-----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, VaK+u/6l0Kg4dDUKBll0G3MOPzWH8lxJdjkXrulPKmhhBa/thiln4nobXHH/K/10 u7YsopL9UDtYjlmJ1R1g7w== 0000712537-99-000012.txt : 19990403 0000712537-99-000012.hdr.sgml : 19990403 ACCESSION NUMBER: 0000712537-99-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251428528 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11138 FILM NUMBER: 99583569 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. BOX 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, 1998 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 22, 1999 Common Stock, $1 Par Value 30,942,973 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 22, 1999), was approximately $606,292,260. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement related to the annual meeting of security holders to be held April 26, 1999 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 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 27 ITEM 8. Financial Statements and Supplementary Data...... 28 ITEM 9. Disagreements on Accounting and Financial Disclosures..................................... 63 PART III ITEM 10. Directors and Executive Officers of the Registrant..................................... 63 ITEM 11. Management Renumeration and Transactions........ 64 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................. 64 ITEM 13. Certain Relationships and Related Transactions.. 64 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 65 Signatures..................................... 67 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business Description of Business First Commonwealth Financial Corporation (the "Corporation") was incorporated as a Pennsylvania business corporation on November 15, 1982 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Corporation operates two chartered banks, First Commonwealth Bank and Southwest Bank. Financial services and insurance products are also provided through First Commonwealth Trust Company and First Commonwealth Insurance Agency. The Corporation also operates through Commonwealth Systems Corporation, a data processing subsidiary and BSI Financial Services Inc., a mortgage banking and loan servicing company. First Commonwealth Bank ("FCB"), a Pennsylvania-chartered banking corporation headquartered in Indiana, Pennsylvania operates through divisions doing business under the following names: NBOC Bank, Deposit Bank, Cenwest Bank, First Bank of Leechburg, Peoples Bank, Central Bank, Peoples Bank of Western Pennsylvania, Unitas Bank and Reliable Bank. On December 31, 1998 the Corporation affiliated, as a result of a statutory merger, with Southwest National Corporation ("SNC") and its wholly-owned subsidiary, Southwest Bank ("Southwest"). SNC was a Pennsylvania-chartered bank holding company headquartered in Greensburg, Pennsylvania. Southwest Bank is a Pennsylvania-chartered, federally insured commercial bank also headquartered in Greensburg, Pennsylvania which traces its origin to 1900. Upon merger, SNC was combined with the Corporation and Southwest Bank became a subsidiary of the Corporation. Through FCB, the Corporation traces its banking origins to 1866. FCB and Southwest ("Subsidiary Banks") conduct business through 96 community banking offices in the counties of Adams (1 office), Allegheny (6), Armstrong (3), Beaver (1), Bedford (4), Blair (8), Cambria (11), Centre (2), Clearfield (6), Elk (3), Franklin (2), Huntingdon (6), Indiana (9), Jefferson (4), Lawrence (6), Somerset (5), Washington (1), and Westmoreland (18). The Subsidiary Banks engage in general banking business and offer a full range of financial services including such general retail banking services as demand, savings and time deposits; mortgage, consumer installment and commercial loans; and credit card loans through MasterCard and VISA. The Subsidiary Banks operate a network of 79 automated teller machines ("ATMs") which permits customers to conduct routine banking transactions 24 hours a day. Of the ATMs, 60 are located on the premises of their main or branch offices and 19 are in remote locations. All the ATMs are part of the MAC network which consists of over 23,000 ATMs owned by numerous banks, savings and loan associations and credit unions located throughout 45 states. The ATMs operated by the Subsidiary Banks are also part of the global MasterCard/Cirrus network which is comprised of more than 300,000 ATMs located in the United States, Canada and 58 other countries and territories, which services over 365 million card holders. Such networks allow the Subsidiary Banks' customers to withdraw cash and in certain cases conduct other banking transactions from ATMs of all participating financial institutions. In addition to funds access through the use of ATMs, the MAC debit card offered to the Subsidiary Banks' deposit customers may be used at 300,000 point of sale terminals on the MAC system as well as being used on the global MasterCard system for the purchase of goods and services. The MAC debit card provides customers with the almost universal acceptability of a credit card combined with the convenience of direct debit to the customers' checking account. 2 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) Description of Business (Continued) First Commonwealth's corporate philosophy is to encourage its subsidiaries to operate as locally-oriented, community-based financial service affiliates, augmented by experienced, centralized support from the Corporation in selected critical areas. This local market orientation is reflected in the Subsidiary Banks' boards of directors and branch banking centers, which generally have advisory boards comprised of local business persons, professionals and other community representatives, that assist the Subsidiary Banks in responding to local banking needs. The Subsidiary Banks concentrate on customer service and business development, while relying upon the support of the Corporation in identifying operational areas that can be effectively centralized without sacrificing the benefits of a local orientation. Primary candidates for centralization are those functions which are not readily visible to customers and those which are critical to risk management. Asset quality review, financial reporting, investment activities, funds management, internal audit, data processing and loan servicing are among the functions which are managed at the holding company level, either directly or through utilization of non-bank subsidiaries as professional resources providers. Commonwealth Systems Corporation ("CSC") was incorporated as a Pennsylvania business corporation in 1984 by the Corporation to function as its data processing subsidiary and it has its principal place of business in Indiana, Pennsylvania. Before August 1984, it had operated as the data processing department of NBOC. CSC provides on-line general ledger accounting services and bookkeeping services for deposit and loan accounts to the Corporation, the Banking Subsidiaries and its other nonbank subsidiaries. CSC also acts as a centralized purchasing agent for the purchase of computer hardware and software products by the Corporation and subsidiaries as well as providing technical support for the installation and use of these products. It competes, principally with data processing subsidiaries of other, mostly larger, banks, on the basis of the price and quality of its services and the speed with which such services are delivered. First Commonwealth Trust Company ("FCTC") was incorporated on January 18, 1991 as a Pennsylvania chartered trust company to render general trust services. The trust departments of subsidiary banks were combined to form FCTC, and the corporate headquarters are located in Indiana, Pennsylvania. Upon the Corporation's merger with Southwest National, the trust department of Southwest Bank was also merged into FCTC. FCTC has eight branch offices in the service areas of the Subsidiary Banks and offers personal and corporate trust services, including administration of estates and trusts, individual and corporate investment management and custody services and employee benefit trust services. 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 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 1,500 persons (full- time equivalents) at December 31, 1998. On June 1, 1989 Commonwealth Trust Credit Life Insurance Company ("Commonwealth Trust") began operations. The Corporation owns 50% of the voting common stock of Commonwealth Trust. Commonwealth Trust provides reinsurance for credit life and credit accident and health insurance sold by the subsidiaries of the two unrelated holding company owners under a joint venture arrangement whereby the net income derived from such reinsurance inures proportionally to the benefit of the holding company selling the underlying insurance to its banks' customers. 3 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. Business (Continued) The Corporation does not engage in any significant business activities other than holding the stock of its subsidiaries. The Corporation does not at present have any plans to expand or modify its business or that of its subsidiaries, other than as described herein. Nevertheless, it will be receptive to and may actively seek out mergers and acquisitions in the event opportunities which management considers advantageous to the development of the Corporation's business arise, and may otherwise expand or modify its business as management deems necessary to respond to changing market conditions or the laws and regulations affecting the business of banking. Competition The Subsidiary Banks, FCTC, BSI and FCIA face intense competition, both from within and without their service areas, in all aspects of business. The Subsidiary Banks compete for deposits, in such forms as checking, savings and NOW (negotiable order of withdrawal) accounts, MMDA (money market deposit accounts) and certificates of deposit, and in making consumer loans and loans to smaller businesses, with numerous other commercial banks and savings banks doing business within their service area. With respect to loans to larger businesses the Subsidiary Banks also compete with much larger banks located outside of their service area. The Subsidiary Banks also compete, primarily in making consumer loans and for deposits, with state and federally chartered savings and loan associations and with credit unions. In recent years the Subsidiary Banks have encountered significant competition for deposits from money market funds and institutions that offer annuities located throughout the United States. Money market funds pay dividends to their shareholders (which are the equivalent of the interest paid by banks on deposits) and they are able to offer services and conveniences similar to those offered by the Subsidiary Banks. Annuities accumulate interest on the amounts deposited over a predetermined time period. The depositor is then entitled to withdraw his funds for a fixed period of time or until death. The effect of such competition has been to increase the costs of the rest of deposits, which provide the funds with which loans are made. In addition to savings and loan associations and credit unions, the Subsidiary Banks also compete for consumer loans with local offices of national finance companies and finance subsidiaries of automobile manufacturers and with national credit card companies such as MasterCard and VISA, whose cards, issued through financial institutions, are held by consumers throughout their service area. The Subsidiary Banks believe that the principal means by which they compete for deposits and consumer and smaller commercial loans are the number and desirability of the locations of their offices and ATMs, the sophistication and quality of their services and the prices (primarily interest rates) of their services. Additionally, the Subsidiary Banks intend to remain competitive by offering financial services that target specific customer needs. Examples of such specialized products include the "Sentry CD Watch" which provides certificate of deposit rates of competitors to members of the Subsidiary Banks' "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 the Subsidiary Banks' branch offices. The Corporation will continue to enhance its customer delivery system in the future as the Internet is utilized to provide customers access to product information and on-line banking. 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 the Corporation of such percentage of voting shares or substantially all the assets of any bank located in any state other than Pennsylvania unless the laws of such state specifically authorize such an acquisition. The Bank Holding Company Act generally prohibits a bank holding company from engaging in a non-banking business or acquiring direct or indirect ownership or control of more that 5% of the outstanding voting shares of any non- banking corporation subject to certain exceptions, the principal exception being where the business activity in question is determined by the Federal Reserve Board to be closely related to banking or to managing or controlling banks to be a proper incident thereto. The Bank Holding Company Act does not place territorial restrictions on the activities of such banking related subsidiaries of bank holding companies. Under the Federal Reserve Act, subsidiary banks of a bank holding company are subject to certain restrictions on extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof, or acceptance of such stock or securities as collateral for loans to any one borrower. A bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or the furnishing of property or services. Under the Pennsylvania Banking Code, there is no limit on the number of Pennsylvania banks that may be owned or controlled by a Pennsylvania bank holding company. Subsidiary Banks FCB and Southwest are Pennsylvania-chartered banks and are subject to the supervision of and regularly examined by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation ("FDIC"), and subject to certain regulations of the Federal Reserve Board. The areas of operation subject to regulation by Federal and Pennsylvania laws, regulations and regulatory agencies include reserves against deposits, maximum interest rates for specific classes of loans, truth-in-lending disclosures, permissible types of loans and investments, trust operations, mergers and acquisitions, issuance of securities, payment of dividends, Community Reinvestment Act evaluations, mandatory external audits, establishment of branches and other aspects of operations. Under the Pennsylvania Banking Code, a state bank located in Pennsylvania may establish branches anywhere in the state. 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, 1998 enabling laws have been passed so that the required reciprocity presently exists with approximately 34 states, of which the following 18 are east of the Mississippi River: Connecticut, Delaware, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Rhode Island, Tennessee, Vermont and West Virginia. A similar law is applicable to savings associations and savings and loan holding companies. It is difficult to determine the precise effects that reciprocal regional interstate banking will have on the Corporation in the future, but the law has increased, and as reciprocity becomes effective for additional states will increase further, the number of potential buyers for Pennsylvania banks and bank holding companies. The law also permits Pennsylvania bank holding companies and Pennsylvania savings and loan holding companies that desire to expand outside Pennsylvania to acquire banks, savings institutions and bank holding companies located in jurisdictions with which Pennsylvania has reciprocity. Effects of Governmental Policies The business and earnings of the Corporation are affected not only by general economic conditions, but also by the monetary and fiscal policies of the United States Government and its agencies, including the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open market operations in United States government securities, changes in the discount rate on borrowings by member banks and savings institutions from the Federal Reserve System and changes in reserve requirements against bank and savings institution deposits. These instruments, together with fiscal and economic policies of various governmental entities, influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans, received on investments or paid for deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of bank holding companies and their subsidiary banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and Pennsylvania economies and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels and loan demand or the effect of such changes on the business and earnings of the Corporation or its subsidiaries. 6 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 2. PROPERTIES The Corporation's principal office is located in the old Indiana County Courthouse complex. This certified Pennsylvania and national historic landmark was built in 1870 and restored by NBOC in the early 1970s. The Corporation, NBOC, CSC and FCB occupy this grand structure, which provides 32,000 square feet of floor space, under a 25-year restoration lease agreement with Indiana County, which NBOC entered into in 1973 and renewed during 1998 for an additional 25 years. Under the lease, NBOC is obligated to pay all taxes, maintenance and insurance on the building and to restore it in conformity with historic guidelines. In order to support future expansion needs and centralization of various functional areas such as loan processing, marketing, and accounting, the Corporation also owns two additional structures, free of all liens and encumbrances. These facilities currently provide office space for the Corporation, CSC, FCTC, FCB and FCIA. The Subsidiary Banks have 96 banking facilities of which 27 are leased and 69 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 12,000. 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 1998 First Quarter $34.250 $27.313 $0.220 Second Quarter $29.750 $26.313 $0.220 Third Quarter $30.563 $23.000 $0.220 Fourth Quarter $26.813 $23.000 $0.230 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 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, 1998 1997 1996 1995 1994 Interest income....................... $283,421 $254,772 $235,188 $227,182 $207,368 Interest expense...................... 148,282 124,427 109,189 103,019 86,133 Net interest income................. 135,139 130,345 125,999 124,163 121,235 Provision for possible credit losses.. 15,049 10,152 6,301 5,575 4,456 Net interest income after provision for possible credit losses........ 120,090 120,193 119,698 118,588 116,779 Securities gains (losses)............. 1,457 6,825 1,599 (603) 5,536 Other operating income................ 24,881 18,716 17,359 15,996 15,468 Merger and related charges............ 7,915 -0- -0- -0- -0- Other operating expenses.............. 92,286 88,857 85,299 83,689 82,680 Income before taxes and extra- ordinary items................. 46,227 56,877 53,357 50,292 55,103 Applicable income taxes............... 12,229 17,338 16,164 15,728 17,761 Net income before extraordinary items.......................... 33,998 39,539 37,193 34,564 37,342 Extraordinary items (less applicable taxes of $336)...................... (624) -0- -0- -0- -0- Net income............................ $ 33,374 $ 39,539 $ 37,193 $ 34,564 $ 37,342 Per Share Data Net income before extraordinary items.............................. $1.11 $1.28 $1.19 $1.11 $1.18 Extraordinary items................. (0.02) 0.00 0.00 0.00 0.00 Net income.......................... $1.09 $1.28 $1.19 $1.11 $1.18 Dividends declared.................. $0.89 $0.82 $0.74 $0.66 $0.58 Average shares outstanding.......... 30,666,786 30,835,949 31,155,043 31,236,202 31,689,718 Per Share Data Assuming Dilution Net income before extraordinary items.............................. $1.10 $1.28 $1.19 $1.10 $1.18 Extraordinary items................. (0.02) 0.00 0.00 0.00 0.00 Net income.......................... $1.08 $1.28 $1.19 $1.10 $1.18 Dividends declared.................. $0.89 $0.82 $0.74 $0.66 $0.58 Average shares outstanding.......... 30,833,013 30,922,837 31,190,895 31,281,960 31,763,564 At End of Period Total assets........................ $4,096,789 $3,668,557 $3,339,996 $3,075,123 $3,020,204 Investment securities............... 1,525,332 1,015,798 901,411 960,588 1,018,228 Loans and leases, net of unearned income............................ 2,374,850 2,436,337 2,236,523 1,935,938 1,790,684 Allowance for possible credit losses 32,304 25,932 25,234 23,803 22,375 Deposits............................ 2,931,131 2,884,343 2,756,111 2,586,545 2,493,135 Long-term debt...................... 630,850 193,054 52,737 7,168 9,549 Shareholders' equity................ 355,405 354,323 341,522 329,486 293,237 Key Ratios Return on average assets............ 0.85% 1.15% 1.17% 1.14% 1.25% Return on average equity............ 9.13% 11.31% 11.07% 11.02% 12.61% Net loans to deposit ratio.......... 79.92% 83.57% 80.23% 73.93% 70.93% Dividends per share as a percent of net income per share.............. 81.65% 64.06% 62.18% 59.46% 49.15% Average equity to average assets ratio............................. 9.28% 10.16% 10.53% 10.38% 9.93%
