts will be amortized over three years for software and five years for hardware. The cash outlay will be funded through operating cash flows and will occur primarily during the next two years. As of December 31, 1997, the Corporation estimates that expenditures for the year 2000 issue will not have a material impact on the Corporation's financial condition or results of operations. 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. 26 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Balance Sheets (Dollar Amounts in Thousands) December 31, 1997 1996 Assets Cash and due from banks.....................$ 60,109 $ 69,406 Interest-bearing bank deposits.............. 4,985 4,199 Federal funds sold.......................... 2,880 -0- Securities available for sale, at market.... 396,631 244,415 Securities held to maturity, at cost, (market value $462,086 in 1997 and $457,189 in 1996) 460,063 459,746 Loans....................................... 1,937,744 1,778,130 Unearned income........................... (16,841) (30,795) Allowance for possible credit losses...... (19,766) (19,324) Net loans............................ 1,901,137 1,728,011 Property and equipment...................... 32,578 32,590 Other real estate owned..................... 1,788 1,647 Other assets................................ 69,144 44,624 Total assets.........................$2,929,315 $2,584,638 Liabilities Deposits (All Domestic): Noninterest-bearing.......................$ 150,426 $ 200,473 Interest-bearing.......................... 2,092,052 1,904,310 Total deposits....................... 2,242,478 2,104,783 Short-term borrowings....................... 193,918 150,330 Other liabilities........................... 28,031 27,287 Long-term debt.............................. 193,054 40,880 Total liabilities.................... 2,657,481 2,323,280 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, 22,436,628 shares issued and 22,046,326 shares outstanding in 1997; 22,436,628 shares issued and 22,194,426 shares outstanding in 1996................................... 22,437 22,437 Additional paid-in capital.................. 76,171 76,664 Retained earnings........................... 181,137 168,711 Unrealized gain on securities available for sale, net of taxes.................... 1,632 1,309 Treasury stock (390,302 and 242,202 shares at December 31, 1997 and 1996, respectively at cost).................................. (7,107) (4,289) Unearned ESOP shares........................ (2,436) (3,474) Total shareholders' equity........... 271,834 261,358 Total liabilities and shareholders' equity..........$2,929,315 $2,584,638 The accompanying notes are an integral part of these consolidated financial statements. 27 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, 1997 1996 1995 Interest Income Interest and fees on loans................ $155,676 $138,654 $128,582 Interest and dividends on investments: Taxable interest........................ 38,926 38,240 41,775 Interest exempt from Federal income taxes.......................... 3,766 3,530 2,785 Dividends............................... 1,201 1,407 1,040 Interest on Federal funds sold............ 12 85 1,033 Interest on bank deposits................. 230 413 486 Total interest income................. 199,811 182,329 175,701 Interest Expense Interest on deposits..................... 91,486 80,712 73,821 Interest on short-term borrowings........ 7,548 6,549 8,013 Interest on long-term debt............... 3,719 1,064 584 Total interest expense............... 102,753 88,325 82,418 Net interest income........................ 97,058 94,004 93,283 Provision for possible credit losses....... 6,929 4,501 4,125 Net interest income after provision for possible credit losses................... 90,129 89,503 89,158 Other Income Securities gains (losses)................ 6,686 1,403 (603) Trust income............................. 2,698 2,192 2,173 Service charges on deposits.............. 5,721 5,772 5,601 Other income............................. 4,738 4,374 3,233 Total other income................... 19,843 13,741 10,404 Other Expenses Salaries and employee benefits........... 35,824 33,287 33,034 Net occupancy expense.................... 5,156 4,528 4,347 Furniture and equipment expense.......... 4,744 4,715 4,110 FDIC expense............................. 322 1,062 2,373 Other operating expenses................. 19,863 19,997 18,198 Total other expenses................. 65,909 63,589 62,062 Income before income taxes................. 44,063 39,655 37,500 Applicable income taxes.................... 13,529 12,072 11,974 Net Income................................. $30,534 $27,583 $25,526 Average Shares Outstanding................. 21,878,945 21,954,111 22,005,427 Average Shares Outstanding Assuming Dilution................................. 21,965,833 21,989,963 22,051,185 Earnings per common share: Net income............................... $1.40 $1.26 $1.16 Earnings per common share assuming dilution: Net income............................... $1.39 $1.25 $1.16
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 Changes in Shareholders' Equity (Dollar Amounts in Thousands)
Unrealized Gain (Loss) on Additional Securities Unearned Total Common Paid-in Retained Available ESOP Treasury Shareholders' Stock Capital Earnings For Sale Shares Stock Equity Balance at December 31, 1994........... $22,437 $77,964 $146,814 $(16,802) $(5,196) $ (82) $225,135 Net income............................ -0- -0- 25,526 -0- -0- -0- 25,526 Cash dividends declared............... -0- -0- (14,764) -0- -0- -0- (14,764) Change in market value of securities available for sale, net of tax effect -0- -0- -0- 17,313 -0- -0- 17,313 Decrease in unearned ESOP shares...... -0- 24 -0- -0- 651 -0- 675 Discount on dividend reinvestment plan purchases....................... -0- (342) -0- -0- -0- -0- (342) Treasury stock acquired............... -0- -0- -0- -0- -0- (1,583) (1,583) Treasury stock reissued............... -0- (420) -0- -0- -0- 736 316 Balance at December 31, 1995........... 22,437 77,226 157,576 511 (4,545) (929) 252,276 Net income............................ -0- -0- 27,583 -0- -0- -0- 27,583 Cash dividends declared............... -0- -0- (16,448) -0- -0- -0- (16,448) Change in market value of securities available for sale, net of tax effect -0- -0- -0- 798 -0- -0- 798 Decrease in unearned ESOP shares...... -0- 105 -0- -0- 1,071 -0- 1,176 Discount on dividend reinvestment plan purchases....................... -0- (529) -0- -0- -0- -0- (529) Treasury stock acquired............... -0- -0- -0- -0- -0- (4,050) (4,050) Treasury stock reissued............... -0- (138) -0- -0- -0- 690 552 Balance at December 31, 1996........... 22,437 76,664 168,711 1,309 (3,474) (4,289) 261,358 Net income............................ -0- -0- 30,534 -0- -0- -0- 30,534 Cash dividends declared............... -0- -0- (18,108) -0- -0- -0- (18,108) Change in market value of securities available for sale, net of tax effect.............................. -0- -0- -0- 323 -0- -0- 323 Decrease in unearned ESOP shares...... -0- 171 -0- -0- 1,038 -0- 1,209 Discount on dividend reinvestment plan purchases....................... -0- (630) -0- -0- -0- -0- (630) Treasury stock acquired............... -0- -0- -0- -0- -0- (2,868) (2,868) Treasury stock reissued............... -0- (34) -0- -0- -0- 50 16 Balance at December 31, 1997........... $22,437 $76,171 $181,137 $ 1,632 $(2,436) $(7,107) $271,834 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 Cash Flows (Dollar Amounts in Thousands)
