-----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, JHww4nFfoO6UbZ6HPrmQMkRqVL+kHna6EebtagAGkDo97WnR1Reaf24s6+dR+3sQ 2Ct18AliEZ5iMl2jsaV/hw== 0000712537-99-000029.txt : 19991117 0000712537-99-000029.hdr.sgml : 19991117 ACCESSION NUMBER: 0000712537-99-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251428528 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11138 FILM NUMBER: 99755928 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C 20549 ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-11242 First Commonwealth Financial Corporation (Exact name of registrant as specified in its charter) Pennsylvania 25-1428528 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 22 North Sixth Street Indiana, PA 15701 (Address of principal executive offices) (Zip Code) 724-349-7220 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report.) Indicate a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Number of shares outstanding of issuer's common stock, $1.00 Par Value as of November 11, 1999 was 29,117,916. FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Included in Part I of this report: PAGE First Commonwealth Financial Corporation and Subsidiaries Consolidated Balance Sheets . . . . . 3 Consolidated Statements of Income. . . . . . . . . 4 Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows. . . . . . . 6 Notes to Consolidated Financial Statements . . . . 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . 28 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . 29 Signatures . . . . . . . . . . . . . . . . . . . . Signature Page FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands) September 30, December 31, 1999 1998 ASSETS Cash and due from banks on demand.... $ 76,437 $ 96,615 Interest-bearing deposits with banks. 2,744 1,914 Federal funds sold .................. 15,575 1,000 Securities available for sale, at market.............................. 1,177,454 1,042,636 Securities held to maturity, at cost, (Market value $468,364 in 1999 and $486,185 in 1998).................. 476,350 482,696 Loans................................ 2,441,623 2,382,229 Unearned income.................... (4,232) (7,379) Allowance for credit losses........ (34,197) (32,304) Net loans....................... 2,403,194 2,342,546 Property and equipment............... 40,979 41,929 Other real estate owned.............. 1,628 2,370 Other assets......................... 128,387 85,083 TOTAL ASSETS.................... $4,322,748 $4,096,789 LIABILITIES Deposits (all domestic): Noninterest-bearing................ $ 240,300 $ 264,082 Interest-bearing................... 2,694,392 2,667,049 Total deposits.................. 2,934,692 2,931,131 Short-term borrowings................ 330,960 140,547 Other liabilities.................... 37,707 38,856 Company obligated mandatorily redeemable capital securities of subsidiary trust.................... 35,000 -0- Other long-term debt................. 638,288 630,850 Total long-term debt............ 673,288 630,850 Total liabilities............... 3,976,647 3,741,384 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; 31,017,993 and 30,937,973 shares outstanding in 1999 and 1998, respectively........ 31,263 31,263 Additional paid-in capital........... 99,677 100,240 Retained earnings.................... 253,466 235,623 Accumulated other comprehensive income (26,838) 2,199 Treasury stock (244,713 shares at September 30, 1999 and 324,733 at December 31, 1998, at cost)........ (4,456) (5,913) Unearned ESOP shares................. (7,011) (8,007) Total shareholders' equity......... 346,101 355,405 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $4,322,748 $4,096,789 The accompanying notes are an integral part of these consolidated financial statements. 3 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands except per share data)
For the Quarter For the 9 Months Ended September 30, Ended September 30, 1999 1998 1999 1998 Interest Income Interest and fees on loans............ $49,204 $51,286 $145,896 $153,937 Interest and dividends on investments: Taxable interest.................... 22,924 18,273 65,484 51,300 Interest exempt from Federal income taxes.............................. 2,407 1,783 7,004 4,698 Dividends........................... 797 577 2,235 1,492 Interest on Federal funds sold........ 18 405 77 1,291 Interest on bank deposits............. 10 84 101 156 Total interest income.............. 75,360 72,408 220,797 212,874 Interest Expense Interest on deposits.................. 25,774 28,700 77,214 85,880 Interest on short-term borrowings..... 3,456 2,909 8,737 9,162 Interest on company obligated mandatorily redeemable capital securities of subsidiary trust....... 175 -0- 175 -0- Interest on other long-term debt...... 8,749 6,785 25,757 16,576 Total interest on long-term debt... 8,924 6,785 25,932 16,576 Total interest expense............. 38,154 38,394 111,883 111,618 Net Interest Income..................... 37,206 34,014 108,914 101,256 Provision for credit losses........... 2,363 2,857 6,913 7,957 Net interest income after provision for credit losses......................... 34,843 31,157 102,001 93,299 Other Income Securities gains...................... 2 1,657 565 2,639 Trust income.......................... 1,265 1,477 4,288 4,105 Service charges on deposit accounts... 2,468 2,521 6,759 6,585 Gain on sale of loans................. 122 85 5,024 178 Other income.......................... 2,726 1,716 7,773 5,820 Total other income................. 6,583 7,456 24,409 19,327 Other Expenses Salaries and employee benefits........ 12,039 12,242 37,637 36,719 Net occupancy expense................. 1,583 1,706 4,948 5,165 Furniture and equipment expense....... 1,349 1,564 4,317 4,563 Data processing expense............... 804 773 2,468 2,322 Pennsylvania shares tax expense....... 882 794 2,612 2,390 Other operating expenses.............. 6,213 5,926 18,569 17,619 Total other expenses............... 22,870 23,005 70,551 68,778 Income before income taxes.............. 18,556 15,608 55,859 43,848 Applicable income taxes............... 4,804 4,063 15,276 11,827 Net income.............................. $13,752 $11,545 $40,583 $32,021 Average Shares Outstanding..............30,645,187 30,751,603 30,607,997 30,775,934 Average Shares Outstanding Assuming Dilution.....................30,745,973 30,898,079 30,717,017 30,953,058 Per Share Data: Basic earnings per share.............. $ 0.45 $ 0.38 $ 1.33 $ 1.04 Diluted earnings per share............ $ 0.45 $ 0.37 $ 1.32 $ 1.03 Cash dividends per share.............. $ 0.26 $ 0.22 $ 0.75 $ 0.66 The accompanying notes are an integral part of these consolidated financial statements.