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, 1998, 1997 and 1996 and are intended to supplement, and should be read in conjunction with, the consolidated financial statements and related footnotes. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. The Corporation acquired Southwest National Corporation and its subsidiary ("Southwest") effective December 31, 1998. The merger was accounted for as a pooling of interests and accordingly, all financial statements have been restated as though the merger had occurred at the beginning of the earliest period presented. During the fourth quarter of 1997 the Corporation formed First Commonwealth Insurance Agency ("FCIA") as a subsidiary of First Commonwealth Bank ("FCB"), a commercial banking subsidiary of the Corporation. FCIA began marketing a wide range of insurance and annuity products to the Corporation's retail and commercial customers beginning January 1, 1998. 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 1998 was $33.4 million, a decrease of $6.1 million from the 1997 level of $39.5 million and compared to $37.2 million reported in 1996. Basic earnings per share decreased $0.19 per share in 1998 to $1.09. The decrease in net income and basic earnings per share for 1998 was primarily the result of merger and other related charges of $7.9 million incurred during 1998. These charges include merger expenses for the acquisition of Southwest National Corporation, early retirement and postretirement benefit accruals and premises and equipment expenses to standardize depreciation methods. On a net of tax basis the impact of these merger and other related charges decreased earnings per share by $0.19 in 1998. Net income and basic earnings per share for 1998 also reflected a pre-tax decrease of $0.17 as a result of lower securities gains during 1998 compared to 1997 levels. Net income and basic earnings per share for 1998 were impacted favorably by increases in net interest margin and other income and negatively impacted by an increase in the provision for possible credit losses. Extraordinary items for 1998 resulted from a single transaction whereby the Corporation incurred a cost of $960 thousand for the prepayment of FHLB term borrowings. This transaction was executed as part of the Corporation's repositioning of its balance sheet to reduce exposure to declining interest rates. The increase in basic earnings per share of $0.09 generated during 1997 reflected increases in net interest income and securities gains. Net income and basic earnings per share for 1997 were negatively impacted by increases in the provision for possible credit losses and salary and benefit expenses. Return on average assets was 0.85% and return on average equity was 9.13% during 1998 compared to 1.15% and 11.31%, respectively for 1997. Return on average assets was 1.17% during 1996 while return on average equity was 11.07%. 10 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) The following is an analysis of the impact of changes in net income on earnings per share: 1998 1997 vs. vs. 1997 1996 Net income per share, prior year $1.28 $1.19 Increase (decrease) from changes in: Net interest income 0.18 0.18 Provision for possible credit losses (0.16) (0.13) Security transactions (0.17) 0.17 Other income 0.21 0.05 Salaries and employee benefits (0.06) (0.11) Occupancy and equipment costs 0.01 (0.02) Merger and other related charges (0.26) 0.00 Other expenses (0.08) (0.01) Provision for income taxes 0.16 (0.04) Extraordinary items, net of tax (0.02) 0.00 Net income per share $1.09 $1.28 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 $135.1 million in 1998 compared to $130.3 million in 1997 and $126.0 million in 1996. 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, 1998. 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) 1998 1997 1996 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 $ 3,692 $ 230 6.23% $ 4,663 $ 236 5.06% $ 7,504 $ 419 5.58% Investment securities 1,271,319 78,205 6.43 931,017 55,490 6.24 950,684 56,006 6.16 Federal funds sold 35,521 1,893 5.33 12,653 689 5.45 22,752 1,207 5.31 Loans (b) (c), net of unearned income 2,439,436 203,093 8.43 2,330,657 198,357 8.60 2,060,196 177,556 8.69 Total interest- earning assets 3,749,968 283,421 7.72 3,278,990 254,772 7.91 3,041,136 235,188 7.87 Noninterest-earning assets: Cash 78,999 77,259 81,115 Allowance for credit losses (27,388) (25,510) (24,827) Other assets 138,114 110,112 94,163 Total noninterest- earning assets 189,725 161,861 150,451 Total Assets $3,939,693 $3,440,851 $3,191,587 Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits (d) $ 341,835 $ 7,579 2.22% $ 271,321 $ 5,042 1.86% $ 265,964 $ 4,093 1.54% Savings deposits (d) 715,814 21,379 2.99 737,725 22,752 3.08 721,509 20,792 2.88 Time deposits 1,530,491 85,002 5.55 1,517,972 84,806 5.59 1,387,899 76,301 5.50 Short-term borrowings 195,334 10,214 5.23 156,470 8,108 5.18 132,527 6,777 5.11 Long-term debt 430,677 24,108 5.60 65,820 3,719 5.65 20,317 1,226 6.03 Total interest- bearing liabilities 3,214,151 148,282 4.61 2,749,308 124,427 4.53 2,528,216 109,189 4.32 Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits (d) 328,720 311,304 299,285 Other liabilities 31,177 30,541 28,073 Shareholders' equity 365,645 349,698 336,013 Total noninterest- bearing funding sources 725,542 691,543 663,371 Total Liabilities and Shareholders' Equity $3,939,693 $3,440,851 $3,191,587 Net Interest Income and Net Yield On Interest- earning Assets $135,139 3.77% $130,345 4.12% $125,999 4.28% (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 1998 and 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 1997 levels as volumes increased. Average interest-earning assets increased $471.0 million while average interest-bearing liabilities increased $464.8 million in 1998. Average loans increased $108.8 million in 1998 and were supported by deposit growth and short-term borrowings. Average investments increased $340.3 million and were funded by long-term Federal Home Loan Bank borrowings. Asset yields, on a tax-equivalent basis, decreased 19 basis points (0.19%) during 1998 to 7.72% from 7.91% reported in 1997 and compared to 7.87% reported in 1996. The decline in loan yields which began in the fourth quarter of 1995 has continued throughout 1997 and 1998. Loan yields declined 17 basis points (0.17%) during 1998 to 8.43% from 8.60% reported for 1997 and compared to 8.69% during 1996. The 1998 period reflected decreased yields in all loan categories except personal revolving credit loans which reflected an increase of 213 basis points (2.13%) over 1997 levels. The 1998 decline in loan yields included declines of 18 basis points (0.18%) for mortgage loans, 34 basis points (0.34%) for installment loans and 49 basis points (0.49%) for home equity loans. The mortgage portfolio continues to be impacted by loan refinancings and loans maturing at higher interest rates than current market rates. Loan yields on innovative loan products introduced in previous years which bear lower introductory interest rates began to increase during 1998 as these products aged and introductory interest rates were no longer offered on aged loans but since many of these loans are still at introductory rates these products continue to generate lower yields than the mortgage loan portfolio as a whole. Although loan yields declined during 1998, interest income on loans increased $4.7 million over 1997 levels as a result of increases due to volume of $9.3 million which were partially offset by decreases due to rate of $4.6 million. Interest income on investments increased $22.7 million during 1998 primarily as a result of increases due to volume of $22.2 million and increases due to rate of $1.3 million for U.S. government agency securities. Average balances of U.S. government agency securities for 1998 increased $348.6 million over 1997 averages as part of a capital management leveraging strategy whereby borrowings from the Federal Home Loan Bank classified as long-term debt were invested in U.S. government agency securities. Yields on investments for the 1998 period reflected an increase of 19 basis points (0.19%) over 1997 yields and included an increase on U.S. government agency securities of 20 basis points (0.20%) for the 1998 period compared to 1997. Although prepayments of mortgage backed securities ("MBS") continued to increase during 1998 over 1997 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 1998 increased 8 basis points (0.08%) over 1997 costs of 4.53% and compared to costs of 4.32% for 1996. Interest on deposits increased $1.4 million in 1998 and included increases in interest-bearing demand deposits of $2.5 million which were partially offset by decreases in interest on savings accounts of $1.4 million compared to 1997 levels. Average interest-bearing demand deposits for 1998 increased $70.5 million over 1997 averages. This increase in interest-bearing demand deposits for 1998 occurred primarily in a secured cash manager product utilized by municipalities. This secured cash manager product allows the municipality to sweep excess balances from noninterest-bearing accounts into an interest- bearing account which offers higher interest rates than traditional N.O.W. accounts. 13 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis (Continued) Interest expense on short-term borrowings increased $2.1 million during 1998 primarily as a result of increases in average borrowings of $38.9 million over 1997 averages. Increases in interest expense on long-term debt of $20.4 million during 1998 were primarily a result of increases in average borrowings of $364.9 million over 1997 averages. The long-term debt increase for 1998 was a result of borrowings from the Federal Home Loan Bank with maturities of up to 10 years to be utilized as part of the above mentioned capital management leveraging strategy. The average spread of this leverage strategy was approximately 1.13% during the 1998 period. During 1998 interest income before taxes on these investments exceeded the funding costs by $4.9 million. Net interest margin (net interest income, on a tax-equivalent basis as a percentage of average earning assets), was 3.77% during 1998 compared to 4.12% in 1997 and 4.28% in 1996. 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) 1998 Change from 1997 1997 Change from 1996 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 $ (6) $ (49) $ 43 $ (183) $ (158) $ (25) Securities 22,715 21,241 1,474 (516) (1,211) 695 Federal funds sold 1,204 1,246 (42) (518) (536) 18 Loans 4,736 9,351 (4,615) 20,801 23,514 (2,713) Total interest income 28,649 31,789 (3,140) 19,584 21,609 (2,025) Interest-bearing liabilities: Deposits 1,360 1,334 26 11,414 7,701 3,713 Short-term borrowings 2,106 2,014 92 1,331 1,224 107 Long-term debt 20,389 20,613 (224) 2,493 2,747 (254) Total interest expense 23,855 23,961 (106) 15,238 11,672 3,566 Net interest income $ 4,794 $ 7,828 $(3,034) $ 4,346 $ 9,937 $(5,591)
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 $15.0 million in 1998 compared to $10.2 million in 1997 and $6.3 million in 1996. This brought the allowance for possible credit losses to $32.3 million at December 31, 1998, for a ratio of 1.36% of actual loans outstanding. Although net charge-offs for 1998 reflect a decrease of $777 thousand over 1997 levels, net charge-offs have not returned to historic levels, therefore the additional provision of $4.2 million in the fourth quarter of 1998 reflects changing economic conditions. Net charge-offs for 1998 reflected decreases in consumer installment and revolving credit loans of $839 thousand and commercial loans not secured by real estate of $253 thousand which were partially offset by increases in net charge-offs of auto leases of $329 thousand. Net charge-offs against the allowance for possible credit losses were $8.7 million, or 0.36% of average total loans in 1998. This compared to $9.5 million in 1997 and $4.9 million in 1996. Net charge- offs were 0.41% and 0.24% of average total loans during 1997 and 1996, respectively. Net charge-offs as a percent of average total loans exceed peer averages when comparing the Corporation results at December 31, 1998 to the most recent peer averages from September 30, 1998. The peer group was defined as all bank holding companies in the country with assets ranging between $3 billion and $10 billion. Although the allowance for possible credit losses as a percentage of average loans outstanding is below peer averages the additional provision recorded in the fourth quarter of 1998 brings the ratio closer to peer when comparing the Corporation's 14 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis ratio from December 31, 1998 to the most recent peer averages from September 30, 1998. For an analysis of credit quality, see the "Credit Review" section of this discussion. The following table presents an analysis of the consolidated allowance for possible credit losses for the five years ended December 31, 1998 (dollars in thousands):
Summary of Loan Loss Experience 1998 1997 1996 1995 1994 Loans outstanding at end of year $2,374,850 $2,436,337 $2,236,523 $1,935,938 $1,790,684 Average loans outstanding $2,439,436 $2,330,657 $2,060,196 $1,846,507 $1,672,546 Allowance for possible credit losses: Balance, beginning of year $ 25,932 $ 25,234 $ 23,803 $ 22,375 $ 20,934 Loans charged off: Commercial, financial and agricultural 1,513 1,473 633 1,188 1,279 Loans to individuals 7,293 8,022 5,069 3,717 3,059 Real estate-construction -0- -0- -0- -0- -0- Real estate-commercial 812 664 440 218 23 Real estate-residential 690 819 195 481 266 Lease financing receivables 319 -0- 26 52 52 Total loans charged off 10,627 10,978 6,363 5,656 4,679 Recoveries of loans previously charged off: Commercial, financial and agricultural 462 223 263 159 291 Loans to individuals 1,328 1,218 1,033 1,067 1,030 Real estate-construction -0- -0- -0- -0- -0- Real estate-commercial 70 13 83 56 249 Real estate-residential 87 57 109 128 87 Lease financing receivables 3 13 5 99 7 Total recoveries 1,950 1,524 1,493 1,509 1,664 Net loans charged off 8,677 9,454 4,870 4,147 3,015 Provision charged to expense 15,049 10,152 6,301 5,575 4,456 Balance, end of year $ 32,304 $ 25,932 $ 25,234 $ 23,803 $ 22,375 Ratios: Net charge-offs as a percentage of average loans outstanding 0.36% 0.41% 0.24% 0.22% 0.18% Allowance for possible credit losses as a percentage of average loans outstanding 1.32% 1.11% 1.22% 1.29% 1.34%
Net securities gains decreased $5.4 million in 1998 from $6.8 million reported in 1997 and compared to $1.6 million in 1996. The securities gains during 1998 resulted in part from the third and fourth quarter sales of floating collateralized mortgage obligations classified as securities "available for sale" having book values of $87.9 million and $16.1 million respectively, which resulted in security gains of $1.7 million during the third quarter and security losses of $803 thousand during the fourth quarter. These securities were sold to reduce the exposure to accelerated prepayments as interest rates were expected to fall. The $89.6 million proceeds from the sale of securities in the third quarter of 1998 were used to reduce outstanding Federal funds purchased while the $15.3 million proceeds in the fourth quarter were reinvested in higher yielding municipal securities. The 1998 securities gains also included the first quarter sale of U.S. Treasury securities classified as securities "available for sale" having a book value of $45.8 million with the proceeds being reinvested in mortgage backed and other U.S. government agency securities with similar average expected maturities. Securities losses of $586 thousand were incurred during the fourth quarter of 1998 primarily as a result of the sale of mutual funds classified as equity securities having a book value of $5.8 million. Additional security gains were incurred during the fourth quarter of 1998 as a result of the sale of Pennsylvania bank stocks having a book value of $5.2 million. 15 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis The securities gains during 1997 and 1996 resulted primarily from the sale of investments in Pennsylvania bank stocks. 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. Trust income reflected an increase in 1998 of $830 thousand over 1997 levels as the book value of assets managed continued to increase. The 1998 increase in trust income occurred primarily in fees from employee benefit accounts, agency/custodial accounts and retail mutual fund commissions and trailer fees. Service charges on deposits decreased by $158 thousand during 1998 but are expected to increase during 1999 as fee schedules for the Corporation's subsidiary banks are evaluated and standardized. Service charges on deposits increased during 1997, primarily as a result of changes in the fee structure and introduction of a debit card product at Southwest Bank. Other income increased $5.5 million in 1998 to $11.4 million from $5.9 million reported in 1997 and can be compared to $5.4 million in 1996. Included in the increase in other revenue for 1998 were increases in gains on sales of assets of $2.4 million over 1997 levels. The Corporation sold $52.5 million of 1-4 family residential mortgage loans during the fourth quarter of 1998 which resulted in a gain of $1.3 million. The Corporation mitigated prepayment risk through the sale of mortgage loans bearing higher interest rates than current market rates and reduced interest rate risk through the sale of mortgage loans bearing interest rates which were lower than current market rates. As a result of branch analysis including the evaluation of the potential sale or consolidation of branches competing in the same market area, the Corporation sold two of its branches located in State College, Pennsylvania. The premium on sale of $10.1 million of deposits from the State College branches resulted in a gain of $950 thousand in the fourth quarter of 1998. Other revenue continued to be favorably impacted by income from the increase in cash surrender value of bank owned life insurance which increased by $1.2 million during 1998. Insurance commissions, primarily those generated from FCIA increased $288 thousand during 1998 compared to 1997. Charges for non-customer use of the Corporation's ATMs continued to favorably impact other revenue, reflecting an increase of $607 thousand for 1998 over 1997 levels. Additional increases in other revenue for 1998 occurred in MAC and debit card income, charge card merchant discount and charge card equipment rental compared to 1997 revenues. Total other operating expenses increased $11.3 million to $100.2 million in 1998 and compared to $88.9 million and $85.3 million in 1997 and 1996, respectively. Employee costs were $48.7 million for 1998, reflecting an increase of $1.6 million over $47.1 million reported in 1997 and compared to $44.1 million reported in 1996. The most notable increase in employee benefit costs for 1998 over 1997 levels was an increase in health insurance costs due to a rate increase. Salary and benefit increases of $3.0 million for 1997 compared to 1996 reflected merit increases, an increase in full time equivalent employees and the inclusion of BSI for twelve months of 1997. Decreases in deferred loan origination costs also increased employee costs for 1997 over 1996 levels. Although employee costs in dollars has increased, employee costs as a percentage of average assets has continued to decline to 1.24% for 1998 from 1.37% in 1997 and 1.38% in 1996. Salary levels are generally maintained through attrition management programs. Net occupancy and furniture and equipment costs decreased $373 thousand during 1998 after reflecting an increase of $621 thousand during 1997. All categories of occupancy expense reflected decreases during 1998 while furniture and equipment expense included decreases in maintenance and repairs which were partially offset by an increase in depreciation during 1998. Net occupancy and furniture and equipment expense increases for 1997 resulted primarily from increases in building rental expense, building repairs, and depreciation. These 1997 increases were primarily the result of the construction of new branches during 1996 and 1997 as well as remodeling of existing branches. 16 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Outside data processing expenses were $3.1 million for 1998 compared to $3.0 million and $3.1 million for 1997 and 1996 respectively. Outside data processing expenses would be expected to decline in the future when outsourced processing for Southwest Bank is converted to the Corporation's data processing subsidiary. Pennsylvania shares tax expense increased $201 thousand during 1998 and $129 thousand in 1997 as shareholder's equity of subsidiary banks continued to rise. FDIC expenses which are included in other operating expenses, decreased $860 thousand for 1997 and $1.8 million for 1996. Merger expenses incurred during the acquisition of Southwest National Corporation for legal, accounting, printing, filing and other professional services total $1.6 million and were expensed during the fourth quarter of 1998. As part of the evaluation of appropriate staffing levels for the Corporation after inclusion of Southwest, an early retirement plan was offered to employees during the fourth quarter of 1998. Salary and benefit costs of the early retirement plan in the amount of $4.7 million are included in merger and other related charges for 1998, as approximately 5% of employees took advantage of this opportunity. The success of the early retirement plan accelerated the process of right-sizing the Corporation beyond normal attrition management by adjusting employment levels quickly while continuing the Corporation's tradition of not laying off employees due to merger activity. In anticipation of the merger of Southwest benefit plans into those of the Corporation in the near future, Southwest curtailed their postretirement benefit plan during the fourth quarter of 1998. An additional accrual adjustment of $1.1 million related to this curtailment is included in merger and other related charges for 1998. Additional merger and other related charges of $462 thousand were incurred during 1998 to standardize depreciation for Southwest to that of the Corporation and to write-off signs and supplies that become obsolete as a result of the merger. Other operating expenses increased $1.9 million during 1998 to $24.5 million and compared to $22.6 million reported in 1997 and $22.7 million reported in 1996. Lease residual insurance costs, operational losses and charge-offs and software depreciation and maintenance expenses for 1998 reflected increases of $192 thousand, $403 thousand and $325 thousand respectively over 1997 levels. Loan processing expenses increased $353 thousand for 1998 compared to 1997, while accelerated prepayment speeds for loans in the fourth quarter of 1998 resulted in an increase in the amortization of purchased mortgage servicing rights of $336 thousand over 1997 amortization. Other professional fees for 1998 increased $753 thousand over amounts recorded for 1997. Outside professionals were contracted under limited engagements to review the Corporation's asset/liability management model, analyze fee structures and recommend modifications and to provide research and consulting services for marketing, customer profitability analysis and branch automation initiatives. It is anticipated that the use of outside professionals for these types of limited engagements will decline in the future as both Southwest and the Corporation benefit from the combined resources and talents available as a result of the merger. Other professional fees for 1998 also reflected increases due to the inclusion of FCIA expenses for the 1998 period. Income tax expense was $12.2 million during 1998 representing a decrease of $5.1 million over the 1997 total of $17.3 million and compared to $16.2 million in 1996. The decrease in income tax expense for 1998 resulted primarily from an increase in tax-free income and a decrease in income before taxes due to early retirement and other merger related charges incurred during 1998. Income tax expense increased $1.1 million during 1997. The Corporation's effective tax rate was 26.5% for 1998 compared to 30.5% for 1997 and 30.3% for 1996. The decrease in the Corporation's effective tax rate for 1998 resulted primarily from an increase in tax-free income, including income from tax-free investment securities and bank owned life insurance. 17 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Liquidity Liquidity is a measure of the Corporation's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from deposits (primary source) and the maturity or repayment of earning assets, such as securities and loans. As an additional secondary source, short-term liquidity needs may be provided through the use of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements, and borrowings from the Federal Reserve Bank. Additionally, the banking subsidiaries are members of the Federal Home Loan Bank and may borrow under overnight and term borrowing arrangements. The sale of earning assets may also provide an additional source of liquidity. The Corporation'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 1998, it could become more consequential in the future. Core deposits increased $76.7 million in 1998 while total deposits increased $46.8 million for 1998. Non- core deposits, which are time deposits in denominations of $100 thousand or more represented 10.21% of total deposits at December 31, 1998, down from 11.42% of total deposits at December 31, 1997. Non-core deposits increased by $43.2 million in 1997 primarily as a result of an increase in public funds. Time deposits of $100 thousand or more at December 31, 1998, 1997 and 1996 had remaining maturities as follows:
Maturity Distribution of Large Certificates of Deposit (Dollar Amounts in Thousands) 1998 1997 1996 Amount Percent Amount Percent Amount Percent Remaining Maturity: 3 months or less $151,121 50% $ 92,481 28% $ 96,314 34% Over 3 months through 6 months 40,363 14 64,874 20 41,404 15 Over 6 months through 12 months 27,546 9 53,428 16 49,942 17 Over 12 months 80,382 27 118,524 36 98,431 34 Total $299,412 100% $329,307 100% $286,091 100%
Net loans decreased $67.9 million during 1998 as consumer installment and real estate loans secured by residential properties decreased by $42.4 million and $38.5 million respectively compared to year-end 1997. The reduction in residential real estate loans was the result of the sale of mortgage loans including the sale of $52.5 million during the fourth quarter of 1998. As discussed previously, the sale of these loans allowed the Corporation to reduce interest rate and prepayment risk. Although not reflected in year-end balances, the volume of residential mortgage loans originated during 1998 remained strong. New mortgage loan product offerings scheduled for 1999 are expected to have a favorable impact on loan volumes. The reduction in loans to individuals during 1998 was due in part to a decrease in indirect auto loans at Southwest. Competitive rates and aggressive marketing programs for loans to individuals including indirect auto lending at Southwest are planned for 1999. 18 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Below is a schedule of loans by classification for the five years ended December 31, 1998.