Years Ended December 31, 1997 1996 1995 Operating Activities Net income............................................ $ 30,534 $ 27,583 $ 25,526 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible credit losses............... 6,929 4,501 4,125 Depreciation and amortization...................... 5,775 5,155 5,126 Net losses (gains) on sales of assets.............. (6,989) (2,030) 427 Increase in cash surrender of bank owned life insurance........................................ (204) -0- -0- Increase in interest receivable.................... (7,915) (1,448) (765) Increase in interest payable....................... 2,641 2,523 3,349 Increase (decrease) in income taxes payable........ (355) 2,021 (2,168) Change in deferred taxes........................... 1,515 (683) 863 Other - net........................................ 3,561 (4,082) 544 Net cash provided by operating activities....... 35,492 33,540 37,027 Investing Activities Transactions with securities held to maturity: Sales.............................................. -0- -0- -0- Maturities and redemptions......................... 124,870 87,684 49,859 Purchases of investment securities................. (125,078) (42,576) (38,462) Transactions with securities available for sale: Sales.............................................. 29,811 20,240 76,999 Maturities and redemptions......................... 44,411 46,448 46,965 Purchases of investment securities................. (219,364) (64,562) (44,342) Proceeds from sales of loans and other assets......... 20,674 21,974 21,180 Investment in bank owned life insurance............... (25,000) -0- -0- Acquisition of affiliate and branch, net of cash received............................................. -0- 7,836 -0- Changes net of acquisitions: Net decrease (increase) in time deposits with banks... (786) 4,090 5,398 Net increase in loans................................. (200,767) (285,160) (132,610) Purchases of premises and equipment................... (4,019) (6,757) (4,095) Net cash used by investing activities............... (355,248) (210,783) (19,108) Financing Activities Proceeds from issuance of long-term debt.............. 204,842 33,000 -0- Repayments of long-term debt.......................... (51,630) (8,509) (1,684) Discount on dividend reinvestment plan purchases...... (630) (529) (342) Dividends paid........................................ (17,695) (16,037) (14,326) Net increase (decrease) in Federal funds purchased.... 53,675 23,740 (34,940) Net increase (decrease) in other short-term borrowings (10,087) 18,015 (45,993) Changes net of acquisitions: Acquisition of treasury stock....................... (2,868) (4,050) (1,583) Reissuance of treasury stock........................ 16 108 316 Net increase in deposits............................ 137,716 133,730 81,759 Net cash provided (used) by financing activities 313,339 179,468 (16,793) Net increase (decrease) in cash and cash equivalents................................... (6,417) 2,225 1,126 Cash and cash equivalents at January 1.................. 69,406 67,181 66,055 Cash and cash equivalents at December 31................ $ 62,989 $ 69,406 $ 67,181
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 Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 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 a commercial bank, 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 eighteen counties in central and western Pennsylvania. 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. As part of the Corporation's long-term strategic plan, Reliable Savings Bank PaSA merged into First Commonwealth Bank during the third quarter of 1997. The merger of these wholly-owned subsidiaries was accounted for in a manner similar to a pooling of interests and accordingly the combined entity was recorded at historic cost. Investments of 20 to 50 percent of the outstanding common stock of investees are accounted for using the equity method of accounting. In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income", which requires businesses to disclose comprehensive income and its component in their general-purpose financial statements. This statement requires the reporting of all items of comprehensive income in a financial statement that is displayed with the same prominence as other financial statements. This statement is effective for fiscal years beginning after December 15, 1997, with reclassification of comparative financial statements and is applicable to interim periods. Management is in the process of evaluating the impact of this statement on the financial statements. In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for financial statements for periods beginning after December 15, 1997. Statement No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. Management's preliminary determination is that, under current conditions, the Corporation will report one business segment. 31 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 NOTE 1--Statement of Accounting Policies (Continued) 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 had 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 was determined by using the specific identification method. 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. Effective January 1, 1995, the Corporation adopted Financial Accounting Standards Board Statement No. 114 "Accounting by Creditors for Impairment of a Loan", as amended by Statement No. 118 "Accounting By Creditors for Impairment of a Loan-Income Recognition and Disclosures", ("FAS No. 118"). These statements address the accounting by creditors, such as banks, for the impairment of certain 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. The adoption of FAS No. 118 did not have a material impact on the Corporation's financial condition or results of operations. Mortgage Servicing Rights Effective January 1, 1996, the Corporation adopted the Financial Accounting Standards Board Statement No. 122 "Accounting for Mortgage Servicing Rights an amendment of FASB Statement No. 65" (FAS No. 122). When a mortgage banking enterprise purchases or originates mortgage loans with a definitive plan to sell or securitize those loans and retain the mortgage servicing rights, the Corporation must measure 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 mortgage banking enterprise 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 must 32 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 1--Statement of Accounting Policies (Continued) Mortgage Servicing Rights (Continued) allocate 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 income (servicing revenue in excess of servicing cost). FAS No. 122 also requires mortgage servicing rights to be periodically evaluated for impairment based on fair values. The adoption of FAS No. 122 did not have a material impact on the Corporation's financial condition or results of operations. 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 Possible Credit Losses The allowance for possible 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 In November 1997, the Corporation purchased insurance on the lives of a certain group of employees. The policy accumulates asset values to meet future liabilities including the payment of employee benefits such as health care. The premium for such coverage was $25,000 and is shown in the Consolidated Statements of Cash Flows. Increases in the cash surrender value are recorded as other income in the Consolidated Statements of Income. The policy was issued by the Hartford Life Insurance Company. 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. 33 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 1--Statement of Accounting Policies (Continued) Accounting for the Impairment of Long-Lived Assets The Corporation adopted the Financial Accounting Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of ("FAS No. 121") effective January 1, 1996. This statement requires long-lived assets, such as premises and equipment and intangibles to be reviewed 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 Statement of Financial Accounting Standards 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. Cash Flow Statement 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. Supplemental Disclosures 1997 1996 1995 Cash paid during the year for: Interest $100,128 $85,802 $ 79,069 Income taxes $ 12,375 $10,604 $ 13,266 Noncash investing and financing activities: ESOP borrowings $ -0- $ -0- $ 500 ESOP loan reductions $ 1,038 $ 1,071 $ 1,151 Gross increase in Market Value adjustment to securities available for sale pursuant to FAS No. 115 $ 497 $ 1,228 $ 26,635 Net securities available for sale transferred to securities held to maturity $ -0- $ -0- $145,723 Loans transferred to other real estate owned and repossessed assets $ 5,104 $ 2,964 $ 2,733 34 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 1--Statement of Accounting Policies (Continued) Earnings Per Common Share In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128 "Earnings per Share" ("FAS No. 128") which is effective for financial statements issued after December 15, 1997; earlier adoption is not permitted. This statement replaces the presentation of primary and fully diluted earnings per share with a presentation of basic and diluted earnings per share, respectively. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders 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. FAS No. 128 also requires a reconciliation of the numerator and denominator of the basic earnings per share calculation to the numerator and denominator of the diluted earnings per share calculation. All periods presented have been restated to report earnings per share in conformity with the provisions of FAS No. 128. Adoption of this statement did not have a material impact on the disclosure of earnings per share in the financial statements. Employee Stock Ownership Plan In November 1993, the Accounting Standards Division of the American Institute of Certified Public Accountants issued Statement of Position 93-6 ("SOP 93-6") "Employers' Accounting for Employee Stock Ownership Plans." This statement affects the accounting treatment of the Corporation's Employee Stock Ownership Plan ("ESOP") described in NOTE 15. The Corporation prospectively adopted SOP 93-6 for ESOP shares acquired after December 31, 1992 (new shares). As permitted by the Statement of Position the Corporation has elected 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 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 The Corporation adopted the Financial Accounting Standards Board Statement No. 123 "Accounting for Stock Based Compensation" ("FAS No. 123") effective January 1, 1996. This statement 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 Practice Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). 35 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 1--Statement of Accounting Policies (Continued) Employee Stock Option Plan (Continued) 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 17). The adoption of FAS No. 123 did not have a material impact on the Corporation's financial condition or results of operations. NOTE 2--Business Combinations Effective April 1, 1996, the Corporation acquired all of the outstanding common stock of BSI Financial Services Inc. ("BSI"), headquartered in Titusville, PA for cash and stock consideration aggregating $1.2 million. BSI provides mortgage banking, loan servicing and collection services to the Corporation's subsidiary banks as well as unaffiliated organizations. The acquisition was accounted for as a purchase transaction, whereby the identifiable tangible and intangible assets and liabilities of BSI were recorded at their fair values on the acquisition date. Under the purchase method of accounting, the results of operations of BSI from the date of acquisition are included in the Corporation's financial statements. NOTE 3--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 bank maintained with the Federal Reserve Bank average balances of $11,341 during 1997 and $12,119 during 1996. 36 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 4--Securities Available For Sale Below is an analysis of the amortized cost and approximate fair values of securities available for sale at December 31, 1997 and 1996:
1997 1996 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 $ 70,766 $ 732 $ (26) $ 71,472 $ 57,706 $ 97 $ -0- $ 57,803 Obligations of U.S. Government Corporations and Agencies: Mortgage Backed Securities 237,841 2,374 (102) 240,113 105,656 231 (81) 105,806 Other 64,517 339 (131) 64,725 45,627 17 (358) 45,286 Obligations of States and Political Subdivisions 387 -0- -0- 387 2 -0- -0- 2 Debt Securities Issued by Foreign Governments 460 -0- -0- 460 710 -0- -0- 710 Corporate Securities 1,301 -0- (28) 1,273 1,984 -0- (32) 1,952 Other Mortgage Backed Securities -0- -0- -0- -0- -0- -0- -0- -0- Total Debt Securities 375,272 3,445 (287) 378,430 211,685 345 (471) 211,559 Equities 18,629 -0- (428) 18,201 30,394 2,906 (444) 32,856 Total Securities Available for Sale $393,901 $3,445 $(715) $396,631 $242,079 $3,251 $(915) $244,415
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 20 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, 1997 and 1996, 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. 37 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 4--Securities Available For Sale (Continued) The amortized cost and estimated market value of debt securities at December 31, 1997, 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 $ 43,003 $ 42,968 Due after 1 but within 5 years 68,861 69,579 Due after 5 but within 10 years 25,567 25,770 Due after 10 years -0- -0- 137,431 138,317 Mortgage backed securities 237,841 240,113 Total debt securities $375,272 $378,430 Proceeds from the sales of securities available for sale were $29,811, $20,240 and $76,999 during 1997, 1996 and 1995 respectively. Gross gains of $6,682, $1,624 and $136 and gross losses of $2, $239 and $739 were realized on those sales during 1997, 1996 and 1995 respectively. Securities available for sale with a book value of $94,035 and $88,649 were pledged at December 31, 1997 and 1996, respectively to secure public deposits and for other purposes required or permitted by law. 38 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 5--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:
1997 1996 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 $230,777 $ 599 $(656) $230,720 $285,576 $-0- $(1,720) $283,856 Other 139,938 792 (98) 140,632 87,906 -0- (478) 87,428 Obligations of States and Political Subdivisions 86,833 1,436 (50) 88,219 79,429 9 (390) 79,048 Debt Securities Issued By Foreign Governments 360 -0- -0- 360 113 -0- -0- 113 Corporate Securities -0- -0- -0- -0- 1,490 4 -0- 1,494 Other Mortgage Backed Securities 2,155 1 (1) 2,155 5,232 18 -0- 5,250 Total Debt Securities $460,063 $2,828 $(805) $462,086 $459,746 $ 31 $(2,588) $457,189
The amortized cost and estimated market value of debt securities at December 31, 1997, 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 $ 51,562 $ 51,472 Due after 1 but within 5 years 46,783 47,127 Due after 5 but within 10 years 92,521 93,485 Due after 10 years 36,265 37,127 227,131 229,211 Mortgage backed securities 232,932 232,875 Total debt securities $460,063 $462,086 39 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 5--Securities Held to Maturity (Continued) There were no sales of securities held to maturity in 1997, 1996 or 1995. Securities held to maturity with a book value of $302,695 and $232,648 were pledged at December 31, 1997 and 1996, respectively, to secure public deposits and for other purposes required or permitted by law. NOTE 6--Loans (all domestic) Loans at year end were divided among these general categories: December 31, 1997 1996 Commercial, financial, agricultural and other $ 290,298 $ 252,798 Real estate loans: Construction and land development 17,873 24,111 1-4 Family dwellings 854,894 752,562 Other real estate loans 305,887 287,318 Loans to individuals for household, family and other personal expenditures 417,547 425,012 Leases, net of unearned income 51,245 36,329 Subtotal 1,937,744 1,778,130 Unearned income (16,841) (30,795) Total loans and leases $1,920,903 $1,747,335 Most of the Corporation's business activity was with customers located within Pennsylvania. The portfolio is well diversified, and as of December 31, 1997 and 1996, there were no significant concentrations of credit. The Federal Home Loan Bank had a security interest in qualifying residential mortgage loans with an aggregate estimated fair value of $237,789 at December 31, 1997 and $45,862 at December 31, 1996 as collateral for long-term debt by the Corporation's banking subsidiaries. NOTE 7--Allowance for Possible Credit Losses Description of changes: 1997 1996 1995 Allowance at January 1 $19,324 $18,152 $17,337 Additions: Recoveries of previously charged off loans 831 905 860 Provision charged to operating expense 6,929 4,501 4,125 Deductions: Loans charged off 7,318 4,234 4,170 Allowance at December 31 $19,766 $19,324 $18,152 40 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 7--Allowance for Possible Credit Losses (Continued) 1997 1996 Recorded investment in impaired loans at end of period $7,952 $8,186 Average balance of impaired loans for the year $8,188 $6,123 Allowance for possible credit losses related to impaired loans $1,985 $1,639 Impaired loans with an allocation of the allowance for possible credit losses $4,284 $4,485 Impaired loans with no allocation of the allowance for possible credit losses $3,668 $3,701 Income recorded on impaired loans on a cash basis $ 123 $ 112 NOTE 8--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, 1997 and 1996, 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, 1997 and 1996. 1997 1996 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $377,824 $305,744 Standby letters of credit $ 23,775 $ 20,747 Commercial letters of credit $ -0- $ 483 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. 41 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 8--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 9--Premises and Equipment Premises and equipment are described as follows: Estimated Useful Life 1997 1996 Land Indefinite $ 4,437 $ 4,378 Buildings and improvements 5 - 50 Years 32,293 31,555 Leasehold improvements 5 - 39 Years 5,841 5,371 Furniture and equipment 3 - 25 Years 32,191 30,072 Subtotal 74,762 71,376 Less accumulated depreciation and amortization 42,184 38,786 Total premises and equipment $32,578 $32,590 Depreciation and amortization related to premises and equipment was $3,972 in 1997, $3,657 and $3,536 in 1996 and 1995, respectively. NOTE 10--Interest-Bearing Deposits Components of interest-bearing deposits at December 31 were as follows: 1997 1996 NOW and Super NOW accounts $ 56,058 $ 205,090 Savings and MMDA accounts 748,614 495,355 Time deposits 1,287,380 1,203,865 Total interest-bearing deposits $2,092,052 $1,904,310 Interest-bearing deposits at December 31, 1997 include reallocations from demand deposits of $60,717 and reallocations from NOW and Super NOW accounts of $201,023 into Savings and MMDA accounts. These reallocations are based on a formula approved by the regulatory authorities and have been made to reduce the Corporation's reserve requirement. Included in time deposits at December 31, 1997 and 1996, were certificates of deposit in denominations of $100 or more of $301,871 and $260,743 respectively. Interest expense related to $100 or greater certificates of deposit amounted to $16,107 in 1997, $11,040 in 1996, and $9,643 in 1995. Included in time deposits at December 31, 1997, were certificates of deposit with the following scheduled maturities: 1998 $ 601,439 1999 439,853 2000 100,417 2001 73,312 2002 and thereafter 72,111 $1,287,132 42 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 11--Short-term Borrowings Short-term borrowings at December 31 were as follows:
1997 1996 Ending Average Average Ending Average Average Balance Balance Rate Balance Balance Rate Federal funds purchased $108,650 $ 60,892 5.66% $ 54,975 $ 34,536 5.54% Borrowings from FHLB -0- 69 5.73% -0- 6,832 5.48% Securities sold under agreements to repurchase 79,016 72,627 4.82% 79,023 73,766 4.91% Treasury, tax and loan note option 6,252 11,399 5.22% 16,332 12,015 5.31% Total $193,918 $144,987 5.21% $150,330 $127,149 5.15% Maximum total at any month-end $193,918 $188,232
At December 31, 1997 and 1996, the Corporation had approved but unused borrowing capacity with the FHLB of $165,308 and $173,217, respectively. Interest expense on short-term borrowings for the years ended December 31 is detailed below:
1997 1996 1995 Federal funds purchased $3,446 $1,915 $2,259 Borrowings from FHLB 4 374 1,583 Securities sold under agreements to repurchase 3,502 3,622 3,653 Treasury, tax and loan note option 596 638 518 Total interest on short-term borrowings $7,548 $6,549 $8,013
NOTE 12--Long-term Debt Long-term debt at December 31, follows:
1997 1996 Amount Rate Amount Rate Bank subordinated notes due September, 1997 $ -0- $ 716 8.38% ESOP loan due March, 2004 2,436 Libor +1% 3,474 Libor +1% Borrowings from FHLB due: March, 1998 43 7.22% 165 7.22% March, 1998 8,000 7.22% 8,000 7.22% March, 1998 10,000 5.99% -0- May, 1998 733 5.94% -0- August, 1998 188 6.43% 425 6.43% December, 2001 -0- 25,000 4.92% August, 2002 25,000 5.36% -0- November, 2002 50,000 5.82% -0- November, 2002 25,000 5.33% -0- December, 2002 50,000 5.71% -0- March, 2007 1,204 6.51% -0- July, 2007 3,903 6.29% -0- August, 2007 1,719 6.57% -0- January, 2009 2,775 6.27% 3,100 6.18% July, 2017 4,007 6.52% -0- December, 2017 7,659 6.17% -0- Mortgage loan due July, 2012 188 2.00% -0- Mortgage loan due January, 2013 199 4.50% -0- $193,054 $40,880