Loans by Classification (Dollar Amounts in Thousands) 1998 1997 1996 1995 1994 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Commercial, financial, agricultural and other $ 377,733 16% $ 363,699 15% $ 316,550 14% $ 254,311 13% $ 218,035 12% Real estate-construction 33,097 1 35,308 1 39,120 2 32,914 2 34,204 2 Real estate-commercial 387,166 16 384,794 16 356,106 16 347,543 18 321,238 17 Real estate-residential 1,009,903 42 1,048,405 43 941,147 41 801,306 40 765,822 42 Loans to individuals 517,907 22 569,742 23 578,204 25 519,949 26 467,518 25 Net leases 56,423 3 51,245 2 36,329 2 24,190 1 30,498 2 Gross loans and leases 2,382,229 100% 2,453,193 100% 2,267,456 100% 1,980,213 100% 1,837,315 100% Unearned income (7,379) (16,856) (30,933) (44,275) (46,631) Total loans, and leases net of unearned income $2,374,850 $2,436,337 $2,236,523 $1,935,938 $1,790,684
An additional source of liquidity is marketable securities that the Corporation holds in its investment portfolio. These securities are classified as "securities available for sale." While the Corporation does not have specific intentions to sell these securities, they have been designated as "available for sale" because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of December 31, 1998, securities available for sale had an amortized cost of $1.0 billion and an approximate fair value of $1.0 billion. Gross unrealized gains were $5.6 million and gross unrealized losses were $2.1 million. Based upon the Corporation's historical ability to fund liquidity needs from other sources, the current available for sale portfolio is deemed to be more than adequate, as the Corporation does not anticipate a need to liquidate the investments until maturity. Below is a schedule of the contractual maturity distribution of securities held to maturity and securities available for sale at December 31, 1998.
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 $ 2,023 $ 2,556 $ -0- $ 4,579 6.41% After 1 but within 5 years 66,769 24,192 11,728 102,689 6.33 After 5 but within 10 years 180,376 27,085 358 207,819 6.17 After 10 years 80,929 86,680 -0- 167,609 6.48 Total $330,097 $140,513 $12,086 $482,696 6.32%
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 $ 22,717 $ 1,074 $ 529 $ 24,320 5.51% After 1 but within 5 years 129,112 10,877 380 140,369 6.18 After 5 but within 10 years 104,751 10,435 34,819 150,005 6.36 After 10 years 665,834 13,839 44,749 724,422 6.61 Total $922,414 $36,225 $80,477 $1,039,116 6.49% *Yields are calculated on a tax-equivalent basis.
19 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Interest Sensitivity The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances. While no single number can accurately describe the impact of changes in interest rates on net interest income, interest rate sensitivity positions, or "gaps" when measured over a variety of time periods may be helpful. An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period. If interest-sensitive assets ("ISA") exceeds interest-sensitive liabilities ("ISL") during a prescribed time period, a positive gap results. Conversely, when ISL exceeds ISA during a time period, a negative gap results. A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively when interest rates fall during the time period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes. In other words, as interest rates fall, a negative gap should tend to produce a positive effect on earnings and when interest rates rise, a negative gap should tend to affect earnings negatively. The primary components of ISA include adjustable rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and short-term borrowings. The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated as of December 31, 1998 and 1997 (Dollar Amounts in Thousands):
1998 Cumulative 0-90 Days 91-180 Days 181-365 Days 0-365 Days Loans $ 765,948 $168,297 $293,082 $1,227,327 Investments 59,942 87,042 149,497 296,481 Other interest-earning assets 38,048 4,120 6,207 48,375 Total interest-sensitive assets 863,938 259,459 448,786 1,572,183 Certificates of deposit 359,487 323,760 318,282 1,001,529 Other deposits 1,094,125 -0- -0- 1,094,125 Borrowings 142,509 1,085 2,413 146,007 Total interest-sensitive liabilities 1,596,121 324,845 320,695 2,241,661 Gap $ (732,183) $(65,386) $128,091 $ (669,478) ISA/ISL 0.54 0.80 1.40 0.70 Gap/Total assets 17.87% 1.60% 3.13% 16.34%
1997 Cumulative 0-90 Days 91-180 Days 181-365 Days 0-365 Days Loans $1,010,147 $153,279 $277,296 $1,440,722 Investments 68,650 86,001 126,173 280,824 Other interest-earning assets 157,721 5,214 10,043 172,978 Total interest-sensitive assets 1,236,518 244,494 413,512 1,894,524 Certificates of deposit 341,898 214,522 310,138 866,558 Other deposits 1,013,190 -0- -0- 1,013,190 Borrowings 216,721 1,441 1,725 219,887 Total interest-sensitive liabilities 1,571,809 215,963 311,863 2,099,635 Gap $ (335,291) $ 28,531 $101,649 $ (205,111) ISA/ISL 0.79 1.13 1.33 0.90 Gap/Total assets 9.14% 0.78% 2.77% 5.59%
20 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Although the periodic gap analysis provides management with a method of measuring current interest rate risk, it only measures rate sensitivity at a specific point in time. Therefore, to more precisely measure the impact of interest rate changes on the Corporation's net interest income, management simulates the potential effects of changing interest rates through computer modeling. The income simulation model used by the Corporation captures all assets, liabilities, and off-balance sheet financial instruments, accounting for significant variables that are believed to be affected by interest rates. These variables include prepayment speeds on mortgage loans and mortgage backed securities, cash flows from loans, deposits and investments and balance sheet growth assumptions. The model also captures embedded options, such as interest rate caps/floors or call options, and accounts for changes in rate relationships as various rate indices lead or lag changes in market rates. The Corporation is then better able to implement strategies which would include an acceleration of a deposit rate reduction or lag in a deposit rate increase. The repricing strategies for loans would be inversely related. The Corporation's asset/liability management policy guidelines limit interest rate risk exposure for the succeeding twenty-four month period. Simulations are prepared under the base case where interest rates remain flat and most likely case where interest rates are defined using projections of economic factors. Additional simulations are produced estimating the impact on net interest income of a 300 basis point (3.00%) movement upward or downward from the base case scenario. The Corporation's current asset/liability management policy indicates that a 300 basis point (3.00%) change in interest rates up or down cannot result in more than a 7.5% change in net interest income when compared to a base case without Board approval and a strategy in place to reduce interest rate risk below the established maximum level. The analysis at December 31, 1998, indicated that a 300 basis point (3.00%) movement in interest rates in either direction over the next twelve months would not have a significant impact on the Corporation's anticipated net interest income over that time nor over the next twenty-four months and the Corporation's position would remain well within current policy guidelines. The Corporation's "Asset/Liability Management Committee" ("ALCO") is responsible for the identification, assessment and management of interest rate risk exposure, liquidity, capital adequacy and investment portfolio position. The primary objective of the ALCO process is to ensure that the Corporation's balance sheet structure maintains prudent levels of risk within the context of currently known and forecasted economic conditions and to establish strategies which provide the Corporation with appropriate compensation for the assumption of those risks. The ALCO attempts to mitigate interest rate risk through the use of strategies such as asset disposition, asset and liability pricing and matched maturity funding. The ALCO strategies are established by the Corporation's senior management and are approved by the Corporation's board of directors. Final loan maturities and rate sensitivity of the loan portfolio excluding consumer installment and mortgage loans and before unearned income at December 31, 1998 were as follows (Dollar Amounts in Thousands): Within One One to After Year 5 Years 5 Years Total Commercial and industrial $167,950 $ 55,098 $ 57,116 $280,164 Financial institutions -0- 105 -0- 105 Real estate-construction 17,277 7,142 8,678 33,097 Real estate-commercial 77,310 53,595 256,261 387,166 Other 33,640 19,246 44,578 97,464 Totals $296,177 $135,186 $366,633 $797,996 Loans at fixed interest rates 95,374 207,728 Loans at variable interest rates 39,812 158,905 Totals $135,186 $366,633 21 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis 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. 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. Additional credit review procedures regarding year 2000 issues were established for commercial loan customers during 1998. These procedures include the gathering of information to evaluate new customers' year 2000 risk and modifying loan covenants to mitigate the Corporation's credit risk due to loan customers failure to remediate their year 2000 issues. All current commercial loan customers were contacted by direct mail to increase customer awareness of how the year 2000 date change may affect them. Credit risk inherent in the existing loan portfolio related to year 2000 issues was assessed through review of the Corporation's largest commercial credits. In addition to direct mail contact, large commercial customers were contacted by phone to improve awareness and to gather information needed for evaluation of year 2000 credit risk. Economic factors used in evaluating the adequacy of the allowance for possible credit losses have also been expanded to include the impact of year 2000 problems. 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. 22 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis 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. 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) 1998 1997 1996 1995 1994 Commercial, industrial, financial, agricultural and other $ 4,375 $ 3,726 $ 3,628 $ 2,482 $ 2,870 Real estate-construction 414 415 461 330 329 Real estate-commercial 5,119 4,912 4,731 4,170 3,930 Real estate-residential 10,319 8,595 8,145 6,420 6,463 Loans to individuals 5,223 4,583 4,933 3,892 3,783 Lease financing receivables 512 393 285 162 243 Unallocated 6,342 3,308 3,051 6,347 4,757 Total $32,304 $25,932 $25,234 $23,803 $22,375 Allowance as percentage of average total loans 1.32% 1.11% 1.22% 1.29% 1.34%
The unallocated portion of the allowance for possible credit losses increased to $6.3 million for 1998 from $3.3 million reported in 1997. The unallocated portion of the allowance for possible credit losses represented 19.6% of the total allowance for 1998 compared to 12.8% of the total allowance for 1997 and is more in line with historical levels. Although net charge-offs have decreased for the 1998 period compared to 1997 levels, net charge-offs for 1998 became higher than peer averages. The allowance for possible credit losses at December 31, 1998 provides for this change in the Corporation's trend in credit loss experience exceeding peers, rather than continuation of the historic trend which has been favorable in comparison to peers. The Corporation continues to monitor changing economic conditions and their potential impact on credit risk and based on this analysis deemed it appropriate to provide for these economic conditions by increasing the provision for possible credit losses in the fourth quarter of 1998. This increase brings the allowance for possible credit losses, which has historically lagged behind peer levels closer to peer averages when comparing actual results from December 31, 1998 to the most recent peer results available from September 30, 1998. Other than those described below, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. The following table identifies nonperforming loans at December 31. A loan is placed in a nonaccrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt. Past due loans are those loans which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower. 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) 1998 1997 1996 1995 1994 Loans on nonaccrual basis $ 9,677 $11,387 $ 9,536 $ 8,782 $10,811 Past due loans 15,780 13,955 14,046 9,410 7,829 Renegotiated loans 64 67 280 803 733 Total nonperforming loans $25,521 $25,409 $23,862 $18,995 $19,373 Nonperforming loans as a percentage of total loans 1.07% 1.04% 1.07% 0.98% 1.08% Allowance as percentage of nonperforming loans 126.58% 102.06% 105.75% 125.31% 115.50% Other real estate owned $ 2,370 $ 1,950 $ 1,732 $ 1,467 $ 2,405 Gross income that would have been recorded at original rates $ 961 $ 1,017 $ 799 $ 946 $ 1,170 Interest that was reflected in income 286 146 223 241 287 Net reduction to interest income due to nonaccrual $ 675 $ 871 $ 576 $ 705 $ 883
The reduction of income due to renegotiated loans was less than $50 thousand in any year presented. The level of nonperforming loans at year-end 1998 remains stable in dollar amount when compared to 1997 levels. Nonperforming loans as a percentage of total loans increased over 1997 levels but is in line with historic levels. The increase in this ratio is due in part to the reduction in outstanding loans at December 31, 1998. The ratio of the allowance for possible credit losses as a percentage of nonperforming loans at December 31, 1998 was 126.58% an increase over 1997 levels. Management believes that the allowance for possible credit losses and nonperforming loans remained safely within acceptable levels. Capital Resources Equity capital increased $1.1 million in 1998 to $355.4 million. Dividends declared decreased equity by $26.0 million during 1998, an increase over dividends for the 1997 period as the dividend rate was increased. The retained net income remains in permanent capital to fund future growth and expansion. Additional advances by the Corporation's Employee Stock Ownership Plan ("ESOP") to fund the acquisition of the Corporation's common stock for future distribution as employee compensation, net of long-term debt payments, and fair value adjustments to unearned ESOP shares, decreased equity capital by $5.4 million. The market value adjustment to securities available for sale increased capital by $43 thousand. Amounts paid to fund the discount on reinvested dividends and optional cash payments reduced equity by $1.0 million. The cost of purchasing treasury shares decreased equity by $2.1 million while proceeds from the reissuance of treasury shares to provide for stock options exercised and unearned ESOP shares increased equity capital by $2.2 million during 1998. 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. During 1995 the Corporation began evaluating the size and complexity of the year 2000 issue. An awareness effort to inform board of directors, senior management and other staff of the year 2000 problem and its significance began, and communications continue to provide progress updates. The Corporation completed an inventory process and developed a plan for addressing the year 2000 issue. The plan addressed mainframe and PC based hardware and software systems and was later expanded to include environmental systems that are dependent on embedded microchips. Examples of environmental systems are vaults, security systems, elevators, telephones, heating and electrical systems. Project teams were established to identify and prioritize critical systems and processes affected by the year 2000 date change. Critical mainframe and PC based hardware and software systems were assessed for year 2000 readiness and those with identified date issues were scheduled for modification or replacement. Significant suppliers and outside professional service contractors were also evaluated to determine the extent to which the Corporation is vulnerable to those parties failure to remediate their own year 2000 issues. By fully dedicating numerous technical staff from Commonwealth Systems Corporation, the Corporation's data processing subsidiary and utilizing additional staff from various functional areas, multiple computer systems can be addressed concurrently. Renovation whereby code enhancements, hardware and software upgrades and system replacements are implemented was 95% complete for mission critical systems at December 31, 1998. An application is considered mission critical if it is vital to the successful continuation of a core business activity. Validation or testing of all changes to hardware and software components, including connections with other systems was 90% complete at year-end 1998, while implementation of mission critical systems was approximately 80% completed by the same time frame. Mission critical systems not in a state of readiness are primarily smaller PC based systems. All mission critical systems are scheduled for implementation by March 31, 1999 which places the Corporation within guidelines established by federal regulatory agencies. Regulatory agencies will continue to perform quarterly reviews of the Corporation's year 2000 readiness throughout 1999. The Corporation has also engaged outside professionals to provide additional independent verification and validation processes and to assure the reliability of internal risk and cost estimates. 25 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Year 2000 Analysis (Continued) Due to the broad scope of risks and uncertainties associated with the year 2000 problem the Corporation established a separate business resumption plan for year 2000 events which is integrated with its general business resumption plan. The Corporation's remediation contingency plan addresses major identifiable internal and external components and identifies alternative processes in event that a system fails. Third party vendors have been evaluated and outside sources have been tested where possible. Contingencies established for critical systems and processes include manual processing of transactions, utilization of tape transfer rather than electronic medium, use of alternate communications lines or methods and the installation of a generator as a backup power source. Contingencies for communication with customers include maintaining access to the Corporation's telephone banking center by relocation of the center if necessary. Short- term liquidity needs have been estimated and multiple sources of funds have been identified. Contingency planning will continue throughout 1999 and although all possible problems can not possibly be anticipated, management believes that potential difficulties associated with implementation are likely to result in only minor delays in transaction or information availability. The Corporation's greatest asset in dealing with year 2000 issues continues to be its dedicated staff who enable the Corporation to redirect internal resources as needed. The Corporation utilized internal resources to evaluate, reprogram and test software and hardware for year 2000 issues to the extent possible. Salary and benefit costs related to year 2000 activities were expensed as incurred. External year 2000 expenditures included amounts for capitalized hardware and software which will be amortized over three years for software and five years for hardware. In most cases the new software and hardware offer additional benefits in processing capability or efficiencies gained from modernization in addition to achieving year 2000 compliance. Mainframe software and hardware replaced will result in enhancements or features of potential benefit in serving banking customers or processing financial transactions. Year 2000 expenditures which were expensed as incurred during 1998 included the cost of leased off-site testing of mainframe systems, outside professionals utilized for independent verification, travel and lodging during off-site testing and vendor testing. The Corporation's estimates of additional year 2000 expenditures to be incurred during 1999 are based on presently available information and estimates. Cash outlays were funded through operating cash flows. Due to the Corporation's commitment to mitigate year 2000 risks where possible, management does not believe the year 2000 problem will have a material impact on the Corporation's financial condition or results of operations. The following table summarizes year 2000 expenditures during 1998 and 1997 and estimated amounts to be incurred during 1999. Estimate 1998 1997 for 1999 Capitalized hardware and software $ 250 $106 $ 92 Non-employee expenses including testing 152 20 136 Employee related costs 1,003 163 353 Subtotal 1,405 289 581 Capitalized hardware and software replaced without acceleration due to year 2000 2,043 70 671 Total expenditures $3,448 $359 $1,252 26 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 7. Management's Discussion and Analysis Inflation and Changing Prices Management is aware of the impact inflation has on interest rates and therefore the impact it can have on a bank's performance. The ability of a financial institution to cope with inflation can only be determined by analysis and monitoring of its asset and liability structure. The Corporation monitors its asset and liability position with particular emphasis on the mix of interest-sensitive assets and liabilities in order to reduce the effect of inflation upon its performance. However, it must be remembered that the asset and liability structure of a financial institution is substantially different from an industrial corporation in that virtually all assets and liabilities are monetary in nature, meaning that they have been or will be converted into a fixed number of dollars regardless of changes in general price levels. Examples of monetary items include cash, loans and deposits. Nonmonetary items are those assets and liabilities which do not gain or lose purchasing power solely as a result of general price level changes. Examples of nonmonetary items are premises and equipment. Inflation can have a more direct impact on categories of noninterest expenses such as salaries and wages, supplies and employee benefit costs. These expenses are very closely monitored by management for both the effects of inflation and increases relating to such items as staffing levels, usage of supplies and occupancy costs. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk Information appearing in Item 7 of this report under the caption "Interest Sensitivity" is incorporated herein by reference in response to this item. 27 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Balance Sheets (Dollar Amounts in Thousands) December 31, 1998 1997 Assets Cash and due from banks.....................$ 96,615 $ 82,500 Interest-bearing bank deposits.............. 1,914 5,040 Federal funds sold.......................... 1,000 29,880 Securities available for sale, at market.... 1,042,636 505,918 Securities held to maturity, at cost, (market value $486,185 in 1998 and $511,711 in 1997) 482,696 509,880 Loans....................................... 2,382,229 2,453,193 Unearned income........................... (7,379) (16,856) Allowance for possible credit losses...... (32,304) (25,932) Net loans............................ 2,342,546 2,410,405 Property and equipment...................... 41,929 41,531 Other real estate owned..................... 2,370 1,950 Other assets................................ 85,083 81,453 Total assets.........................$4,096,789 $3,668,557 Liabilities Deposits (All Domestic): Noninterest-bearing.......................$ 264,082 $ 259,565 Interest-bearing.......................... 2,667,049 2,624,778 Total deposits....................... 2,931,131 2,884,343 Short-term borrowings....................... 140,547 203,449 Other liabilities........................... 38,856 33,388 Long-term debt.............................. 630,850 193,054 Total liabilities.................... 3,741,384 3,314,234 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, 31,262,706 shares issued and 30,937,973 shares outstanding in 1998; 31,660,910 shares issued and 30,934,565 shares outstanding in 1997................................... 31,263 31,661 Additional paid-in capital.................. 100,240 106,659 Retained earnings........................... 235,623 228,230 Accumulated other comprehensive income...... 2,199 2,156 Treasury stock (324,733 and 726,345 shares at December 31, 1998 and 1997, respectively at cost).................................. (5,913) (11,947) Unearned ESOP shares........................ (8,007) (2,436) Total shareholders' equity........... 355,405 354,323 Total liabilities and shareholders' equity..........$4,096,789 $3,668,557 The accompanying notes are an integral part of these consolidated financial statements. 28 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Statements of Income (Dollar Amounts in Thousands, except per share data)
Years Ended December 31, 1998 1997 1996 Interest Income Interest and fees on loans................ $203,093 $198,357 $177,556 Interest and dividends on investments: Taxable interest........................ 69,467 49,246 49,741 Interest exempt from Federal income taxes.......................... 6,600 4,869 4,692 Dividends............................... 2,138 1,375 1,573 Interest on Federal funds sold............ 1,893 689 1,207 Interest on bank deposits................. 230 236 419 Total interest income................. 283,421 254,772 235,188 Interest Expense Interest on deposits..................... 113,960 112,600 101,186 Interest on short-term borrowings........ 10,214 8,108 6,777 Interest on long-term debt............... 24,108 3,719 1,226 Total interest expense............... 148,282 124,427 109,189 Net interest income........................ 135,139 130,345 125,999 Provision for possible credit losses....... 15,049 10,152 6,301 Net interest income after provision for possible credit losses................... 120,090 120,193 119,698 Other Income Securities gains......................... 1,457 6,825 1,599 Trust income............................. 5,251 4,421 3,920 Service charges on deposits.............. 8,274 8,432 8,060 Other income............................. 11,356 5,863 5,379 Total other income................... 26,338 25,541 18,958 Other Expenses Salaries and employee benefits........... 48,710 47,074 44,066 Net occupancy expense.................... 6,750 7,063 6,475 Furniture and equipment expense.......... 6,105 6,165 6,132 Data processing expense.................. 3,101 3,049 3,081 Pennsylvania shares tax expense.......... 3,152 2,951 2,822 Merger and related charges............... 7,915 -0- -0- Other operating expenses................. 24,468 22,555 22,723 Total other expenses................. 100,201 88,857 85,299 Income before income taxes and extra- ordinary items............................ 46,227 56,877 53,357 Applicable income taxes.................... 12,229 17,338 16,164 Net income before extraordinary items...... 33,998 39,539 37,193 Extraordinary items (less applicable income taxes of $336).................... (624) -0- -0- Net Income................................. $33,374 $39,539 $37,193 Average Shares Outstanding................. 30,666,786 30,835,949 31,155,043 Average Shares Outstanding Assuming Dilution................................. 30,833,013 30,922,837 31,190,895 Earnings per common share: Net income before extraordinary items.... $1.11 $1.28 $1.19 Extraordinary items...................... $(0.02) $0.00 $0.00 Net income............................... $1.09 $1.28 $1.19 Earnings per common share assuming dilution: Net income before extraordinary items.... $1.10 $1.28 $1.19 Extraordinary items...................... $(0.02) $0.00 $0.00 Net income............................... $1.08 $1.28 $1.19
The accompanying notes are an integral part of these consolidated financial statements. 29 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Statements of Changes in Shareholders' Equity (Dollar Amounts in Thousands)
Accumulated Additional Other Unearned Total Common Paid-in Retained Comprehensive Treasury ESOP Shareholders' Stock Capital Earnings Income Stock Shares Equity Balance at December 31, 1995............. $31,661 $107,714 $193,968 $1,617 $(929) $(4,545) $329,486 Comprehensive income Net income............................. -0- -0- 37,193 -0- -0- -0- 37,193 Other comprehensive income, net of tax: Unrealized holding gains on securities arising during the period............ -0- -0- -0- 798 -0- -0- 798 Less: reclassification adjustment for gains on securities included in net income...................... -0- -0- -0- (986) -0- -0- (986) Total other comprehensive income....... -0- -0- -0- (188) -0- -0- (188) Total comprehensive income.............. -0- -0- 37,193 (188) -0- -0- 37,005 Cash dividends declared.................. -0- -0- (20,318) -0- -0- -0- (20,318) Decrease in unearned ESOP shares......... -0- 105 -0- -0- -0- 1,071 1,176 Discount on dividend reinvestment plan purchases............................... -0- (529) -0- -0- -0- -0- (529) Treasury stock acquired.................. -0- -0- -0- -0- (5,850) -0- (5,850) Treasury stock reissued.................. -0- (138) -0- -0- 690 -0- 552 Balance at December 31, 1996............. 31,661 107,152 210,843 1,429 (6,089) (3,474) 341,522 Comprehensive income Net income............................. -0- -0- 39,539 -0- -0- -0- 39,539 Other comprehensive income, net of tax: Unrealized holding gains on securities arising during the period. -0- -0- -0- 5,159 -0- -0- 5,159 Less: reclassification adjustment for gains on securities included in net income...................... -0- -0- -0- (4,432) -0- -0- (4,432) Total other comprehensive income....... -0- -0- -0- 727 -0- -0- 727 Total comprehensive income.............. -0- -0- 39,539 727 -0- -0- 40,266 Cash dividends declared.................. -0- -0- (22,152) -0- -0- -0- (22,152) Decrease in unearned ESOP shares......... -0- 171 -0- -0- -0- 1,038 1,209 Discount on dividend reinvestment plan purchases............................... -0- (630) -0- -0- -0- -0- (630) Treasury stock acquired.................. -0- -0- -0- -0- (5,908) -0- (5,908) Treasury stock reissued.................. -0- (34) -0- -0- 50 -0- 16 Balance at December 31, 1997............. 31,661 106,659 228,230 2,156 (11,947) (2,436) 354,323 Comprehensive income Net income............................. -0- -0- 33,374 -0- -0- -0- 33,374 Other comprehensive income, net of tax: Unrealized holding gains on securities arising during the period............. -0- -0- -0- 971 -0- -0- 971 Less: reclassification adjustment for gains on securities included in net income...................... -0- -0- -0- (928) -0- -0- (928) Total other comprehensive income....... -0- -0- -0- 43 -0- -0- 43 Total comprehensive income.............. -0- -0- 33,374 43 -0- -0- 33,417 Cash dividends declared.................. -0- -0- (25,981) -0- -0- -0- (25,981) Net increase in unearned ESOP shares..... -0- 158 -0- -0- -0- (5,571) (5,413) Discount on dividend reinvestment plan purchases............................... -0- (1,016) -0- -0- -0- -0- (1,016) Treasury stock acquired.................. -0- -0- -0- -0- (2,123) -0- (2,123) Treasury stock reissued.................. -0- (38) -0- -0- 2,255 -0- 2,217 Treasury stock cancelled in merger....... (397) (5,505) -0- -0- 5,902 -0- -0- Cash issued for partial shares in merger. (1) (18) -0- -0- -0- -0- (19) Balance at December 31, 1998............. $31,263 $100,240 $235,623 $2,199 $(5,913) $(8,007) $355,405 The accompanying notes are an integral part of these consolidated financial statements.