43 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands, except per share data) NOTE 12--Long-Term Debt (Continued) Scheduled loan payments are summarized below: 1998 1999 2000 2001 2002 Thereafter Loan payments $20,707 $1,816 $1,890 $1,685 $151,677 $15,279 NOTE 13--Common Share Commitments At December 31, 1997, the Corporation had 100,000,000 common shares authorized and 22,046,326 shares outstanding. Outstanding shares were reduced by 390,302 shares of treasury stock at December 31, 1997 and 242,202 shares at December 31, 1996. The Corporation may be required to issue additional shares to satisfy common share purchases related to the employee stock ownership plan described in NOTE 15. The dilutive effect of stock options outstanding on average shares outstanding in the diluted earning per share reported on the income statement in accordance with FAS No. 128 were 86,888, 35,852 and 45,758 shares at December 31, 1997, 1996 and 1995 respectively. During 1997 and 1996, 150,900 and 217,294 shares of treasury stock were acquired at an average price per share of $19.01 and $18.64 respectively, for the purpose of funding stock options upon exercise. Treasury shares consisting of 2,800 and 16,694 were reissued during 1997 and 1996 upon exercise of various stock option plans assumed by the Corporation in the merger transactions with Reliable and United. In addition 23,400 treasury shares were reissued during 1996 to fund the BSI acquisition. NOTE 14--Income Taxes The income tax provision consists of: 1997 1996 1995 Current tax provision for income exclusive of securities transactions: Federal $12,466 $12,129 $11,309 State 238 135 15 Securities transactions 2,340 491 (213) Total current tax provision 15,044 12,755 11,111 Deferred tax provision (benefit) (1,515) (683) 863 Total tax provision $13,529 $12,072 $11,974 44 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 14--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, 1997 and 1996, were as follows: 1997 1996 Deferred tax assets: Allowance for possible credit losses $ 6,692 $ 6,136 Alternative minimum tax carry forward -0- 116 Other 316 290 Deferred tax liabilities: Accumulated accretion of bond discount (534) (440) Unrealized gain on securities available for sale (879) (705) Lease financing deduction (5,704) (3,837) Loan origination fees and costs (923) (756) Accumulated depreciation (240) (238) Basis difference in assets acquired (1,356) (1,561) Other (223) (167) Net deferred tax liability $(2,851) $(1,162) 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:
1997 1996 1995 % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income Tax at statutory rate $15,422 35.0 $13,879 35.0 $13,125 35.0 Increase (decrease) resulting from: Effect of nontaxable interest (2,157) (4.9) (1,924) (4.9) (1,408) (3.8) State income taxes 238 0.5 135 0.3 13 0.0 Other 26 0.1 (18) 0.0 244 0.7 Total tax provision $13,529 30.7 $12,072 30.4 $11,974 31.9
45 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 15--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 36,880 shares of the Corporation's common stock in 1995, at a corresponding cost of $500, which the Corporation borrowed and concurrently loaned these amounts to the ESOP. These amounts represent leveraged and unallocated shares, and accordingly have been recorded as long-term debt and the offset as a reduction of the common shareholders' equity. Compensation costs related to the plan were $1,032 in 1997, $1,224 in 1996 and $1,908 in 1995. (See NOTE 16). 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 5% of compensation to the plan which is matched by the employer's contribution equal to 80% of the employee's contribution. Prior to January 1, 1996, the employer's matching contribution was 60% of the employee's contribution. The 401(k) plan expense was $1,715 in 1997, $1,638 in 1996 and $1,294 in 1995. NOTE 16--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 $2,436 at December 31, 1997 and $3,474 at December 31, 1996. 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 nine year period from contributions to the ESOP by the Corporation and dividends on unallocated ESOP shares. 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, 1995 329,068 194,459 134,609 Shares allocated during 1996 (82,980) (49,036) (33,944) Shares in suspense December 31, 1996 246,088 145,423 100,665 Shares allocated during 1997 (74,837) (44,224) (30,613) Shares in suspense December 31, 1997 171,251 101,199 70,052 The fair market value of the new shares remaining in suspense was approximately $2,456 and $1,875 at December 31, 1997 and 1996 respectively. Interest on ESOP loans was $211 in 1997, $313 in 1996 and $434 in 1995. During 1997, 1996 and 1995 dividends on unallocated shares in the amount of $213, $256 and $285 respectively were used for debt service while all dividends on allocated shares were allocated to the participants. 46 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands,except share data) NOTE 17--Stock Option Plan At December 31, 1997, the Corporation had a stock-based compensation plan, which is described below. The plan permits the executive compensation committee to grant options for up to one million shares of the Corporation's common stock through October 15, 2005. Although the vesting requirements and term of future options granted are at the discretion of the executive compensation committee, all options granted during 1996 require a three year vesting period and expire ten years from the grant date and all options granted during 1997 become vested at December 31, 1997 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:
1997 1996 As Reported Pro Forma As Reported Pro Forma Net Income $30,534 $24,592 $27,583 $27,548 Basic earnings per share $ 1.40 $ 1.12 $ 1.26 $ 1.25 Diluted earnings per share $ 1.39 $ 1.12 $ 1.25 $ 1.25
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: 1997 1996 Dividend yield 2.5% per annum 3.0% per annum Expected volatility 28.0% 10.0% Risk-free interest rate 5.6% 6.7% Expected option life 5.7 years 9.3 years Under the Corporation's 1995 Stock Option Plan, the Corporation may grant options to its executives for up to one million shares of common stock. The Corporation also assumed the Stock Options of United National Bank Corporation ("Unitas") and Reliable Financial Corporation ("RFC") upon the merger of these financial institutions into the Corporation in 1994. Options for 45,508 shares of the Corporation's common stock assumed from mergers were unexercised at December 31, 1997. A summary of the status of the Corporation's outstanding stock options as of December 31, 1997 and 1996 and changes for the years ending on those dates is presented below:
1997 1996 Weighted-Average Exercise Weighted-Average Exercise Shares Price Per Share Shares Price Per Share Outstanding at beginning of year 233,308 $16.10 58,134 $ 6.47 Granted 312,280 $18.50 195,048 $18.375 Exercised (2,800) $ 6.44 (9,140) $ 6.44 Forfeited (16,514) $18.44 (10,734) $13.38 Outstanding at end of year 526,274 $17.49 233,308 $16.10
47 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 17--Stock Option Plans (Continued) At December 31, 1996, 44,374 stock options were exercisable with a weighted- average exercise price of $6.47. The following table summarizes information about the stock options outstanding at December 31, 1997.
Options Outstanding Options Exercisable Weighted-Average Range of Number Outstanding Remaining Contract Weighted-Average Number Exercisable Weighted-Average Exercise Prices at 12/31/97 Life Exercise Price at 12/31/97 Exercise Price $5.00-5.99 26,874 3.8 $ 5.46 26,874 $ 5.53 $6.00-8.99 18,634 5.2 $ 7.78 18,634 $ 8.07 $18.375-18.50 480,766 9.0 $18.46 299,511 $18.50 526,274 345,019 $16.93
NOTE 18--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 19--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 1997. Balances December 31, 1996 $11,113 Advances 8,130 Repayments (11,376) Other (2,076) Balances December 31, 1997 $ 5,791 "Other" primarily reflects the change in those classified as a "related party" as a result of mergers, resignations and retirements. NOTE 20--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, 1997, dividends from subsidiary banks were restricted not to exceed $43,499. These restrictions have not had, and are not expected to have, a significant impact on the Corporation's ability to meet its cash obligations. 48 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 20--Regulatory Restrictions and Capital Adequacy (Continued) 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, 1997, the Corporation and its banking subsidiaries meet all capital adequacy requirements to which they are subject. As of December 31, 1997, the most recent notifications from the Federal Reserve Board and Federal Deposit Insurance Corporation categorized First Commonwealth Bank as well capitalized under the regulatory framework for prompt corrective action. To be considered as well capitalized, First Commonwealth Bank 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 institution's category.
To Be Well Capitalized Under Prompt Corrective Actual Regulatory Minimum Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 1997 Total Capital to Risk Weighted Assets First Commonwealth Financial Corporation $279,184 15.1% $147,913 8.0% Not Applicable Not Applicable First Commonwealth Bank $252,457 13.8% $146,276 8.0% $182,845 10.0% Tier I Capital to Risk Weighted Assets First Commonwealth Financial Corporation $259,418 14.0% $ 73,957 4.0% Not Applicable Not Applicable First Commonwealth Bank $232,691 12.7% $ 73,138 4.0% $109,707 6.0% Tier I Capital to Average Assets First Commonwealth Financial Corporation $259,418 9.2% $112,669 4.0% Not Applicable Not Applicable First Commonwealth Bank $232,691 8.3% $111,772 4.0% $139,715 5.0% As of December 31, 1996 Total Capital to Risk Weighted Assets First Commonwealth Financial Corporation $266,999 15.3% $139,303 8.0% Not Applicable Not Applicable First Commonwealth Bank $225,903 13.7% $131,642 8.0% $164,553 10.0% Tier I Capital to Risk Weighted Assets First Commonwealth Financial Corporation $247,531 14.2% $ 69,651 4.0% Not Applicable Not Applicable First Commonwealth Bank $207,437 12.6% $ 65,821 4.0% $ 98,732 6.0% Tier I Capital to Average Assets First Commonwealth Financial Corporation $247,531 9.7% $102,061 4.0% Not Applicable Not Applicable First Commonwealth Bank $207,437 8.7% $ 95,067 4.0% $118,833 5.0%
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 21--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) Balance Sheets December 31, 1997 1996 Assets Cash $ 7,725 $ 5,762 Securities available for sale 3,502 2,148 Loans to affiliated parties 469 517 Investment in subsidiaries 254,182 250,023 Investment in jointly-owned company 2,622 2,214 Premises and equipment 4,507 4,050 Dividends receivable from subsidiaries 4,924 3,571 Receivable from related parties 810 922 Other assets 1,634 1,561 Total assets $280,375 $270,768 Liabilities and Shareholders' Equity Accrued expenses and other liabilities $ 1,254 $ 1,496 Dividends payable 4,851 4,440 Loans payable 2,436 3,474 Shareholders' equity 271,834 261,358 Total liabilities and shareholders' equity $280,375 $270,768 Statements of Income Years Ended December 31, 1997 1996 1995 Interest and dividends $ 94 $ 129 $ 160 Dividends from subsidiaries 29,739 23,873 30,260 Net securities gains (losses) 382 (169) -0- Other revenue 16 92 2 Operating expenses (8,427) (8,513) (8,940) Income before taxes and equity in undistributed earnings of subsidiaries 21,804 15,412 21,482 Applicable income tax benefits 2,593 2,788 2,782 Income before equity in undistributed earnings of subsidiaries 24,397 18,200 24,264 Equity in undistributed earnings of subsidiaries 6,137 9,383 1,262 Net income $30,534 $27,583 $25,526 50 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 21--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) (Continued) Statements of Cash Flows Years Ended December 31, 1997 1996 1995 Operating Activities Net income $ 30,534 $ 27,583 $ 25,526 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,522 1,198 1,223 Net (gains) losses on sale of assets (381) 167 2 Decrease (Increase) in prepaid income taxes 229 69 (156) Undistributed equity in subsidiaries (6,137) (9,383) (1,262) Other - net (400) (1,031) 210 Net cash provided by operating activities 25,367 18,603 25,543 Investing Activities Transactions with securities available for sale: Purchases of investment securities (6,689) (317) (2,133) Sales of investment securities 5,419 3,331 -0- Net change in loans to affiliated parties 48 (236) (281) Purchases of premises and equipment (1,005) (1,714) (931) Acquisition of and additional investment in subsidiary, net of cash received -0- (1,913) -0- Net cash used by investing activities (2,227) (849) (3,345) Financing Activities Repayment of long-term debt -0- -0- (1,500) Discount on dividend reinvestment plan purchases (630) (529) (342) Treasury stock acquired (2,868) (4,050) (1,583) Treasury stock reissued 16 108 316 Cash dividends paid (17,695) (16,037) (14,326) Net cash used by financing activities (21,177) (20,508) (17,435) Net increase (decrease) in cash 1,963 (2,754) 4,763 Cash at beginning of year 5,762 8,516 3,753 Cash at end of year $ 7,725 $ 5,762 $ 8,516 51 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 21--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) (Continued) Supplemental schedule of noncash investing and financing activities The Corporation borrowed $500 in 1995 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 the common shareholders' equity. Loan payments in the amount of $1,038 in 1997, $1,176 in 1996 and $1,151 in 1995 were made by the ESOP thereby reducing the outstanding amount related to unearned ESOP shares to $2,436 at December 31, 1997. NOTE 22--Fair Values of Financial Instruments Below are various estimated fair values at December 31, 1997 and 1996, 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. 