30 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Consolidated Statements of Cash Flows (Dollar Amounts in Thousands)
Years Ended December 31, 1998 1997 1996 Operating Activities Net income............................................ $ 33,374 $ 39,539 $ 37,193 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible credit losses............... 15,049 10,152 6,301 Depreciation and amortization...................... 7,914 7,033 6,403 Net gains on sales of assets....................... (3,829) (7,148) (2,216) Income from increase in cash surrender value of bank owned life insurance........................ (1,365) (204) -0- Increase in interest receivable.................... (4,011) (8,241) (1,280) Increase in interest payable....................... 1,159 2,842 2,569 Increase (decrease) in income taxes payable........ (584) (451) (47) Change in deferred taxes........................... (1,404) 1,327 600 Other - net........................................ 6,567 3,621 (3,288) Net cash provided by operating activities....... 52,870 48,470 46,235 Investing Activities Transactions with securities held to maturity: Sales.............................................. -0- -0- -0- Maturities and redemptions......................... 211,948 137,124 97,597 Purchases of investment securities................. (184,668) (125,078) (42,576) Transactions with securities available for sale: Sales.............................................. 171,891 50,049 30,482 Maturities and redemptions......................... 184,508 87,936 89,961 Purchases of investment securities................. (891,718) (256,444) (114,957) Proceeds from sales of loans and other assets......... 104,609 22,772 23,208 Investment in bank owned life insurance............... -0- (25,000) -0- Acquisition of affiliate and branch, net of cash received........................................... -0- -0- 7,836 Changes net of acquisitions and disposals: Net decrease (increase) in time deposits with banks 3,127 (759) 4,116 Net increase in loans.............................. (50,580) (232,881) (328,693) Purchases of premises and equipment................ (7,702) (6,141) (7,828) Net cash used by investing activities........... (458,585) (348,422) (240,854) Financing Activities Proceeds from issuance of long-term debt.............. 469,800 204,842 43,000 Repayments of long-term debt.......................... (37,576) (63,487) (8,509) Discount on dividend reinvestment plan purchases...... (1,016) (630) (529) Dividends paid........................................ (25,746) (21,739) (19,907) Net increase (decrease) in Federal funds purchased.... (60,675) 53,675 23,740 Net increase (decrease) in other short-term borrowings (2,228) (7,417) 21,385 Sale of branch and deposits, net of cash received..... (8,612) -0- -0- Changes, net of acquisitions: Acquisition of treasury stock....................... (2,123) (5,908) (5,850) Reissuance of treasury stock........................ 2,217 16 108 Net increase in deposits............................ 56,909 128,253 161,273 Net cash provided by financing activities....... 390,950 287,605 214,711 Net increase (decrease) in cash and cash equivalents................................... (14,765) (12,347) 20,092 Cash and cash equivalents at January 1.................. 112,380 124,727 104,635 Cash and cash equivalents at December 31................ $ 97,615 $112,380 $124,727
The accompanying notes are an integral part of these consolidated financial statements. 31 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 NOTE 1--Statement of Accounting Policies General The following summary of accounting and reporting policies is presented to aid the reader in obtaining a better understanding of the financial statements and related financial data of First Commonwealth Financial Corporation and its subsidiaries (the "Corporation") contained in this report. The financial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions. In preparing financial statements management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. In addition, these estimates and assumptions affect revenues and expenses in the financial statements and as such, actual results could differ from those estimates. Through its subsidiaries which include two commercial banks, a nondepository trust company, and insurance agency, the Corporation provides a full range of loan, deposit, trust and insurance services primarily to individuals and small to middle-market businesses in nineteen 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. Investments of 20 to 50 percent of the outstanding common stock of investees are accounted for using the equity method of accounting. Effective January 1, 1998, the Corporation adopted the Financial Accounting Standards Board Statement No. 130 "Reporting Comprehensive Income" ("FAS No. 130"). Comprehensive income is defined as "the change in equity of a business enterprise during a period from transactions and other events from nonowner sources. Comprehensive income includes all changes in equity except those resulting from investments by owners and distributions to owners." Comprehensive income includes net income and other nonowner changes in equity which qualify as components of comprehensive income but bypass a statement of income and are reported in a separate component of equity in a balance sheet. FAS No. 130 does not change the calculation of net income or earnings per share but requires companies to provide additional disclosures for comprehensive income and its components in financial statements for fiscal years beginning after December 15, 1997, including interim periods. 32 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 NOTE 1--Statement of Accounting Policies (Continued) Basis of Presentation (Continued) The Corporation has elected, as permitted under FAS No. 130, to report comprehensive income in the Statement of Changes in Shareholders' Equity and has reclassified comparative financial statements to conform to the required presentation under FAS No. 130 for comprehensive income. For all periods presented, "other comprehensive income" (comprehensive income excluding net income) includes only one component, which is the change in unrealized holding gains and losses on available for sale securities. The following table identifies the related tax effects allocated to each component of other comprehensive income in the Statements of Changes in Shareholders' Equity (dollar amounts in thousands):
December 31, 1998 December 31, 1997 December 31, 1996 Tax Net of Tax Net of Tax Net of Pre-tax (Expense) Tax Pre-tax (Expense) Tax Pre-tax (Expense) Tax Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period $1,495 $(524) $971 $7,936 $(2,777) $5,159 $1,317 $(519) $ 798 Less: reclassification adjustment for gains realized in net income (1,428) 500 (928) (6,819) 2,387 (4,432) (1,582) 596 (986) Net unrealized gains 67 (24) 43 1,117 (390) 727 (265) 77 (188) Other comprehensive income $ 67 $ (24) $ 43 $1,117 $ (390) $ 727 $ (265) $ 77 $(188)
The adoption of FAS No. 130 did not have a material impact on the Corporation's financial condition or results of operations. In June, 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS No. 131") which is effective for financial statements for periods beginning after December 15, 1997. FAS No. 131 redefines how operating segments are determined and requires disclosures of certain financial and descriptive information about a company's operating segments. Under current conditions, the Corporation is reporting one business segment. 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. In June 1998, the FASB issued statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133") which is effective for the first quarter of years beginning after June 15, 1999. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities which require that an entity recognize all derivatives as either assets or liabilities in a balance sheet and measure those instruments at fair value. Management believes that adoption of FAS No. 133 will not have a material impact on the Corporation's financial 33 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 NOTE 1--Statement of Accounting Policies (Continued) Securities (Continued) condition or results of operations. As of December 31, 1998, the Corporation did not own or trade derivatives, although such instruments may be appropriate to use in the future to manage interest rate risk. In October, 1998, the FASB issued Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("FAS No. 134") which is effective for quarters beginning after December 15, 1998. FAS No. 134 amends FASB Statement No. 65 "Accounting for Certain Mortgage Banking Activities" ("FAS No. 65"). FAS No. 65 required that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities as trading securities while FAS No. 134 requires the resulting mortgage-backed securities or other retained interests to be classified based on the entity's ability and intent to sell or hold those investments. On the date FAS No. 134 is initially applied, an enterprise may reclassify mortgage backed securities and other beneficial interests retained after the securitization of mortgage loans held for sale from the trading category, except for those with sales commitments in place. Management believes that adoption of FAS No. 134 will not have a material impact on the Corporation's financial condition or results of operations. Loans Loans are carried at the principal amount outstanding. Unearned income on installment loans and leases is taken into income on a declining basis which results in an approximately level rate of return over the life of the loan or lease. Interest is accrued as earned on nondiscounted loans. The Corporation considers a loan to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect principal or interest due according to the contractual terms of the loan. Loan impairment is measured based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Payments received on impaired loans are applied against the recorded investment in the loan. For loans other than those that the Corporation expects repayment through liquidation of the collateral, when the remaining recorded investment in the impaired loan is less than or equal to the present value of the expected cash flows, income is recorded on a cash basis. Mortgage Servicing Rights Effective January 1, 1997, the Corporation adopted the Financial Accounting Standards Board Statement No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS No. 125"). FAS No. 125 supersedes FAS No. 122 "Accounting for Mortgage Servicing Rights." 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 allocate the amortized cost of the mortgage loans between the mortgage servicing rights and the mortgage loans (without 34 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 1--Statement of Accounting Policies (Continued) Mortgage Servicing Rights (Continued) 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. 125 also requires mortgage servicing rights to be periodically evaluated for impairment based on fair values. The adoption of FAS No. 125 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 cash surrender value of bank-owned life insurance is reflected in "other assets" on the Consolidated Balance Sheets. 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. 35 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 1--Statement of Accounting Policies (Continued) Accounting for the Impairment of Long-Lived Assets The Corporation reviews long-lived assets, such as premises and equipment and intangibles for impairment whenever events or changes in circumstances, such as a significant decrease in the market value of an asset or the extent or manner in which an asset is used indicate that the carrying amount of an asset may not be recoverable. If there is an indication that the carrying amount of an asset may not be recoverable, future discounted cash flows expected to result from the use of the asset are estimated. If the sum of the expected cash flows is less than the carrying value of the asset a loss is recognized for the difference between the carrying value and fair market value of the asset. Income Taxes The Corporation records taxes in accordance with the asset and liability method utilized by 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 1998 1997 1996 Cash paid during the year for: Interest $147,123 $121,600 $106,621 Income taxes $ 14,200 $ 16,685 $ 14,976 Noncash investing and financing activities: ESOP borrowings $ 6,000 $ -0- $ -0- ESOP loan reductions $ 429 $ 1,038 $ 1,071 Gross increase in Market Value adjustment to securities available for sale pursuant to FAS No. 115 $ 67 $ 1,117 $ (265) Loans transferred to other real estate owned and repossessed assets $ 6,624 $ 7,314 $ 4,236 36 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (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. 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 Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). 37 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (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 December 31, 1998, the Corporation acquired all of the outstanding shares of Southwest National Corporation ("Southwest"), a Pennsylvania- chartered bank holding company headquartered in Greensburg, Pennsylvania. Each of the 3,043,738 outstanding shares of Southwest National Corporation were exchanged for 2.9 shares of the Corporation's common stock. The aggregate number of shares issued by the Corporation, excluding partial shares was 8,826,078. The merger was accounted for as a pooling of interests, and accordingly, all financial statements were restated as though the merger had occurred at the beginning of the earliest period presented. The following table reconciles net interest income and net income as previously reported and as restated for the merger. Results of the nine- month period ended September 30, 1998 were unaudited.
Nine Months Ended September 30, Years Ended December 31, 1998 1997 1996 Net interest income as previously reported: Corporation $ 76,294 $ 97,057 $ 94,004 Southwest 24,966 33,288 31,995 Net interest income as restated $101,260 $130,345 $125,999 Net income as previously reported: Corporation $ 25,227 $ 30,534 $ 27,583 Southwest 6,793 9,005 9,610 Net income as restated $ 32,020 $ 39,539 $ 37,193
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 banks maintained with the Federal Reserve Bank average balances of $18,561 during 1998 and $15,006 during 1997. 38 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (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, 1998 and 1997:
1998 1997 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 $ 29,961 $ 400 $ -0- $ 30,361 $112,701 $ 796 $(105) $113,392 Obligations of U.S. Government Corporations and Agencies: Mortgage Backed Securities 715,882 2,342 (1,167) 717,057 237,841 2,374 (102) 240,113 Other 176,571 1,149 (152) 177,568 110,020 499 (206) 110,313 Obligations of States and Political Subdivisions 36,225 744 (185) 36,784 18,587 736 (2) 19,321 Debt Securities Issued by Foreign Governments 460 -0- -0- 460 460 -0- -0- 460 Corporate Securities 1,099 -0- (7) 1,092 1,301 -0- (28) 1,273 Other Mortgage Backed Securities 34,169 61 (552) 33,678 -0- -0- -0- -0- Total Debt Securities 994,367 4,696 (2,063) 997,000 480,910 4,405 (443) 484,872 Equities 44,749 887 -0- 45,636 21,472 2 (428) 21,046 Total Securities Available for Sale $1,039,116 $5,583 $(2,063) $1,042,636 $502,382 $4,407 $(871) $505,918
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 17 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, 1998 and 1997, 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. 39 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 4--Securities Available For Sale (Continued) The amortized cost and estimated market value of debt securities at December 31, 1998, 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 $ 23,696 $ 23,820 Due after 1 but within 5 years 139,382 140,778 Due after 5 but within 10 years 67,399 68,001 Due after 10 years 13,839 13,666 244,316 246,265 Mortgage Backed Securities 750,051 750,735 Total Debt Securities $994,367 $997,000 Proceeds from the sales of securities available for sale were $171,891, $50,049 and $30,482 during 1998, 1997 and 1996 respectively. Gross gains of $2,817, $6,833 and $1,821 and gross losses of $1,284, $14 and $239 were realized on those sales during 1998, 1997 and 1996 respectively. Securities available for sale with a book value of $179,943 and $132,776 were pledged at December 31, 1998 and 1997, respectively to secure public deposits and for other purposes required or permitted by law. 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:
1998 1997 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 $224,312 $ 655 $(429) $224,538 $280,594 $ 608 $ (857) $280,345 Other 105,785 1,296 (92) 106,989 139,938 792 (98) 140,632 Obligations of States and Political Subdivisions 140,513 2,556 (512) 142,557 86,833 1,436 (50) 88,219 Debt Securities Issued by Foreign Governments 358 -0- -0- 358 360 -0- -0- 360 Corporate Securities 5,249 10 -0- 5,259 -0- -0- -0- -0- Other Mortgage Backed Securities 6,479 5 -0- 6,484 2,155 1 (1) 2,155 Total Securities Held to Maturity $482,696 $4,522 $(1,033) $486,185 $509,880 $2,837 $(1,006) $511,711
40 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) Note 5--Securities Held to Maturity (Continued) The amortized cost and estimated market value of debt securities at December 31, 1998, 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 $ 3,557 $ 3,564 Due after 1 but within 5 years 81,335 82,375 Due after 5 but within 10 years 80,334 81,481 Due after 10 years 86,679 87,743 251,905 255,163 Mortgage Backed Securities 230,791 231,022 Total Debt Securities $482,696 $486,185 There were no sales of securities held to maturity in 1998, 1997 or 1996. Securities held to maturity with a book value of $277,345 and $312,701 were pledged at December 31, 1998 and 1997, 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, 1998 1997 Commercial, financial, agricultural and other $ 377,733 $ 363,699 Real estate loans: Construction and land development 33,097 35,308 1-4 Family dwellings 1,009,903 1,048,405 Other real estate loans 387,166 384,794 Loans to individuals for household, family and other personal expenditures 517,907 569,742 Leases, net of unearned income 56,423 51,245 Subtotal 2,382,229 2,453,193 Unearned income (7,379) (16,856) Total loans and leases $2,374,850 $2,436,337 Most of the Corporation's business activity was with customers located within Pennsylvania. The portfolio is well diversified, and as of December 31, 1998 and 1997, there were no significant concentrations of credit. NOTE 7--Allowance for Possible Credit Losses Description of changes: 1998 1997 1996 Allowance at January 1 $25,932 $25,234 $23,803 Additions: Recoveries of previously charged off loans 1,950 1,524 1,493 Provision charged to operating expense 15,049 10,152 6,301 Deductions: Loans charged off 10,627 10,978 6,363 Allowance at December 31 $32,304 $25,932 $25,234 41 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 7--Allowance for Possible Credit Losses (Continued) Relationship to impaired loans: 1998 1997 Recorded investment in impaired loans at end of period $ 9,741 $11,387 Average balance of impaired loans for the year $10,756 $10,258 Allowance for possible credit losses related to impaired loans $ 1,593 $ 2,089 Impaired loans with an allocation of the allowance for possible credit losses $ 4,530 $ 6,978 Impaired loans with no allocation of the allowance for possible credit losses $ 5,211 $ 4,409 Income recorded on impaired loans on a cash basis $ 286 $ 146 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, 1998 and 1997, 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, 1998 and 1997. 1998 1997 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $481,354 $489,938 Standby letters of credit $ 38,456 $ 39,851 Commercial letters of credit $ -0- $ 1,194 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. 42 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (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 1998 1997 Land Indefinite $ 5,481 $ 5,461 Buildings and improvements 5 - 50 Years 44,368 41,631 Leasehold improvements 5 - 39 Years 9,725 9,774 Furniture and equipment 3 - 25 Years 44,124 42,462 Subtotal 103,698 99,328 Less accumulated depreciation and amortization 61,769 57,797 Total premises and equipment $41,929 $41,531 Depreciation and amortization related to premises and equipment was $5,669 in 1998, $5,171 and $4,844 in 1997 and 1996, respectively. NOTE 10--Interest-Bearing Deposits Components of interest-bearing deposits at December 31 were as follows: 1998 1997 NOW and Super NOW accounts $ 107,947 $ 89,234 Savings and MMDA accounts 1,078,534 982,574 Time deposits 1,480,568 1,552,970 Total interest-bearing deposits $2,667,049 $2,624,778 Interest-bearing deposits at December 31, 1998 and 1997, include reallocations from demand deposits of $94,588 and $60,717 and reallocations from NOW and Super NOW accounts of $272,320 and $222,504 respectively 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, 1998 and 1997, were certificates of deposit in denominations of $100 or more of $299,412 and $329,307 respectively. Interest expense related to $100 or greater certificates of deposit amounted to $16,921 in 1998, $17,574 in 1997, and $12,376 in 1996. Included in time deposits at December 31, 1998, were certificates of deposit with the following scheduled maturities: 1999 $ 984,771 2000 217,243 2001 145,646 2002 70,557 2003 and thereafter 59,889 43 $1,478,106 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 11--Short-term Borrowings Short-term borrowings at December 31 were as follows:
1998 1997 Ending Average Average Ending Average Average Balance Balance Rate Balance Balance Rate Federal funds purchased $ 47,975 $ 72,511 5.68% $108,650 $ 61,232 5.66% Borrowings from FHLB -0- 18,336 5.73% 5,000 4,997 5.48% Securities sold under agreements to repurchase 84,228 90,383 4.76% 83,547 78,842 4.78% Treasury, tax and loan note option 8,344 14,104 5.24% 6,252 11,399 5.23% Total $140,547 $195,334 5.23% $203,449 $156,470 5.18% Maximum total at any month-end $278,247 $203,449
At December 31, 1998 and 1997, the Corporation had unused borrowing capacity with the FHLB of $200,000 and $184,845, respectively. Interest expense on short-term borrowings for the years ended December 31 is detailed below:
1998 1997 1996 Federal funds purchased $ 4,119 $3,466 $1,916 Borrowings from FHLB 1,051 274 374 Securities sold under agreements to repurchase 4,305 3,772 3,849 Treasury, tax and loan note option 739 596 638 Total interest on short-term borrowings $10,214 $8,108 $6,777
44 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 12--Long-term Debt Long-term debt at December 31, follows:
1998 1997 Amount Rate Amount Rate ESOP loan due December, 2005 $8,007 Libor +1% $2,436 Libor +1% Borrowings from FHLB due: March, 1998 -0- 43 7.22% March, 1998 -0- 8,000 7.22% March, 1998 -0- 10,000 5.99% May, 1998 -0- 733 5.94% August, 1998 -0- 188 6.43% February, 2000 25,000 4.72% -0- July, 2000 25,000 4.72% -0- August, 2002 25,000 5.36% 25,000 5.36% November, 2002 50,000 5.82% 50,000 5.82% November, 2002 25,000 5.33% 25,000 5.33% December, 2002 50,000 5.71% 50,000 5.71% March, 2007 -0- 1,204 6.51% May, 2007 -0- 3,903 6.29% August, 2007 -0- 1,719 6.57% February, 2008 100,000 5.45% -0- February, 2008 100,000 5.48% -0- May, 2008 55,000 5.67% -0- May, 2008 45,000 5.67% -0- November, 2008 50,000 5.03% -0- December, 2008 65,000 4.96% -0- January, 2009 -0- 2,775 6.27% July, 2017 -0- 4,007 6.52% December, 2017 7,476 6.17% 7,659 6.17% Mortgage loan due July, 2012 177 2.00% 188 2.00% Mortgage loan due January, 2013 190 4.50% 199 4.50% $630,850 $193,054
All Federal Home Loan Bank stock, along with an interest in unspecified mortgage loans and mortgage-backed securities, with an aggregate statutory value equal to the amount of the above advances, have been pledged as collateral with the Federal Home Loan Bank of Pittsburgh. Scheduled loan payments are summarized below: 1999 2000 2001 2002 2003 Thereafter Loan payments $1,372 $50,819 $1,424 $151,350 $1,357 $424,528 During 1998, the Corporation incurred a cost of $960 for the prepayment of FHLB term borrowings with original maturities scheduled for 2007. This amount was recorded on the Consolidated Statements of Income as an extraordinary item, net of $336 of applicable income taxes. NOTE 13--Common Share Commitments At December 31, 1998, the Corporation had 100,000,000 common shares authorized and 30,937,973 shares outstanding. Outstanding shares were reduced by 324,733 shares of treasury stock at December 31, 1998 and 726,345 shares at December 31, 1997. 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 earnings per share reported on the income statement in accordance with FAS No. 128 were 166,227, 86,888 and 35,852 shares at December 31, 1998, 1997 and 1996 respectively. 45 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands, except per share data) NOTE 13--Common Share Commitments (Continued) During 1998, 43,400 shares of treasury stock were acquired at an average price of $24.45 and reissued to the leveraged ESOP. In 1997 150,900 shares of treasury stock were acquired at an average price of $19.01 for the purpose of funding stock options upon exercise. Treasury shares consisting of 65,569 and 2,800 were reissued during 1998 and 1997 upon exercise of stock options. Southwest treasury shares were cancelled upon merger with the Corporation. NOTE 14--Income Taxes The income tax provision consists of: 1998 1997 1996 Current tax provision for income exclusive of securities transactions: Federal $13,097 $13,384 $14,869 State (11) 238 135 Securities transactions 547 2,389 560 Total current tax provision 13,633 16,011 15,564 Deferred tax provision (benefit) (1,404) 1,327 600 Total tax provision $12,229 $17,338 $16,164 The Corporation had deferred tax assets of $13,014 and $9,809 and deferred tax liabilities of $11,820 and $10,062 at December 31, 1998 and 1997, respectively. 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, 1998 and 1997, were as follows: 1998 1997 Deferred tax assets: Allowance for possible credit losses $11,132 $ 8,801 Postretirement benefits other than pensions 973 475 Accumulated depreciation 278 -0- Other 631 533 Deferred tax liabilities: Accumulated accretion of bond discount (325) (554) Unrealized gain on securities available for sale (1,184) (1,160) Lease financing deduction (7,829) (5,704) Loan origination fees and costs (849) (656) Accumulated depreciation -0- (82) Basis difference in assets acquired (1,143) (1,356) Pension expense (233) (306) Other (257) (244) Net deferred tax asset (liability) $ 1,194 $ (253) 46 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 14--Income Taxes (Continued) 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:
1998 1997 1996 % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income Tax at statutory rate $16,179 35.0 $19,907 35.0 $18,675 35.0 Increase (decrease) resulting from: Effect of nontaxable interest (3,894) (8.4) (2,660) (4.7) (2,458) (4.6) Merger expenses 542 1.2 -0- 0.0 -0- 0.0 State income taxes (11) (0.0) 238 0.4 135 0.3 Other (587) (1.3) (147) (0.2) (188) (0.4) Total tax provision $12,229 26.5 $17,338 30.5 $16,164 30.3
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 242,089 shares of the Corporation's common stock in 1998 at a corresponding cost of $6,000, which the Corporation borrowed and concurrently loaned this amount to the ESOP. This amount represents leveraged and unallocated shares, and accordingly has been recorded as long- term debt and the offset as a reduction of the common shareholders' equity. Compensation costs related to the plan were $1,068 in 1998, $1,032 in 1997 and $1,224 in 1996. (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. Employees of Southwest are covered by a 401(k) plan whereby each participant may contribute up to 10% of compensation to the plan of which up to 4% is matched 100% by the employer's contribution. The Southwest Board of Directors may also authorize an annual discretionary contribution to the plan. It is anticipated that Southwest's 401(k) plan will merge into the Corporation's 401(k) plan during 1999. In 1999, the Corporation's plan will change whereby each participant may contribute up to 10% of compensation to the plan, of which up to 4% is matched 100% by the employer's contribution. The 401(k) plan expense was $2,261 in 1998, $2,415 in 1997 and $2,432 in 1996. Pension Plan of Acquired Subsidiary Southwest's noncontributory defined benefit pension plan covers all eligible employees and provides benefits that are based on each employee's years of service and compensation. 47 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 15--Retirement Plans (Continued) Pension Plan of Acquired Subsidiary (Continued) Net periodic pension cost of this plan for each of the last three years was as follows: 1998 1997 1996 Service cost $365 $ 327 $303 Interest cost on projected benefit obligation 469 411 375 Actual return on plan assets (425) (1,042) 126 Net amortization and deferral (179) 507 (590) Net periodic pension cost $230 $ 203 $214 The following table sets forth the plan's funded status and the amounts recognized on the Corporation's consolidated balance sheet as of December 31: 1998 1997 Market value of plan assets, primarily registered investment companies, U.S. government and agency obligations and money markets $7,132 $7,679 Projected benefit obligation 7,926 6,794 Plan assets (less) greater than projected benefit obligation (794) 885 Unrecognized net transition asset (123) (154) Unrecognized prior service cost due to plan amendment -0- 130 Unrecognized net gain 1,470 34 Prepaid pension expense recognized on the balance sheet $ 553 $ 895 Actuarial present value of accumulated benefits, including vested benefits of $7,615 and $4,102 $7,926 $4,617 The following table sets forth the change in benefit obligation: 1998 1997 Benefit obligation at beginning of year $6,794 $5,915 Service cost 365 327 Interest cost 469 411 Benefit payment (973) (625) Actuarial loss 5,343 766 Curtailment (4,072) -0- Benefit obligation at end of year $7,926 $6,794 The following table sets forth the change in plan assets: 1998 1997 Fair value of plan assets at beginning of year $7,679 $6,970 Return on plan assets 425 1,042 Employer contribution -0- 292 Benefits paid (972) (625) Fair value of plan assets at end of year $7,132 $7,679 Assumptions used in determining the actuarial present value of the projected benefit obligation were as follows at December 31: 1998 1997 Discount rates 5.0% 7.0% Rates of increase in compensation levels 3.5 4.5 Expected long-term rate of return on assets 6.0 7.0 48 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 15--Retirement Plans (Continued) Pension Plan of Acquired Subsidiary (Continued) Effective December 31, 1998, participants' accrued benefit in the Southwest Bank Pension Plan was frozen. Participants will become participants in the First Commonwealth Financial Corporation ESOP Plan with no lapse in credited service, and no loss of accrued benefits. The Southwest Bank Plan will be terminated at some future date, with distribution made in accordance with Plan provisions and applicable regulations. Postretirement Benefits other than Pensions for Acquired Subsidiary Employees of Southwest were covered by a postretirement benefit plan. Net periodic benefit cost of this plan was as follows: 1998 1997 Service cost $ 61 $ 75 Interest cost on projected benefit obligation 259 265 Amortization of transition obligation 55 119 Loss amortization 82 29 Net periodic benefit cost $457 $488 The following table sets forth the plan's funded status and the amounts recognized on the Corporation's consolidated balance sheet as of December 31: 1998 1997 Accumulated postretirement obligation: Retirees $2,941 $2,853 Fully eligible active plan participants 155 40 Other plan participants 318 912 Total accumulated postretirement benefit obligation 3,414 3,805 Plan assets at fair value -- -- Accumulated postretirement benefit obligation in excess of plan assets 3,414 3,805 Unrecognized transition obligation (610) (1,234) Unrecognized net loss (23) (1,183) Accrued benefit liability recognized on the balance sheet $2,781 $1,388 The following table sets forth the change in benefit obligation: 1998 1997 Benefit obligation at beginning of year $3,805 $3,785 Service cost 61 75 Interest cost 259 265 Benefit payments (193) (170) Amendments -0- (555) Actuarial loss 642 405 Curtailment (1,160) -0- Benefit obligation at end of year $3,414 $3,805 49 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 15--Retirement Plans (Continued) Postretirement Benefits other than Pensions for Acquired Subsidiary (Continued) The discount rates used in determining the actuarial present value of the accumulated postretirement benefit obligation were 6.0% and 7.0% for 1998 and 1997 respectively. The health care cost trend rates used for 1998 were projected at level rates of 5.75% for grandfathered participants and 5.0% for non-grandfathered participants. This grandfathering is related to cost sharing requirements for different groups of participants for these benefits. The health care cost trend rates used for 1997 were an initial rate of 8.0% and decreasing over time to an annual rate of 6.0% and remaining at that level thereafter for all participants. The health care cost trend rate assumption can have a significant impact on the amounts reported. Increasing the assumed health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation by approximately $251 and the aggregate of the service and interest cost components of net periodic postretirement health care benefit cost by $15. Southwest amended this plan to discontinue participation for active employees December 31, 1998 and to limit participation to employees retiring before January 1, 2002. As the result of this plan curtailment, an additional expense of $1,129 was recorded for 1998. In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS No. 132") which is effective for years beginning after December 15, 1997. FAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. The adoption of FAS No. 132 will not have a material impact on the Corporation's financial condition or results of operations. 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 $8,007 at December 31, 1998 and $2,436 at December 31, 1997. 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 seven year period from contributions to the ESOP by the Corporation and dividends on unallocated ESOP shares. 50 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands, except per share data) NOTE 16--Unearned ESOP Shares (Continued) The following is an analysis of ESOP shares held in suspense: (See NOTE 1 for the definition of "old" and "new shares"). Old New Total Shares Shares Shares in suspense December 31, 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 Shares acquired during 1998 242,089 -0- 242,089 Shares allocated during 1998 (48,033) (11,760) (36,273) Shares in suspense December 31, 1998 365,307 89,439 275,868 The fair market value of the new shares remaining in suspense was approximately $6,759 and $2,456 at December 31, 1998 and 1997 respectively. Interest on ESOP loans was $255 in 1998, $211 in 1997 and $313 in 1996. During 1998, 1997 and 1996 dividends on unallocated shares in the amount of $196, $213 and $256 respectively were used for debt service while all dividends on allocated shares were allocated to the participants. NOTE 17--Stock Option Plan At December 31, 1998, 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, all options granted during 1997 became vested at December 31, 1997 and expire ten years from the grant date, and all options granted during 1998 became vested at December 31, 1998 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:
1998 1997 1996 As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma Net Income $33,374 $33,374 $39,539 $33,597 $37,193 $37,158 Basic earnings per share $ 1.09 $ 1.09 $ 1.28 $ 1.09 $ 1.19 $ 1.19 Diluted earnings per share $ 1.08 $ 1.08 $ 1.28 $ 1.09 $ 1.19 $ 1.19
51 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands, except per share data) NOTE 17--Stock Option Plan (Continued) The fair value of each option granted is estimated on the date of the grant using the Black-Scholes options pricing model with the following weighted average assumptions used: 1998 1997 1996 Dividend yield 3.75% per annum 2.5% per annum 3.0% per annum Expected volatility 90.0% 28.0% 10.0% Risk-free interest rate 5.1% 5.6% 6.7% Expected option life 9.1 years 5.7 years 9.3 years 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. A summary of the status of the Corporation's outstanding stock options as of December 31, 1998, 1997 and 1996 and changes for the years ending on those dates is presented below: Outstanding at beginning of year 526,274 $17.49 233,308 $16.10 58,134 $ 6.47 Granted 202,008 $29.375 312,280 $18.50 195,048 $18.375 Exercised (65,569) $17.44 (2,800) $ 6.44 (9,140) $ 6.44 Forfeited (9,540) $19.62 (16,514) $18.44 (10,734) $13.38 Outstanding at end of year 653,173 $21.05 526,274 $17.49 233,308 $16.10 Exercisable at end of year 478,029 $22.12 345,019 $16.93 44,374 $ 6.47
The following table summarizes information about the stock options outstanding at December 31, 1998.