52 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 22--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. 53 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (Dollar Amounts in Thousands) NOTE 22--Fair Values of Financial Instruments (Continued) The following table presents carrying amounts and estimated fair values of the Corporation's financial instruments at December 31, 1997 and 1996. 1997 1996 Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value Financial assets Cash and due from banks $ 60,109 $ 60,109 $ 69,406 $ 69,406 Interest-bearing deposits with banks 4,985 4,985 4,199 4,199 Federal funds sold 2,880 2,880 -0- -0- Securities available for sale 396,631 396,631 244,415 244,415 Investments held to maturity 460,063 462,086 459,746 457,189 Loans, net of allowance 1,901,137 1,952,672 1,728,011 1,766,390 Financial liabilities Deposits 2,242,478 2,254,035 2,104,783 2,114,561 Short-term borrowings 193,918 193,918 150,330 150,330 Long-term debt 193,056 189,134 40,880 39,022 54 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 sheet of First Commonwealth Financial Corporation and subsidiaries (the Corporation) as of December 31, 1997, and the related consolidated statement of income, changes in shareholders' equity and cash flows for the year then ended. 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 audit. The financial statements of the Corporation for the years ended December 31, 1996 and 1995, were audited by other auditors whose report, dated January 17, 1997, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, such 1997 consolidated financial statements present fairly, in all material respects, the financial position of First Commonwealth Financial Corporation at December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /S/DELOITTE & TOUCHE LLP Pittsburgh, Pennsylvania January 30, 1998 55 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors First Commonwealth Financial Corporation We have audited the accompanying consolidated balance sheet of First Commonwealth Financial Corporation and Subsidiaries as of December 31, 1996 and the related consolidated statements of income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of First Commonwealth Financial 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 generally accepted auditing standards. 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 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, the consolidated financial position of First Commonwealth Financial Corporation and Subsidiaries as of December 31, 1996, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /S/Grant Thornton, LLP Philadelphia, Pennsylvania January 17, 1997 56 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, 1997 and 1996 are as follows:
1997 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income.............................. $47,746 $48,996 $50,993 $52,076 Interest expense............................. 23,656 24,838 26,505 27,754 Net interest income..................... 24,090 24,158 24,488 24,322 Provision for possible credit losses......... 1,241 1,390 1,791 2,507 Net interest income after provision for possible credit losses..................... 22,849 22,768 22,697 21,815 Securities gains............................. 1,758 1,039 3,193 696 Other operating income....................... 2,993 3,313 3,341 3,510 Other operating expenses..................... 16,506 16,639 16,531 16,233 Income before income taxes.............. 11,094 10,481 12,700 9,788 Applicable income taxes...................... 3,419 3,277 3,989 2,844 Net income.............................. $ 7,675 $ 7,204 $ 8,711 $ 6,944 Basic earnings per share..................... $ 0.35 $ 0.33 $ 0.40 $ 0.32 Diluted earnings per share................... $ 0.35 $ 0.33 $ 0.40 $ 0.32 Average shares outstanding..................21,946,450 21,875,647 21,840,434 21,854,681 Average shares outstanding assuming dilution.................................21,977,681 21,932,510 21,928,117 22,024,918
1996 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income.............................. $44,270 $44,694 $45,550 $47,815 Interest expense............................. 20,845 21,281 22,653 23,546 Net interest income..................... 23,425 23,413 22,897 24,269 Provision for possible credit losses......... 900 1,050 1,200 1,351 Net interest income after provision for possible credit losses..................... 22,525 22,363 21,697 22,918 Securities gains (losses).................... 8 (57) 1 1,451 Other operating income....................... 2,933 2,992 3,267 3,146 Other operating expenses..................... 14,993 15,428 16,734 16,434 Income before income taxes.............. 10,473 9,870 8,231 11,081 Applicable income taxes...................... 3,360 2,982 2,369 3,361 Net income.............................. $ 7,113 $ 6,888 $ 5,862 $ 7,720 Basic earnings per share..................... $ 0.32 $ 0.31 $ 0.27 $ 0.35 Diluted earnings per share................... $ 0.32 $ 0.31 $ 0.27 $ 0.35 Average shares outstanding..................22,004,857 21,925,789 21,947,468 21,943,790 Average shares outstanding assuming dilution.................................22,044,810 21,965,930 21,979,507 21,975,157