Options Outstanding Options Exercisable Weighted-Average Range of Number Outstanding Remaining Contract Weighted-Average Number Exercisable Weighted-Average Exercise Prices at 12/31/98 Life Exercise Price at 12/31/98 Exercise Price $5.00-5.99 24,543 3.3 $ 5.50 24,543 $ 5.50 $6.00-8.99 15,400 4.2 $ 8.07 15,400 $ 8.07 $18.375-18.50 414,651 8.0 $18.46 239,507 $18.50 $29.375 198,579 9.2 $29.375 198,579 $29.375 Total 653,173 $21.05 478,029 $22.12
52 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) 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 1998. Balances December 31, 1997 $11,174 Advances 8,303 Repayments (8,865) Other (304) Balances December 31, 1998 $10,308 "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, 1998, dividends from subsidiary banks were restricted not to exceed $56,228. These restrictions have not had, and are not expected to have, a significant impact on the Corporation's ability to meet its cash obligations. The Corporation is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of total and Tier I capital (common and certain other "core" equity capital) to risk weighted assets, and of Tier I capital to average assets. As of December 31, 1998, the Corporation and its banking subsidiaries meet all capital adequacy requirements to which they are subject. 53 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 20--Regulatory Restrictions and Capital Adequacy (Continued) As of December 31, 1998, the most recent notifications from the Federal Reserve Board and Federal Deposit Insurance Corporation categorized First Commonwealth Bank and Southwest Bank as well capitalized under the regulatory framework for prompt corrective action. To be considered as well capitalized, the banks must maintain minimum total risk-based capital, Tier I risk-based capital and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the 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, 1998 Total Capital to Risk Weighted Assets First Commonwealth Financial Corporation $372,538 15.8% $188,929 8.0% Not Applicable Not Applicable First Commonwealth Bank $269,259 14.4% $149,993 8.0% $187,492 10.0% Southwest Bank $ 86,040 18.4% $ 37,364 8.0% $ 46,705 10.0% Tier I Capital to Risk Weighted Assets First Commonwealth Financial Corporation $342,999 14.5% $ 94,464 4.0% Not Applicable Not Applicable First Commonwealth Bank $245,823 13.1% $ 74,997 4.0% $112,495 6.0% Southwest Bank $ 80,184 17.2% $ 18,682 4.0% $ 28,023 6.0% Tier I Capital to Average Assets First Commonwealth Financial Corporation $342,999 8.6% $159,321 4.0% Not Applicable Not Applicable First Commonwealth Bank $245,823 8.0% $123,178 4.0% $153,972 5.0% Southwest Bank $ 80,184 9.2% $ 35,032 4.0% $ 43,790 5.0% As of December 31, 1997 Total Capital to Risk Weighted Assets First Commonwealth Financial Corporation $367,106 15.6% $188,210 8.0% Not Applicable Not Applicable First Commonwealth Bank $252,457 13.8% $146,276 8.0% $182,845 10.0% Southwest Bank $ 87,840 17.4% $ 40,291 8.0% $ 50,364 10.0% Tier I Capital to Risk Weighted Assets First Commonwealth Financial Corporation $341,174 14.5% $ 94,105 4.0% Not Applicable Not Applicable First Commonwealth Bank $232,691 12.7% $ 73,138 4.0% $109,707 6.0% Southwest Bank $ 81,674 16.2% $ 20,146 4.0% $ 30,219 6.0% Tier I Capital to Average Assets First Commonwealth Financial Corporation $341,174 9.6% $142,113 4.0% Not Applicable Not Applicable First Commonwealth Bank $232,691 8.3% $111,772 4.0% $139,715 5.0% Southwest Bank $ 81,674 11.1% $ 29,444 4.0% $ 36,805 5.0%
54 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 21--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) Balance Sheets December 31, 1998 1997 Assets Cash $ 4,501 $ 7,744 Securities available for sale 145 3,547 Loans to affiliated parties 498 469 Investment in subsidiaries 348,597 336,588 Investment in jointly-owned company 3,059 2,622 Premises and equipment 6,022 4,507 Dividends receivable from subsidiaries 2,914 4,924 Receivable from related parties 3,588 810 Other assets 526 1,636 Total assets $369,850 $362,847 Liabilities and Shareholders' Equity Accrued expenses and other liabilities $ 1,352 $ 1,237 Dividends payable 5,086 4,851 Loans payable 8,007 2,436 Shareholders' equity 355,405 354,323 Total liabilities and shareholders' equity $369,850 $362,847 Statements of Income Years Ended December 31, 1998 1997 1996 Interest and dividends $ 251 $ 94 $ 129 Dividends from subsidiaries 28,559 37,023 29,465 Net securities gains (losses) 203 382 (169) Other revenue 1,008 16 92 Operating expenses (8,366) (8,476) (8,555) Income before taxes and equity in undistributed earnings of subsidiaries 21,655 29,039 20,962 Applicable income tax benefits 2,348 2,610 2,802 Income before equity in undistributed earnings of subsidiaries 24,003 31,649 23,764 Equity in undistributed earnings of subsidiaries 9,371 7,890 13,429 Net income $33,374 $39,539 $37,193 55 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (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, 1998 1997 1996 Operating Activities Net income $ 33,374 $ 39,539 $ 37,193 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,470 1,522 1,198 Net (gains) losses on sale of assets (203) (381) 167 Decrease (Increase) in prepaid income taxes 13 229 69 Undistributed equity in subsidiaries (9,371) (7,890) (13,429) Other - net (1,642) (403) (1,044) Net cash provided by operating activities 23,641 32,616 24,154 Investing Activities Transactions with securities available for sale: Purchases of investment securities (10,091) (6,734) (317) Sales of investment securities 13,709 5,419 3,331 Net change in loans to affiliated parties (28) 48 (236) Purchases of premises and equipment (2,036) (1,005) (1,714) Acquisition of and additional investment in subsidiary, net of cash received (1,770) -0- (1,913) Net cash used by investing activities (216) (2,272) (849) Financing Activities Net increase (decrease) in short-term borrowings -0- (103) 103 Discount on dividend reinvestment plan purchases (1,016) (630) (529) Treasury stock acquired (2,123) (5,908) (5,850) Treasury stock reissued 2,217 16 108 Cash dividends paid (25,746) (21,739) (19,907) Net cash used by financing activities (26,668) (28,364) (26,075) Net increase (decrease) in cash (3,243) 1,980 (2,770) Cash at beginning of year 7,744 5,764 8,534 Cash at end of year $ 4,501 $ 7,744 $ 5,764 56 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (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 $6,000 in 1998 and concurrently loaned this amount to the ESOP on identical terms. The loan was recorded as long-term debt and the offset was recorded as a reduction of the common shareholders' equity. Loan payments in the amount of $429 in 1998, $1,038 in 1997 and $1,071 in 1996 were made by the ESOP thereby reducing the outstanding amount related to unearned ESOP shares to $8,007 at December 31, 1998. NOTE 22--Fair Values of Financial Instruments Below are various estimated fair values at December 31, 1998 and 1997, 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. 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. 57 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997 and 1996 (Dollar Amounts in Thousands) NOTE 22--Fair Values of Financial Instruments (Continued) Off-balance-sheet instruments: Many of the Corporation's off-balance-sheet instruments, primarily loan commitments and standby letters of credit, are expected to expire without being drawn upon, therefore the commitment amounts do not necessarily represent future cash requirements. Management has determined that due to the uncertainties of cash flows and difficulty in predicting the timing of such cash flows, fair values were not estimated for these instruments. Deposit liabilities: For deposits which are payable on demand at the reporting date, representing all deposits other than time deposits, management estimates that the carrying value of such deposits is a reasonable estimate of fair value. The carrying amounts of variable rate time deposit accounts and certificates of deposit approximate their fair values at the report date. Fair values of fixed rate time deposits are estimated by discounting the future cash flows using interest rates currently being offered and a schedule of aggregated expected maturities. The carrying amount of accrued interest approximates its fair value. Short-term borrowings: The carrying amounts of short-term borrowings such as Federal funds purchased, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and treasury, tax and loan notes approximate their fair values. Long-term debt: The carrying amounts of variable rate debt approximate their fair values at the report date. Fair values of fixed rate debt are estimated by discounting the future cash flows using the Corporation's estimated incremental borrowing rate for similar types of borrowing arrangements. The following table presents carrying amounts and estimated fair values of the Corporation's financial instruments at December 31, 1998 and 1997. 1998 1997 Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value Financial assets Cash and due from banks $ 96,615 $ 96,615 $ 82,500 $ 82,500 Interest-bearing deposits with banks 1,914 1,914 5,040 5,040 Federal funds sold 1,000 1,000 29,880 29,880 Securities available for sale 1,042,636 1,042,636 505,918 505,918 Investments held to maturity 482,696 486,185 509,880 511,711 Loans, net of allowance 2,342,546 2,389,039 2,410,405 2,459,313 Financial liabilities Deposits 2,931,131 2,946,535 2,884,343 2,897,108 Short-term borrowings 140,547 140,547 203,449 203,449 Long-term debt 630,850 635,252 193,054 189,134 58 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders of First Commonwealth Financial Corporation: We have audited the accompanying consolidated balance sheets of First Commonwealth Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for the years 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 audits. The consolidated financial statements give retroactive effect to the merger of First Commonwealth Financial Corporation and Southwest National Corporation on December 31, 1998, which has been accounted for as a pooling of interests as described in Note 2 to the consolidated financial statements. We did not audit the balance sheet of Southwest National Corporation as of December 31, 1998 and 1997, or the related statements of income, shareholders' equity, and cash flows of Southwest National Corporation for the years then ended, which statements reflect total assets constituting 23% and 20%, respectively, of consolidated total assets at December 31, 1998 and 1997, and net interest income constituting 25% and 26%, respectively, of consolidated net interest income for the years then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Southwest National Corporation, is based solely on the report of such other auditors. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such 1998 and 1997 consolidated financial statements present fairly, in all material respects, the financial position of First Commonwealth Financial Corporation and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The financial statements of First Commonwealth Financial Corporation for the year ended December 31, 1996, before giving retroactive effect to the pooling of interests, and the financial statements of Southwest National Corporation for the year ended December 31, 1996, were audited by other auditors whose reports, dated January 17, 1997 and February 17, 1999, respectively, expressed unqualified opinions on those statements. We audited the combination of the accompanying consolidated statements of income, shareholders' equity and cash flows for the year ended December 31, 1996, after restatement for the 1998 pooling of interests; in our opinion, such consolidated financial statements have been properly combined on the basis described in Note 2 to the consolidated financial statements. /S/Deloitte & Touche, LLP Pittsburgh, Pennsylvania February 17, 1999 59 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 8. Financial Statements and Supplementary Data INDEPENDENT AUDITORS' REPORT To the Board of Directors Southwest National Corporation: We have audited the consolidated balance sheets of Southwest National Corporation and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of Southwest National Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southwest National Corporation and subsidiary at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /S/KPMG Peat Marwick LLP Pittsburgh, Pennsylvania February 17, 1999 60 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 statements of income, shareholders' equity and cash flows of First Commonwealth Financial Corporation and Subsidiaries for the year ended December 31, 1996, before giving retroactive effect to the pooling of interest as described in Note 2 to the consolidated financial statements. 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 audit. 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 our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, before giving retroactive effect to the pooling of interest as described in Note 2 to the consolidated financial statements present fairly, in all material respects, the consolidated results of their operations and their consolidated cash flows of First Commonwealth Financial Corporation and Subsidiaries for the year ended December 31, 1996, in conformity with generally accepted accounting principles. /S/GRANT THORNTON LLP Philadelphia, Pennsylvania January 17, 1997 61 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, restated to reflect pooling of interests for the years ended December 31, 1998 and 1997 are as follows:
1998 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income.............................. $68,450 $72,016 $72,408 $70,547 Interest expense............................. 35,201 38,023 38,394 36,664 Net interest income..................... 33,249 33,993 34,014 33,883 Provision for possible credit losses......... 2,475 2,625 2,857 7,092 Net interest income after provision for possible credit losses..................... 30,774 31,368 31,157 26,791 Securities gains (losses).................... 982 -0- 1,657 (1,182) Other operating income....................... 5,056 5,833 5,798 8,194 Merger and other related charges............. -0- -0- -0- 7,915 Other operating expenses..................... 22,930 22,843 23,005 23,508 Income before taxes and extraordinary items................................. 13,882 14,358 15,607 2,380 Applicable income taxes...................... 3,900 3,864 4,063 402 Net income before extraordinary items... 9,982 10,494 11,544 1,978 Extraordinary items, net of income taxes..... -0- -0- -0- (624) Net income.............................. $ 9,982 $10,494 $11,544 $ 1,354 Basic earnings per share, before extra- ordinary items............................. $ 0.32 $ 0.34 $ 0.38 $ 0.07 Diluted earnings per share, before extra- ordinary items............................. $ 0.32 $ 0.34 $ 0.37 $ 0.06 Average shares outstanding..................30,803,977 30,772,797 30,751,604 30,342,912 Average shares outstanding assuming dilution.................................31,011,647 30,950,698 30,898,079 30,476,801
1997 First Second Third Fourth Quarter Quarter Quarter Quarter Interest income.............................. $61,251 $62,758 $64,919 $65,844 Interest expense............................. 28,975 30,182 32,032 33,238 Net interest income..................... 32,276 32,576 32,887 32,606 Provision for possible credit losses......... 1,691 2,035 2,458 3,968 Net interest income after provision for possible credit losses..................... 30,585 30,541 30,429 28,638 Securities gains............................. 1,758 1,039 3,181 847 Other operating income....................... 4,276 4,662 4,795 4,983 Other operating expenses..................... 22,187 22,240 22,296 22,134 Income before income taxes.............. 14,432 14,002 16,109 12,334 Applicable income taxes...................... 4,417 4,334 5,011 3,576 Net income.............................. $10,015 $ 9,668 $11,098 $ 8,758 Basic earnings per share..................... $ 0.32 $ 0.31 $ 0.36 $ 0.28 Diluted earnings per share................... $ 0.32 $ 0.31 $ 0.36 $ 0.28 Average shares outstanding..................31,015,133 30,837,256 30,750,565 30,744,752 Average shares outstanding assuming dilution.................................31,046,364 30,894,119 30,838,248 30,914,989
62 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Form 8K dated September 24, 1997, reporting a change in accountants is incorporated herein by reference. 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 26, 1999 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 76 Chairman of the Board of the Corporation, Chairman of the Board of FCTC, CSC, and FCB, FCIA and Berkshire Securities Corporation; Director of CTCLIC and New Mexico Banquest Investors Corp.; Former President and Chief Executive Officer of the Corporation Joseph E. O'Dell 53 President, Chief Executive Officer and director of the Corporation; Director of FCB, FCTC, BSI, Southwest Bank 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 43 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. 67 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 David S. Dahlmann 49 Vice Chairman of the Corporation; President and Chief Executive Officer of Southwest Bank; Former President and Chief Executive Officer of Southwest National; Director of Southwest Bank John J. Dolan 42 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 64 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 63 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) R. John Previte 49 Senior Vice President, Investments of the Corporation; Investment Officer of FCB Rosemary Krolick 45 Senior Vice President and Chief Information Officer of the Corporation; President, Chief Executive Officer and director of CSC 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 26, 1999 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 26, 1999 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 26, 1999 is incorporated herein by reference in response to this item. 64 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 10.4 to Form S-4 Robert C. Williams filed June 17, 1994 10.3 Change in Control Exhibit 10.4 to Form 10-K Agreement dated filed March 21, 1996 October 27, 1995 Joseph E. O'Dell 10.4 Change in Control Exhibit 10.5 to Form 10-K Agreement dated filed March 21, 1996 October 27, 1995 Gerard M. Thomchick 10.5 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. 10.6 Employment Contract Exhibit 10.4 to Form S-4 David S. Dahlmann filed November 2, 1998 10.7 Supplemental Executive Page 68 Retirement Plan 65 FIRST COMMONWEALTH FINANCIAL CORPORATION ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K PART IV (Continued) 10.8 Deferred Compensation Page 86 Plan 10.9 Cash Incentive Bonus Page 91 Program 21.1 Subsidiaries of the Page 96 Registrant 23.1 Consent of Deloitte & Page 97 Touche LLP Certified Public Accountants 23.2 Consent of KPMG Peat Page 98 Marwick LLP Certified Public Accountants 23.3 Consent of Grant Thornton Page 99 LLP Certified Public Accountants 24.1 Power of Attorney Page 100 27.1 Financial Data Schedule Page 101 (B) Report on Form 8-K (1) Form 8-K dated January 15, 1999 reporting the Corporation's acquisition of Southwest National Corporation. (2) Form 8-K/A dated March 16, 1999, amending Form 8-K dated January 15, 1999, reporting the Corporation's acquisition of Southwest National Corporation, to include financial statements of acquired subsidiary and Pro Forma financial statements. 66 FIRST COMMONWEALTH FINANCIAL CORPORATION SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Indiana, Pennsylvania, on the 29th day of March 1999. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) /S/JOSEPH E. O'DELL Joseph E. O'Dell, President and Chief Executive Officer 67 EX-10 2 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FIRST COMMONWEALTH FINANCIAL CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN January 1, 1998 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) TABLE OF CONTENTS ARTICLE TITLE PAGE I DEFINITIONS 3 II INTRODUCTION AND PURPOSE 6 2.1 Introduction 6 2.2 Purpose 6 2.3 Interpretation and Intent 6 2.4 Effective Date 6 III PARTICIPATION 7 3.1 Initial Participation 7 3.2 Additional Participation 7 3.3 Termination of Employment 7 IV CONTRIBUTIONS AND ALLOCATIONS 8 4.1 Salary Reduction Contributions 8 4.2 Non-Elective Contributions 8 4.3 Termination of Employment 9 During Year V INVESTMENTS AND VALUATIONS 10 5.1 Measure of Investment Earnings 10 5.2 Quarterly Valuations 10 VI DETERMINATION AND DISTRIBUTION 11 OF BENEFITS 6.1 Determination of Benefits Upon 11 Termination of Employment 6.2 Determination of Benefits Upon 11 Death or Retirement 6.3 Distribution of Vested Portion of 11 Participant's Combined Account 6.4 Making of Distributions 12 VII ADMINISTRATION 13 7.1 Powers and Responsibilities of 13 Administrator 7.2 Plan Sponsor and Named Fiduciary 13 7.3 Powers and Responsibilities of 13 Committee 7.4 Claims Procedure 13 VIII TRUST FUND 15 8.1 Establishment of Trust 15 8.2 Right of Assignment and Transfer 15 of Interest 8.3 Unfunded Nature of Plan 15 IX AMENDMENT AND TERMINATION 16 9.1 Amendment 16 9.2 Termination of Plan 16 X MISCELLANEOUS 17 10.1 Limitation of Rights 17 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) TABLE OF CONTENTS ARTICLE TITLE PAGE 10.2 Headings 17 10.3 Gender and Number 17 10.4 Governing Law 17 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE I DEFINITIONS As used in this Plan, the following words and phrases shall have the meaning set forth below, unless a different meaning is clearly required by the context: 1.1 "Act" means the Employee Retirement Income Security Act of 1974 (P.L. 93-406, 29 USC Section 1001 et seq), as the same may be amended from time to time. 1.2 "Administrator" means Krauss and Pasternack, a Pennsylvania partnership, or any successor or successors thereto designated by the Employer from time to time. 1.3 "Aggregate Account" means, with respect to each Participant, the value of all accounts maintained on behalf of that Participant. 1.4 "Anniversary Date" means December 31, 1998 and each thirty-first day of December thereafter. 1.5 "Basic 401(k) Plan" means the First Commonwealth Financial Corporation 401(k) Retirement Savings and Investment Plan, as amended from time to time. 1.6 "Beneficiary" means the person to whom, or the entity to which, a share of a deceased Participant's interest in the Plan is payable. 1.7 "Board of Directors" means the Board of Directors of the Employer. 1.8 "Committee" means the Executive Compensation Committee of the Board of Directors of the Employer, as the same shall from time to time be constituted. 1.9 "Compensation" with respect to any Participant means such Participant's basic compensation that is paid to him during the calendar year. Such amount shall accordingly exclude bonuses, incentive compensation, overtime pay and all other special and irregular compensation, whether such amounts are required to be included as wages for tax purposes or not. 1.10 "Code" means the Internal Revenue Code of 1986 (26 USC), as amended from time to time. 1.11 " Deferred Compensation" means that portion of a Participant's remuneration which he would have been entitled to receive in cash during a calendar year but for a Salary Reduction Agreement between such Participant and the Employer. 1.12 "Effective Date" means the first day of January, 1998. 1.13 "Elective Contribution" means the Employer's contributions to this Plan that are made pursuant to the Participant's deferral election in accordance with Section 4.1 hereof. 1.14 "Employee" means any person employed by the Employer or of any subsidiaries or affiliates of which the Employer shall own a fifty percent (50%) or greater capital interest, but shall not include consultants, directors who are not also employed by the Employer and other persons not employed by the Employer. 1.15 "Employer" means First Commonwealth Financial Corporation, a bank holding company, and any successor or successors thereto. 1.16 "ESOP" means the First Commonwealth Financial Corporation Employee Stock Ownership Plan, as amended from time to time. 1.17 "Executive Employee" means an Employee who is a member of the Employer's select group of management or highly compensated employees within the meaning of Section 201(2) of the Act (29 USC Section 1051(2)). 1.18 "Fiduciary" means any person who, or entity which, (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of the Plan or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan, FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE I DEFINITIONS including, but not limited to, the Trustee, the Employer and the Administrator. 1.19 "Forfeiture" means that portion of a Participant's Account that is not Vested, and occurs on the same date that a forfeiture would occur for the Participant under Basic 401(k) Plan. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) 1.20 "Former Participant" means a person who has once been a Participant hereunder but who is no longer an Employee and whose Vested Aggregate Account has not yet been fully distributed to him. 1.21 "Labor Regulations" means the regulations of the United States Department of Labor (29 CFR), and as amended periodically. 1.22 "Non-Elective Contribution" means a contribution made by the Employer on behalf of a Participant other than an Elective Contribution. 1.23 "Participant" means any Executive Employee who participates in this Plan. 1.24 "Participant's Combined Account" means the sum of a Participant's Elective Account and the Participant's Non-Elective Account. 1.25 "Participant's Elective Account" means the account established and maintained by the Administrator for each Participant with respect to his interest in the Plan resulting from his Elective Contributions. 1.26 "Participant's Non-Elective Account" means the account established and maintained by the Administrator for each Participant with respect to his interest in the Plan resulting from his Non-Elective Contributions. 1.27 "Plan" means the First Commonwealth Financial Corporation Supplemental Executive Retirement Plan as contained herein or as subsequently amended. 1.28 "Plan Compensation" means a Participant's Compensation, for each calendar year, in excess of the amount permitted to be reflected, for that calendar year, under the Basic Plan because of the requirements of Section 401(a)(17) of the Code. 1.29 "Plan Year" means each calendar year commencing with the 1998 calendar year. 1.30 "Retirement Date" means the date on which a Participant can retire normally or because of disability in accordance with the provisions of the Basic 401(k) Plan. 1.31 "Salary Reduction Agreement" means an agreement between a Participant and the Employer, or, if applicable, with the subsidiary or affiliate employing the Participant, pursuant to which such Participant's Compensation shall be reduced and he shall be entitled to Deferred Compensation pursuant to Section 4.1 hereof. 1.32 "Treasury Regulation" means the income tax regulations as promulgated by the Secretary of the Treasury or his delegate (26 CFR), and as amended periodically. 1.33 "Trust Agreement" means that certain Agreement and Declaration of Trust made and entered into of even date with the Plan by and between the Employer, as settlor, and the Trustee used for funding the benefits accrued hereunder, and any amendments, substitutions or recodifications thereto. 1.34 "Trust Fund" means the assets held in trust by the Trustee from time to time pursuant to the Trust Agreement. 1.35 "Trustee" means First Commonwealth Trust Company of Indiana, Pennsylvania, and any successor or successors thereto. 1.36 "Valuation Date" means March 31, June 30, September 30 and December 31 of each calendar year. 1.37 "Vested" means the non-forfeitable portion of any account maintained on behalf of a Participant. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE II INTRODUCTION AND PURPOSE 2.1 Introduction This Plan shall constitute "a plan which is unfunded and maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees' within the meaning of Section 201(2) of the Act (29 USC Section 1051(2)) and the Labor Regulations applicable thereto. Accordingly, it shall be exempt from Parts 2 and 3 of Title I of the Act and shall be subject to simplified reporting and disclosure under Part 1 of Title I of the Act as provided by the applicable Labor Regulations. 2.2 Purpose The purpose of this Plan is to restore some of the equity to Participants as compared with other Employees that would otherwise be lost under certain provisions of the Basic 401(k) Plan and the ESOP that have been incorporated in those two latter instruments in order to meet specific legal requirements, such as: The maximum compensation restrictions contained at Section 401(a)(17) of the Code. The actual deferral percentage restrictions contained at Section 401(k)(3)(ii) of the Code. The actual contribution percentage restrictions contained at Section 401(m)(2)(A) of the Code. The maximum contribution and forfeiture restrictions contained at Section 415 of the Code. The maximum salary reduction deferral restrictions contained at Section 402(g) of the Code. 2.3 Interpretation and Intent It is intended that this Plan be part of a program of employee benefits for the Participants that includes also the Basic 401(k) Plan and the ESOP and that the former is intended to supplement the latter two (2) plans. Accordingly, this Plan is to be interpreted and administered in pari materia with the latter two (2) plans. 2.4 Effective Date The Plan shall be effective on its Effective Date, but any act or action required for 1998 shall be undertaken as soon as practicable after this Plan and the Trustee Agreement shall be duly executed and adopted. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE III PARTICIPATION 3.1 Initial Participation The Participants in the Plan as and from the Effective Date shall be as follows: Joseph E. O'Dell, President and Chief Executive Officer of the Employer. Gerard M. Thomchick, Senior Executive Vice President and Chief Operating Officer of the Employer. Johnston A. Glass, President and Chief Executive Officer of First Commonwealth Bank, a wholly owned subsidiary of the Employer. 3.2 Additional Participation The Committee may, but is not required to, from time to time extend the right of participation in the Plan to other Executive Employees. 3.3 Termination Of Employment A Participant who ceases being an Employee shall cease being a Participant hereunder and shall thereupon become a Former Participant. If such a Former Participant shall thereafter again become an Employee, he shall not automatically again become a Participant, but shall become a Participant again if, and only if, so ordered by the Committee. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE IV CONTRIBUTIONS AND ALLOCATIONS 4.1 Salary Reduction Contributions Any Participant who is a Participant on the first day of a Plan Year may enter into a Salary Reduction Agreement with the Employer, or if applicable, with the subsidiary or affiliate employing the Participant, but in any event is not required to enter into such an agreement, pursuant to which the Participant's Plan Compensation shall be reduced by the percentage that such Participant elects, not less than one percent (1%) nor more than five percent (5%), in whole integer percentages, such amount to constitute the Participant's Deferred Compensation. For the purpose of assisting the Employer and the Administrator in recording the amount of Deferred Compensation, and for providing additional assurance to the Participant of his rights thereto under certain circumstances, all as provided herein and in the Trust Agreement, the Employer shall make an Elective Contribution on behalf of each such Participant, equal to the Participant's Deferred Compensation for the Plan Year, in the manner provided by the next sentence hereto. The amount of such Elective Contribution, as calculated at the beginning of each Plan Year, shall as soon as practicable at or near the beginning of such Plan Year, be conveyed and transferred to the Trustee to be held in trust for the benefit of the Participant, but subject in any event to the interest of the creditors of the Employer under certain circumstances, as provided in the Trust Agreement. Any such election shall be made prior to the first day of the applicable Plan Year and shall thereafter be irrevocable with respect to that Plan Year, but may be modified or revoked as it pertains to any future Plan Year. The Employer, or if applicable, the subsidiary or affiliate employing the Participant, shall thereupon cause the Participant's Compensation to be reduced in an amount equal to his Deferred Compensation for the Plan Year pursuant to such election, in as level an amount as possible over the number of paychecks (or remaining paychecks) in that Plan Year. Nevertheless, for 1998, such election may be made at any time within, and not later than, fourteen (14) calendar days after this Plan is approved by the Committee. Any such election shall be on a form provided by the Employer. 4.2 Non-Elective Contributions In addition to the Elective Contributions provided by Section 4.1 hereof, the Employer shall also make the following Non-Elective Contributions on behalf of each Participant who is a Participant on the first day of a Plan Year, viz.: A matching contribution which shall be equal to eighty percent (80%) of the Participant's Elective Contribution as provided by Section 4.1 hereof, provided, however if the matching contribution percentage under the Basic 401(k) Plan shall be changed by the Board of Directors to a percentage other than eighty percent (80%), such revised percentage shall automatically be used herein in lieu of eighty percent (80%). A contribution equal to eight percent (8%) of the Plan Compensation of each Participant for the calendar year. The Non-Elective Contribution shall be contributed at the same time and in the same manner as the Elective Contribution as provided by Section 4.1 hereof. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) 4.3 Termination of Employment During Year If a Participant shall terminate his employment during a Plan Year, so that the Participant's total reduction of Compensation pursuant to the Salary Reduction Agreement shall be less than the Elective Contribution made on behalf of the Participant, then the Employer (or, if applicable the subsidiary or affiliate employing the Participant) shall recover the difference from any remaining remuneration otherwise due and payable to the Participant (including, but not limited to, severance benefits and accrued vacation remuneration). Non-Elective Contributions made on behalf of the Participant shall not be recovered from the Participant as a result of early termination of employment or otherwise. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE V INVESTMENTS AND VALUATIONS 5.1 Measure of Investment Earnings The Participant's Elective Account and the Participant's Non- Elective Account shall be credited with hypothetical investment earning and investment gains measured on a market value basis, whether such gains have been realized or not, and charged with hypothetical investment losses measured on a market value basis, whether such losses have been realized or not, in the manner provided in this Section 5.1. Each such account shall be credited or charged in the same manner, and in accordance with the same rules and procedures, as such amounts would have been credited or charged under the Basic 401(k) Plan if the Elective Contributions and Non-Elective Contributions would have been invested therein on the same day as invested herein with the Trustee as part of the Trust Fund. For this purpose, the investment elections and changes therein made by the Participant under the Basic 401(k) Plan shall be applied as if such election also pertained to the hypothetical account provided herein. 5.2 Quarterly Valuations The Administrator shall cause each Participant's Elective Account and Participant's Non-Elective Account to be valued on each Valuation Date in accordance with the procedure established by Section 5.1 hereof. The Administrator shall thereupon cause statements to be prepared and distributed to each Participant showing his account balance as of each such Valuation Date and other relevant information. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 Determination of Benefits Upon Termination of Employment Upon termination of employment, the Participant shall be entitled to that portion of his Participant's Combined Account in which he is then Vested. Such Vested portion shall be determined using the same criteria, pursuant to the same methods, and in accordance with the same rules and procedures as would have been applicable under the Basic 401(k) Plan, had such accounts been the applicable accounts for such Participant under the Basic 401(k) Plan, except that all of the Participant's Combined Accounts shall be deemed Vested on and after a "change in control." For this purpose, a "change in control" shall have occurred if, at any time, any person or group of persons acting in concert (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the regulations of the Securities and Exchange Commission promulgated thereunder) shall acquire legal or beneficial ownership interest, or voting rights, in twenty-five percent (25%) or more of the common voting stock of the Employer. For all purposes hereunder, each Participant's period of service with the Employer prior to the Effective Date shall be credited as well as such period of service subsequent thereto. 6.2 Determination of Benefits Upon Death or Retirement Upon the Participant's retirement or death, the Participant shall be entitled to that portion of his Participant's Combined Account in which he is then Vested. Such Vested portion shall be determined using the same criteria, pursuant to the same methods, and in accordance with the same rules and procedures as would have been applicable under the Basic 401(k) Plan, had such accounts been the applicable accounts for such Participant under the Basic 401(k) Plan. 6.3 Distribution of Vested Portion of Participant's Combined Account The Vested portion of the Participant's Combined Account shall be distributed to him in the same manner, and in accordance with the same rules and procedures, as such amount would have been distributed to the Participant under the Basic 401(k) Plan. In the event of the death of a Participant or Former Participant prior to the total Vested portion of his Participant's Combined Account being distributed to him, the remainder shall be distributed to his Beneficiary as soon as practicable after his death. For this purpose, his Beneficiary shall be the same person or entity entitled to receive benefits on his death under the Basic 401(k) Plan, unless the Participant shall have previously designated, in writing to the Administrator, another person or entity to be his Beneficiary for the purpose of this Plan. Any such designation shall be revocable before the death of the Participant and may be revoked, and another person so designated, by a subsequent writing filed with the Administrator. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) 6.4 Making of Distributions All distributions from this Plan, as provided herein, shall be made by the Trustee, from the Trust Fund, upon written authorization and direction by the Administrator to the Trustee, as long as the Employer shall not then be bankrupt or insolvent, as defined and provided in the Trust Agreement. If payments to the Participants, Former Participants and Beneficiaries shall then be suspended or terminated because of the bankruptcy or insolvency of the Employer, in accordance with the provisions of the Trust Agreement, distributions shall then be made by the Employer, subject to any necessary approvals of a bankruptcy court or other supervising court; provided, however if the suspension of payment from the Trust Fund shall later be discontinued, distributions shall again be made from the Trust Fund, all as more fully provided in the Trust Agreement. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE VII ADMINISTRATION 7.1 Powers and Responsibilities of Administrator The Administrator shall administer, construe and interpret this Plan and shall, subject to its provisions, certify and direct the Trustee as to the making of distributions hereunder and, consistent with the elections (and changes thereof from time to time) under the Basic 401(k) Plan, direct the Trustee as to the manner of investment of the Trust Fund from time to time. The Administrator shall have discretionary authority to exercise all powers and to make all determinations, consistent with the terms of the Plan, in all matters entrusted to it, and its determination shall be given deference and shall be final and binding on all interested parties. The Administrator shall constitute the named administrator within the meaning of Section 3(16)(A) of the Act (29 USC Section 1002(16)(A)) and shall have an obligation under this Plan as a Fiduciary accordingly. 7.2 Plan Sponsor and Named Fiduciary The plan sponsor within the meaning of Section 3(15)(B) of the Act (29 USC Section 1102(15)(B)) shall be the Employer. The named fiduciaries within the meaning of Section 402(a) of the Act (29 USC Section 1102(a)(2)) shall jointly be the Employer and the Administrator. 7.3 Powers and Responsibilities of Committee The Committee may permit additional Participants into the Plan from time to time and provide exceptions and waivers as to any provision thereof, provided no such exception or waiver shall reduce the benefit to which a Participant is otherwise entitled under any provision hereof. The Committee shall also have the power to amend and terminate the Plan to the extent provided by Article VIII hereof. 7.4 Claims Procedure Any Participant, Former Participant or Beneficiary, or his duly authorized representative, may file with the Administrator a claim for a benefit under this Plan. Such a claim must be in writing, be on a form provided by the Administrator if the Administrator had previously issued such a form and made the same available to the Participant, Former Participant or Beneficiary, and must be delivered to the Administrator, in person or by mail, postage prepaid. Within ninety (90) days after the receipt of such a claim, the Administrator shall send to the claimant, by mail, postage prepaid, a notice of the granting or denying, in whole or in part, of such claim, unless special circumstances require an extension of time for the processing of the claim. In no event may the extension exceed ninety (90) days from the date of the initial period. If such an extension is necessary, the claimant will be given written notice to this effect prior to the expiration of the initial ninety (90) day period. The Administrator shall have full discretion to grant or deny a claim in whole or in part in accordance with the terms of this Plan. If notice of the denial of a claim is not furnished in accordance with this Section 7.4, the claim shall be deemed denied and the claimant shall be permitted to exercise his right of review as hereinafter provided. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) The Administrator shall provide to every claimant who is denied a claim for benefits a written notice setting forth, in a manner calculated to be understood by the claimant the following information, viz.: The specific reason or reasons for the denial. Specific references to the pertinent Plan provisions on which the denial is based, together with a copy of such Plan provisions. A description of any additional material or information necessary of the claimant to perfect the claim and an explanation of why such material or information is necessary, and a. An explanation of the Plan's claim review procedure. Within sixty (60) days after the receipt by a claimant of written notification of the denial (in whole or in part) of a claim by the Administrator, the claimant or his duly authorized representative, upon written application to the Administrator, delivered in person or by certified mail, postage prepaid, may review pertinent documents and submit to the Administrator, in writing, his notice of appeal from the initial decision, together with a detailed statement of the basis and arguments upon which such appeal is based, including such statements of fact and conclusions of law, together with the justification therefor, as claimant or his authorized representative believe supports his appeal from the initial decision of the Administrator. Upon the Administrator's receipt of a notice of a request for review, the Administrator shall make a prompt decision on the review and shall communicate the decision on review to the claimant or his authorized representative. The decision on review shall be written in a manner calculated to be understood by the claimant and shall (unless the decision shall fully reverse the denial of the claim and completely accept the claim of the claimant) include specific reasons for the decision and specific references to the pertinent Plan provisions upon which the decision is based. The decision on review shall be made not later than sixty (60) days after the Administrator's receipt of a request for a review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered not later than one-hundred-twenty (120) days after receipt of the request for review. If an extension is necessary, the claimant shall be given written notice of the extension by the Administrator prior to the expiration of the initial sixty (60) day period. If notice of the decision on review is not furnished in accordance with this Section 7.4, the claim shall be deemed denied on review. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE VIII TRUST FUND 8.1 Establishment of Trust Upon even date with the execution of this Plan, or as soon as practicable thereafter, in order to assist the Employer in meeting its obligations hereunder and provide a more certain and regular procedure for receipt of benefits by the Participants, Former Participants and Beneficiaries, the Employer shall enter into a Trust Agreement with the Trustee for the holding of the Trust Fund in trust in accordance with all of the provisions thereof contained. Such trust shall be a grantor trust within the meaning of Section 671 of the Code and an accumulation trust within the meaning of Subpart C of Part 1 of Subchapter J of Chapter 1 of Subtitle A of the Code. 8.2 Right of Assignment and Transfer of Interest No amounts payable hereunder may be assigned, pledged, mortgaged, hypothecated, sold or transferred nor may any such amounts be subject to lien, levy, distraint or other legal process or attachment. All right to benefits hereunder shall be personal to the Participant, Former Participant or Beneficiary and no such person shall have a right to the assets held in the Trust Fund, or any portion thereof, prior to the Administrator directing the Trustee to make payment therefrom in a particular instance. 8.3 Unfunded Nature of Plan Since the rights of the Participants, Former Participants and Beneficiaries as cestuis que trust are not absolute but are defeasible in the event of the bankruptcy or insolvency of the Employer, as provided by the Trust Agreement, this Plan shall, notwithstanding the existence of the Trust Fund, be deemed unfunded for the purpose of Title I of the Act, in accordance with Labor Regulations. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE IX AMENDMENT AND TERMINATION 9.1 Amendment This Plan may be amended at any time and from time to time by the Committee; provided, however no such amendment shall reduce the benefit hereunder accrued by any Participant, Former Participant or Beneficiary prior to the later of (a) the date that such amendment is to be effective or (b) the date that such amendment is so adopted by the Committee. The Committee may authorize and direct any officer of the Employer to take such action, and execute such documents as are necessary or appropriate to evidence the adoption of any amendment hereto. 9.2 Termination of Plan The Committee may cause and authorize this Plan to be terminated at any time; provided, however, no such termination shall defease any right of a Participant, Former Participant or Beneficiary to any benefit accrued prior to the date of such termination (whether such benefit shall otherwise be Vested or not under the terms of the Plan). The Committee may authorize and direct any officer of the Employer to take such action, and execute such documents, as are necessary or appropriate to effectuate any such decision of the Committee. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.7 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (Continued) ARTICLE X MISCELLANEOUS 10.1 Limitation of Rights Nothing contained in this Plan shall be construed to limit in any way the right of the Employer (or, if applicable, the subsidiary or affiliate employing the Employee) to terminate an Employee's or Participant's employment at any time or in any way to constitute an agreement or understanding, express or implied, that the Employer (or, if applicable, the subsidiary or affiliate employing the Employee) will continue to employ Employee, or will employ, or continue to employ, the Employee in any particular position or under any particular circumstances. 10.2 Headings The headings and subheading contained herein are for convenience of reference only and are to be ignored in any construction thereof. 10.3 Gender and Number Whenever used in this Plan, the masculine shall be deemed to include the feminine and the singular shall be deemed to include the plural. 