57 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 27, 1998 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 75 Chairman of the Board of the Corporation, Chairman of the Board of FCTC, CSC, and FCB; Director of CTCLIC, FCIA and New Mexico Banquest Investors Corp.; Former President and Chief Executive Officer of the Corporation Joseph E. O'Dell 52 President, Chief Executive Officer and director of the Corporation; Director of FCB, FCTC, BSI and FCIA; Vice Chairman of the Board of CSC; Former Senior Executive Vice President and Chief Operating Officer of the Corporation; former President and Chief Executive Officer of FCB Gerard M. Thomchick 42 Senior Executive Vice President and Chief Operating Officer of the Corporation; President, Chief Executive Officer and Director of CTCLIC; Director of FCB, FCTC, BSI and FCIA David R. Tomb, Jr. 66 Senior Vice President, Secretary, Treasurer and Director of the Corporation; Secretary and Cashier of FCB; Secretary of FCIA, FCTC and CSC; Director of FCB, CSC, FCTC, BSI, FCIA and CTCLIC John J. Dolan 41 Senior Vice President and Chief Financial Officer of the Corporation; Chief Financial Officer of FCB; Chief Financial Officer, Comptroller of CTCLIC;, Treasurer and Assistant Secretary of FCTC; Comptroller and Chief Financial Officer of BSI; Treasurer of FCIA William R. Jarrett 63 Senior Vice President of the Corporation, Former managing partner of Jarrett Stokes & Co. Certified Public Accountants, until his employment by the Corporation on April 15, 1994. R. John Previte 48 Senior Vice President, Investments of the Corporation Rosemary Krolick 44 Senior Vice President and Chief Information Officer of the Corporation; President, Chief Executive Officer and director of CSC 58 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) 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 27, 1998 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 27, 1998 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 27, 1998 is incorporated herein by reference in response to this item. 59 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 Employment Contract Exhibit 10.2 to Form S-4 Sumner E. Brumbaugh Filed October 15, 1993 10.2 Employment Contract Exhibit 10.3 to Form S-4 Robert F. Koslow filed October 15, 1993 10.3 Employment Contract Exhibit 10.4 to Form S-4 Robert C. Williams filed June 17, 1994 10.4 Change in Control Exhibit 10.4 to Form 10-K Agreement dated filed March 21, 1996 October 27, 1995 Joseph E. O'Dell 10.5 Change in Control Exhibit 10.5 to Form 10-K Agreement dated filed March 21, 1996 October 27, 1995 Gerard M. Thomchick 10.6 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: George E. Dash, William R. Jarrett, R. John Previte, David L. Dawson, Johnston A. Glass, Rosemary Krolick, William Miksich, Domenic P. Rocco, Timothy P. Sissler, Robert C. Wagner and C. Dean Wingard. 21.1 Subsidiaries of the Registrant 60 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K PART IV (Continued) 23.1 Consent of Deloitte & Touche LLP Certified Public Accountant 23.2 Consent of Grant Thornton LLP Certified Public Accountants 24.1 Power of Attorney 27.1 Financial Data Schedule (B) Report on Form 8-K None 61 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 24th day of March 1998. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) /S/JOSEPH E. O'DELL Joseph E. O'Dell, President and Chief Executive Officer 62 EX-21 2 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 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 BSI Financial Services Inc. 100% 101 North Second Street Titusville, PA 16354 Commonwealth Trust Credit Life Insurance Company 50% 100 West Clarendon, Suite 800 Phoenix, AZ 85013 EX-23 3 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 30, 1998, appearing in this Annual Report on Form 10-K of First Commonwealth Financial Corporation for the year ended December 31, 1997. /S/Deloitte & Touche LLP Pittsburgh, Pennsylvania March 24, 1998 EX-23 4 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 23.2 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 17, 1997, accompanying the consolidated financial statements incorporated by reference in the Annual Report of First Commonwealth Financial Corporation and Subsidiaries on Form 10K for the year ended December 31, 1997. We hereby consent to the incorporation by reference of said report in the Registration Statement of First Commonwealth Financial Corporation and Subsidiaries on Form S-8 (File No. 33-55687 effective September 29, 1994). /S/Grant Thornton LLP Philadelphia, Pennsylvania March 24, 1998 EX-24 5 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 24.1 - POWER OF ATTORNEY KNOWN ALL ME 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/JOHN J. DOLAN March 19, 1998 John J. Dolan, Sr. Vice President & CFO (1) /S/JOHNSTON A. GLASS March 17, 1998 Johnston A. Glass, Director /S/CHARLES J. SHEFTIC March 17, 1998 Charles J. Sheftic, Director /S/DAVID R. TOMB, JR. March 17, 1998 David R. Tomb, Jr., Senior Vice President, Secretary and Treasurer and Director /S/RONALD C. GEISER March 17, 1998 Ronald C. Geiser, Director /S/JOSEPH E. O'DELL March 17, 1998 Joseph E. O'Dell, President and CEO and Director /S/THOMAS L. DELANEY March 17, 1998 Thomas L. Delaney, Director /S/SUMNER E. BRUMBAUGH March 17, 1998 Sumner E. Brumbaugh, Director /S/E. H. BRUBAKER March 17, 1998 E. H. Brubaker, Director /S/H. H. HEILMAN, JR. March 17, 1998 H. H. Heilman, Jr., Director /S/DAVID L. JOHNSON March 19, 1998 David L. Johnson, Director /S/EDWARD T. COTE March 19, 1998 Edward T. Cote, Director (1) Also Chief Accounting Officer EX-27 6
9 1,000 YEAR YEAR YEAR DEC-31-1997 DEC-31-1996 DEC-31-1995 JAN-01-1997 JAN-01-1996 JAN-01-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 60,109 69,406 62,381 4,985 4,199 8,288 2,880 0 4,800 0 0 0 396,631 244,415 244,193 460,063 459,746 504,509 462,086 457,189 503,568 1,937,744 1,778,130 1,531,174 19,766 19,324 18,152 2,929,315 2,584,638 2,364,307 2,242,478 2,104,783 1,962,760 193,918 15,030 120,774 28,031 27,287 23,236 193,054 40,880 5,261 0 0 0 0 0 0 22,437 22,437 22,437 249,397 238,921 229,839 2,929,315 2,584,638 2,364,307 155,676 138,654 128,582 43,893 43,177 45,600 242 498 1,519 199,811 182,629 175,701 91,486 80,712 73,821 102,753 88,325 82,418 97,058 94,004 93,283 6,929 4,501 4,125 6,686 1,403 (603) 65,909 63,589 62,062 44,063 39,655 37,500 30,534 27,583 25,526 0 0 0 0 0 0 30,534 27,583 25,526 1.40 1.26 1.16 1.39 1.25 1.16 7.92 7.89 8.04 7,952 7,906 7,419 12,097 12,044 7,881 67 280 803 0 0 0 19,324 18,152 17,337 7,318 4,234 4,170 831 905 860 19,766 19,324 18,152 16,557 16,383 12,146 0 0 0 3,209 2,941 6,006
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