10.4 Governing Law This Plan shall be construed in accordance with, and governed by, the laws of the Commonwealth of Pennsylvania, to the extent such laws are not preempted by the laws of the Untied States of America. IN WITNESS WHEREOF, the undersigned officers, being duly authorized, have caused this instrument to be duly executed by, and on behalf of, FIRST COMMONWEALTH FINANCIAL CORPORATION, a corporation organized and existing pursuant to the laws of the Commonwealth of Pennsylvania, this 30th day of March, 1998, but to be effective, nevertheless, retroactively as and from the first day of January, 1998. (SEAL) FIRST COMMONWEALTH FINANCIAL CORPORATION Attest: By/S/JOSEPH E. O'DELL Joseph E. O'Dell /S/DAVID R. TOMB, JR. President and Chief David R. Tomb, Jr. Executive Officer Senior Vice President, Secretary and Treasurer EX-10 3 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - DEFERRED COMPENSATION PLAN FIRST COMMONWEALTH FINANCIAL CORPORATION DIRECTORS DEFERRED COMPENSATION PLAN THIS PLAN, made this 12th day of January, 1999 WITNESSETH RECITALS This First Commonwealth Financial Corporation Directors Deferred Compensation Plan (the "Plan") is adopted by First Commonwealth Financial Corporation, a bank holding company organized and existing under the laws of the Commonwealth of Pennsylvania (the "Corporation") for its directors who are not officers or employees employed by the Corporation or any subsidiary or affiliate thereof, as well as the directors of any subsidiary or affiliate of the Corporation who are not employed by the Corporation or any subsidiary or affiliate thereof (the "Outside Directors') to allow such Outside Directors to defer receipt of their annual retainer and fees, or any portion thereof, in order to provide such outside Directors with a means to accumulate deferred compensation. Accordingly, the following Plan is adopted. ARTICLE I - DEFINITIONS 1.1 ACCOUNT means the balance credited to a Participant's or Beneficiary's Plan account, including contribution credits and the interest thereon credited thereto as hereinafter provided. A Participant's or Beneficiary's Account shall be determined as of the date of reference. 1.2 BENEFICIARY means any person or persons so designated in accordance with the provisions of Article VII. 1.3 CODE means the Internal Revenue Code of 1986 and the regulations thereunder, as amended from time to time. 1.4 COMPENSATION means the total annual retainer, fees for attending Board of Director's meetings and Committee fees that but for an election under this Plan, would be paid to an Outside Director by the Corporation or, by any subsidiary or affiliate thereof. 1.5 DESIGNATION PERIOD means the ten (10) day period immediately preceding the first day of any calendar year commencing with 1999. 1.6 EFFECTIVE DATE means the effective date of the Plan, which shall be January 1, 1999. 1.7 ELIGIBLE DIRECTOR means any Outside Director. 1.8 EMPLOYER means the Corporation and its successors and assigns. 1.9 ENTRY DATE means the first day of each calendar year commencing on January 1, 1999. 1.10 PARTICIPANT means any person so designated in accordance with the provisions of Article II. 1.11 PARTICIPANT ENROLLMENT AND ELECTION FORM means the form on which a Participant elects to defer Compensation hereunder and on which the Participant makes certain other designations as required thereon. 1.12 PLAN means this Deferred Compensation Plan, as amended from time to time. 1.13 PLAN YEAR means the twelve (12) month period ending on the December 31 of each year during which the Plan is in effect. 1.14 VALUATION DATE means the December 31 of each Plan Year. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - DEFERRED COMPENSATION PLAN (Continued) ARTICLE II - ELIGIBILITY AND PARTICIPATION 2.1 Every Eligible Director on the Effective Date shall be eligible to become a Participant on the Effective Date. Every other Eligible Director shall be eligible to become a Participant on the first Entry Date occurring on or after the date on which he becomes an Eligible Director. Participation in the Plan is voluntary. In order to participate, an otherwise Eligible Director must make written application in such manner as may be required by Section 3.1 and must agree to make Compensation Deferrals as provided in Article III. ARTICLE III - CONTRIBUTIONS AND CREDITS 3.1 In accordance with rules established by the Executive Compensation Committee of the Board of Directors, a Participant may elect to defer Compensation which is due to be earned and which would otherwise be paid to the Participant, in a lump sum or in any fixed periodic dollar amounts designated by the Participant. Amounts so deferred will be considered a Participant's "Compensation Deferrals." Ordinarily, a Participant shall make such an election with respect to each coming Plan Year during Designation Period preceding such Plan Year. Compensation Deferrals shall be made by deferral (as elected by the Participant) of all or any part of that Participant's Compensation. There shall be established and maintained by the Corporation a separate Plan Account in the name of each Participant, which shall at all times be one hundred percent (100%) vested in the Participant, and to which shall be credited or debited: (a) amounts equal to the Participant's Compensation Deferrals, and (b) interest on such Compensation Deferrals equal to one percent (1%) less than the prime lending rate established by First Commonwealth Bank on the first day of each Plan Year. The interest rate hereinabove provided shall be fixed for that Plan Year and shall be redetermined on the first day of each future Plan Year. ARTICLE IV - ACCOUNTS 4.1 An account shall be established for each Participant which shall reflect his Compensation Deferrals to date plus interest to the time of reference in the amount above provided. ARTICLE V - PAYMENT OF ACCOUNTS 5.1 The Participant's Account shall be paid to him in a lump sum upon the earlier of (a) the Participant ceasing to be an Outside Director or (b) the Participant becoming totally or permanently disabled in such manner as he is unable, because of such disability, to engage in any occupation for which he is reasonably fitted by training, education and experience. In the case of the death of the Outside Director, the Participant's Account shall be paid to his Beneficiary as soon as practicable after his date of death. 5.2 With the consent of the Corporation, the Participant's Account may be paid to him sooner than above provided in the case of severe demonstrable financial hardship. For this purpose, the same rules shall be applicable, and the same definitions applied, as is then applicable with respect to an in-service hardship distribution of salary deferrals pursuant to Section 401(k) of the Code and the regulations of the Secretary of the Treasury then applicable. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - DEFERRED COMPENSATION PLAN (Continued) ARTICLE VI - DISTRIBUTION OF BENEFITS 6.1 Benefits shall be distributed in cash in a lump sum as soon as practicable after the Participant shall be eligible therefor in accordance with Article V hereof. ARTICLE VII - BENEFICIARIES; PARTICIPANT DATA 7.1 DESIGNATION OF BENEFICIARIES. Each Participant from time to time may designate any person or persons (who may be named contingently or successively) to receive such benefits as may be payable under the Plan upon or after the Participant's death, and such designation may be changed from time to time by the Participant by filing a new designation. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Corporation, and will be effective only when filed in writing with the Corporation during the Participant's lifetime. In the absence of a valid Beneficiary designation, or if, at the time any benefit payment is due to a Beneficiary, there is no living Beneficiary validly named by the Participant, the Corporation shall pay any such benefit payment to the Participant's spouse, if then living, but otherwise to the Participant's then living descendants, if any, per stripes, but, if none, to the Participant's estate. In determining the existence or identity of anyone entitled to a benefit payment, the Corporation may rely conclusively upon information supplied by the Participant's personal representative, or if a dispute arises with respect to any such payment, then, notwithstanding the foregoing, the Corporation, in its sole discretion, may distribute such payment to the Participant's estate without liability for any tax or other consequences which might flow therefrom, or may take such other action as the Corporation deems to be appropriate. 7.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS AND BENEFICIARIES; INABILITY TO LOCATE PARTICIPANTS OR BENEFICIARIES. Any communication, statement, or notice addressed to a Participant or to a Beneficiary at his or her last post office address as shown on the Corporation's records shall be binding on the Participant or Beneficiary for all purposes of the Plan. The Corporation shall not be obliged to search for any Participant or Beneficiary beyond the sending of a registered letter to such last known address. ARTICLE VIII - ADMINISTRATION 8.1 ADMINISTRATIVE AUTHORITY. Except as otherwise specifically provided herein, the Executive Compensation Committee of the Board of Directors shall have the sole responsibility for and the sole control of the operation and administration of the Plan, and shall have the power and authority to take all action and to make all decisions and interpretations which may be necessary or appropriate in order to administer and operate the Plan, including, without limiting the generality of the foregoing, the power, duty, and responsibility to: FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - DEFERRED COMPENSATION PLAN (Continued) Resolve and determine all disputes or questions arising under the Plan and to remedy any ambiguities, inconsistencies, or omissions in the Plan. Adopt such rules of procedure and regulations as in its opinion may be necessary for the proper and efficient administration of the Plan and as are consistent with the Plan. Implement the Plan in accordance with its terms and the rules and regulations adopted as above. Appoint any persons or firms, or otherwise act to secure specialized advice or assistance, as it deems necessary or desirable in connection with the administration and operation of the Plan, and the Corporation shall be entitled to rely conclusively upon, and shall be fully protected in any action or omission taken by it in good faith reliance upon, the advice or opinion of such firms or persons. ARTICLE IX - AMENDMENT 9.1 The Corporation by its Board of Directors shall have the right to amend the Plan, at any time and with respect to any provisions hereof, and all parties hereto or claiming any interest hereunder shall be bound by such amendment; provided, however, that no such amendment shall deprive a Participant or a Beneficiary of a right accrued hereunder prior to the date of the amendment. ARTICLE X - TERMINATION 10.1 The Corporation, by its Board of Directors, reserves the right to terminate this Plan at any time; provided, however, that no such amendment shall deprive a Participant or a Beneficiary of a right accrued hereunder prior to the date of such termination. ARTICLE XI - MISCELLANEOUS 11.1 No amount payable to a Participant or a Beneficiary under the Plan will be subject in any manner to anticipation, alienation, attachment, garnishment, sale, transfer, assignment (either at law or in equity), levy, execution, pledge, encumbrance, charge, or any other legal or equitable process and any attempt to do so will be void; nor will any benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the person entitled thereto. Further, (i) the withholding of taxes from Plan benefit payments, (ii) the recovery under the Plan of overpayments of benefits previously made to a Participant or Beneficiary, or (iii) the direct deposit of benefit FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.8 - DEFERRED COMPENSATION PLAN (Continued) payments to an account in a banking institution (if not actually part of an arrangement constituting an assignment or alienation) shall not be construed as an assignment or alienation. 11.2 This Plan shall be interpreted pursuant to the laws of the Commonwealth of Pennsylvania wherein it was made, except for its laws governing conflict of laws. 11.3 Headings and titles have been inserted for convenience of reference and are to be ignored in any interpretation thereof. Words in the masculine gender shall include the feminine in all cases in which they would so apply, and the singular shall include the plural in all cases in which they would so apply. IN WITNESS WHEREOF, the Corporation has caused the Plan to be executed and its seal to be affixed hereto, effective as of the 1st day of January, 1999. FIRST COMMONWEALTH (Corporate Seal) FINANCIAL CORPORATION Attest: By/S/JOSEPH E. O'DELL(L.S.) Joseph E. O'Dell President and Chief Executive Officer /S/DAVID R. TOMB, JR. (L.S.) David R. Tomb, Jr. Senior Vice President, Secretary and Treasurer EX-10 4 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.9 - CASH INCENTIVE BONUS PROGRAM FIRST COMMONWEALTH FINANCIAL CORPORATION CASH INCENTIVE BONUS PROGRAM January 1, 1998 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.9 - CASH INCENTIVE BONUS PROGRAM (Continued) ARTICLE I DEFINITIONS 1.1 "Base Year" means each calendar year immediately prior to the applicable Measurement Year. The first such Base Year shall be 1997. 1.2 "Bonus" means the cash bonus payable in a given Bonus Year from this Plan, as herein provided. 1.3 "Bonus Year" means each calendar year which, if the appropriate performance criteria are met, a bonus shall be paid to the Participants hereunder, in accordance with Article III hereof. The first Bonus Year shall be 1999. 1.4 "Committee" means the Executive Compensation Committee of the Board of Directors of the Corporation. 1.5 "Corporation" means First Commonwealth Financial Corporation, a bank holding company and Pennsylvania business corporation having its principal place of business in Indiana, Pennsylvania. 1.6 "Effective Date" means January 1, 1998. 1.7 "EPS" means the primary earnings per share for the Corporation for each relevant calendar year calculated in accordance with generally accepted accounting principals. 1.8 "Measurement Year" means each calendar year immediately prior to the applicable Bonus Year. The first such Measurement Year shall be 1998. 1.9 "Participant" means a person eligible to participate in this Plan in accordance with Article II hereof. 1.10 "Plan" means the Cash Incentive Bonus Plan as contained herein or as subsequently amended. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.9 - CASH INCENTIVE BONUS PROGRAM (Continued) ARTICLE II PARTICIPATION 2.1 The Participants in the Plan for the relevant Bonus Year shall be the eight (8) executive officers of the Corporation and the three (3) presidents of subsidiaries and affiliates of the Corporation for whom the Committee directly reviews, and approves, base compensation, but only if any such person was employed by the Corporation, or the subsidiary or affiliate thereof, on the first and last day of the Measurement Year immediately preceding the relevant Bonus Year. 2.2 If at some time the number of persons for whom the Committee directly reviews, and approves, base compensation shall increase to more than eleven (11), the Committee shall, in its sole discretion, determine whether such additional persons (or any of them) shall be included as Participants hereunder. The Committee may make such determination on a person-by-person basis. If, due to vacancies in office or for other reasons, the number of executive officers for whom the Committee directly reviews, and approves, base compensation shall be less than eleven (11) in a given Bonus Year, the Participants for that Bonus Year in this Plan shall include only the executive officers for whom the Committee directly reviews, and approves, base compensation. 2.3 In the event that the Corporation acquires a bank or other business by merger, acquisition or similar transaction, the Committee shall determine how the senior executives of such acquired business are to be treated for the purpose of this Plan. Accordingly, the Committee may (but is not required to) waive, for such persons or any of them, the requirement that they be employed by the Corporation, or a subsidiary or affiliate thereof, on the first and last day of the Measurement Year immediately preceding the Bonus Year and may make such special rules in connection with the operation of this Plan with respect to mergers, acquisitions and similar transactions as the Committee shall determine. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.9 - CASH INCENTIVE BONUS PROGRAM (Continued) ARTICLE III CALCULATION AND PAYMENT OF BONUS 3.1 A percentage increase in EPS for each Bonus Year shall be calculated. Such percentage shall be equal to a fraction, the numerator of which shall be the difference between the EPS in the Measurement Year immediately preceding the relevant Bonus Year and the EPS in the Base Year immediately preceding that Measurement Year, and the denominator of which shall be the EPS in the Measurement Year immediately preceding the Bonus Year, divided by one hundred (100). No Bonus shall be payable in a given Bonus Year unless the percentage increase so derived is eight percent (8%) or more. However, no Bonus shall be payable in a given Bonus Year for the four (4) most highly compensated Participants unless the percentage increase so derived is ten percent (10%) or more. 3.2 With respect to those Participants entitled to receive a Bonus for a particular Bonus Year, the amount of each Participant's Bonus shall be equal to the product of the percentage increase in EPS determined pursuant to Section 3.1 hereof and the Participant's base compensation on the first day of that Bonus Year. For example (and by way of illustration only), if the primary earnings per share for 1998 shall be $6.00 and the primary earnings per share in 1999 shall be $7.00, the "percentage increase" with respect to the bonus paid early in 2000 will be 16.67 percent. Each Participant will then receive a cash bonus paid early in 2000 equal to 16.67 percent of his base compensation on January 1, 2000. 3.3 If as a result of a merger, consolidation, re-capitalization or similar transaction a material difference is produced between the EPS in a given Measurement Year and in the Base Year immediately preceding it, the Base Year EPS shall be adjusted (or the adjusted Base Year EPS shall be applied) for the purpose of the formula contained at Section 3.1 hereof so that the Base Year EPS and the Measurement Year EPS shall be consistently determined and applied. 3.4 The Bonus calculated pursuant to Section 3.2 hereof shall be paid as early as reasonably practicable in the Bonus Year following the necessary calculations and administration relating thereto. Such Bonus shall be paid as a cash bonus at that time. Such Bonus constitutes wages for income tax purposes and shall be subject to federal, state and local tax withholding, as required by law. FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 10.9 - CASH INCENTIVE BONUS PROGRAM (Continued) ARTICLE IV MISCELLANEOUS 4.1 This Plan may be amended or terminated at any time by the Committee; provided, however no such amendment or termination shall reduce or eliminate a Bonus already earned or accrued for a Bonus Year, but not yet distributed. 4.2 Headings have been provided for convenience of reference only and are to be ignored in any interpretation thereof. Pronouns in the masculine gender shall include the feminine gender in all cases in which they would so apply. 4.3 The Committee may authorize the president and chief executive officer of the Corporation, or any other officer, to undertake all acts, and execute all documents, necessary or appropriate in connection with this Plan, including, but not by way of limitation, the execution of instruments of amendment and termination if so ordered by the Committee. 4.4 This Plan shall be governed by the laws of the Commonwealth of Pennsylvania, where it was duly made and executed. IN WITNESS WHEREOF, the undersigned officer of First Commonwealth Financial Corporation, being duly authorized, has caused this Cash Incentive Bonus Program to be duly adopted by and for the Corporation, this 30th day of March, 1998. (SEAL) FIRST COMMONWEALTH FINANCIAL CORPORATION ATTEST By/S/JOSEPH E. O'DELL Joseph E. O'Dell President and Chief /S/DAVID R. TOMB, JR. Executive Officer David R. Tomb, Jr. Senior Vice President, Secretary & Treasurer EX-21 5 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 21.1 - SUBSIDIARIES OF FIRST COMMONWEALTH FINANCIAL CORPORATION Percent Ownership By Registrant First Commonwealth Bank 100% 22 North Sixth Street Indiana, PA 15701 Southwest Bank 100% 111 South Main Street Greensburg, PA 15601 Unitas Mortgage Corporation 100% 17 East High Street Carlisle, PA 17013 Unitas Financial Corporation 100% PO Box 777 Chambersburg, PA 17201 Commonwealth Systems Corporation 100% 22 North Sixth Street Indiana, PA 15701 Incorporated under the laws of Pennsylvania First Commonwealth Trust Company 100% 614 Philadelphia Street Indiana, PA 15701 Incorporated under the laws of Pennsylvania 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 6 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 February 17, 1999, appearing in this Annual Report on Form 10-K of First Commonwealth Financial Corporation for the year ended December 31, 1998. /S/Deloitte & Touche LLP Pittsburgh, Pennsylvania March 30, 1999 EX-23 7 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 23.2 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to incorporation by reference in the registration statement (Form S-8 No. 33-55687) of First Commonwealth Financial Corporation of our report dated February 17, 1999, relating to the consolidated balance sheets of Southwest National Corporation and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report is included in the December 31, 1998, annual report on Form 10-K of First Commonwealth Financial Corporation. /S/KPMG Peat Marwick LLP Pittsburgh, Pennsylvania March 26, 1999 EX-23 8 FIRST COMMONWEALTH FINANCIAL CORPORATION Exhibit 23.3 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 17, 1997, accompanying the consolidated financial statements, before giving retroactive effect to the pooling of interest as described in Note 2 to 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, 1998. 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 30, 1999 EX-24 9 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 16, 1999 John J. Dolan, Sr. Vice President & CFO (1) /S/DAVID S. DAHLMANN March 16, 1999 David S. Dahlmann, Director /S/JOHN A. ROBERTSHAW, JR. March 16, 1999 John A. Robertshaw, Jr., Director /S/DALE P. LATIMER March 16, 1999 Dale P. Latimer, Director /S/THOMAS L. DELANEY March 16, 1999 Thomas L. Delaney, Director /S/JOSEPH E. O'DELL March 16, 1999 Joseph E. O'Dell, President and CEO and Director /S/SUMNER E. BRUMBAUGH March 16, 1999 Sumner E. Brumbaugh, Director /S/DAVID R. TOMB, JR. March 16, 1999 David R. Tomb, Jr., Sr. Vice President, Secretary and Treasurer and Director /S/HARVEY H. HEILMAN, JR. March 16, 1999 Harvey H. Heilman, Jr., Director /S/E. H. BRUBAKER March 16, 1999 E. H. Brubaker, Director /S/RONALD C. GEISER March 16, 1999 Ronald C. Geiser, Director /S/JOHNSTON A. GLASS March 16, 1999 Johnston A. Glass, Director /S/ROBERT C. WILLIAMS March 25, 1999 Robert C. Williams, Director /S/ROBERT F. KOSLOW March 29, 1999 Robert F. Koslow, Director (1) Also Chief Accounting Officer EX-27 10
9 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 96,615 1,914 1,000 0 1,042,636 482,696 486,185 2,382,229 32,304 4,096,789 2,931,131 140,547 38,856 630,850 0 0 31,263 324,142 4,096,789 203,093 78,205 2,123 283,421 113,960 148,282 135,139 15,049 1,457 100,201 46,227 33,998 (624) 0 33,374 1.09 1.08 7.72 9,677 15,780 64 0 25,932 10,627 1,950 32,304 32,304 0 6,342
EX-27 11
9 1,000 YEAR YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 82,500 0 5,040 0 29,880 0 0 0 505,918 0 509,880 0 511,711 0 2,453,193 2,267,456 25,932 25,234 3,668,557 3,339,996 2,884,343 2,756,111 203,449 0 33,388 0 193,054 52,737 0 0 0 0 31,661 31,661 322,662 309,861 3,668,557 3,339,996 198,357 177,556 55,490 56,006 925 1,626 254,772 235,188 112,600 101,186 124,427 109,189 130,345 125,999 10,152 6,301 6,825 1,599 88,857 85,299 56,877 53,357 39,539 37,193 0 0 0 0 39,539 37,193 1.28 1.19 1.28 1.19 7.91 7.87 11,387 9,536 13,955 14,046 67 280 0 0 25,234 23,803 10,978 6,363 1,524 1,493 25,932 25,234 25,932 25,234 0 0 3,308 3,051
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