4 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands)
Accumulated Additional Other Unearned Total Common Paid-in Retained Comprehensive Treasury ESOP Shareholders' Stock Capital Earnings Income Stock Shares Equity Balance at December 31, 1997......$31,661 $106,659 $228,230 $ 2,156 $(11,947) $(2,436) $354,323 Comprehensive income Net income...................... -0- -0- 32,021 -0- -0- -0- 32,021 Other comprehensive income, net of tax: Unrealized holding gains on securities arising during the period................... -0- -0- -0- 5,570 -0- -0- 5,570 Less: reclassification adjust- ment for gains on securities included in net income....... -0- -0- -0- (1,699) -0- -0- (1,699) Total other comprehensive income....................... -0- -0- -0- 3,871 -0- -0- 3,871 Total comprehensive income...... -0- -0- 32,021 3,871 -0- -0- 35,892 Cash dividends declared......... -0- -0- (17,791) -0- -0- -0- (17,791) Increase in unearned ESOP shares -0- 64 -0- -0- -0- (3,571) (3,507) Discount on dividend reinvestment plan purchases................ -0- (757) -0- -0- -0- -0- (757) Treasury stock acquired......... -0- -0- -0- -0- (2,123) -0- (2,123) Treasury stock reissued......... -0- (38) -0- -0- 2,237 -0- 2,199 Balance at September 30, 1998.....$31,661 $105,928 $242,460 $ 6,027 $(11,833) $(6,007) $368,236 Balance at December 31, 1998......$31,263 $100,240 $235,623 $ 2,199 $ (5,913) $(8,007) $355,405 Comprehensive income Net income...................... -0- -0- 40,583 -0- -0- -0- 40,583 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities arising during the period............ -0- -0- -0- (28,671) -0- -0- (28,671) Less: reclassification adjust- ment for gains on securities included in net income....... -0- -0- -0- (366) -0- -0- (366) Total other comprehensive income....................... -0- -0- -0- (29,037) -0- -0- (29,037) Total comprehensive income...... -0- -0- 40,583 (29,037) -0- -0- 11,546 Cash dividends declared......... -0- -0- (22,740) -0- -0- -0- (22,740) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 996 996 Discount on dividend reinvestment plan purchases................ -0- (296) -0- -0- -0- -0- (296) Treasury stock reissued......... -0- (267) -0- -0- 1,457 -0- 1,190 Balance at September 30, 1999.....$31,263 $ 99,677 $253,466 $(26,838) $ (4,456) $(7,011) $346,101
The accompanying notes are an integral part of these consolidated financial statements. 5 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the 9 Months Ended September 30, 1999 1998 Operating Activities Net income....................................... $40,583 $32,021 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses................... 6,913 7,957 Depreciation and amortization................. 5,750 5,271 Net gains on sales of assets.................. (5,266) (2,703) Income from increase in cash surrender value of bank owned life insurance................. (1,591) (1,044) Increase in interest receivable............... (1,722) (2,647) Increase (decrease) in interest payable....... (1,543) 1,032 Increase in income taxes payable.............. 2,258 843 Change in deferred taxes...................... (2,041) 1,176 Other-net..................................... (9,882) (3,976) Net cash provided by operating activities... 33,459 37,930 Investing Activities Transactions with securities held to maturity: Proceeds from sales........................... -0- -0- Proceeds from maturities and redemptions...... 99,549 160,573 Purchases..................................... (93,151) (155,205) Transactions with securities available for sale: Proceeds from sales........................... 38,583 139,831 Proceeds from maturities and redemptions...... 156,889 124,216 Purchases..................................... (374,201) (552,142) Proceeds from sales of loans and other assets.... 94,327 30,371 Sale of subsidiary............................... (2,396) -0- Investment in bank owned life insurance.......... (20,000) -0- Net decrease (increase) in time deposits with banks........................................... (837) 2,624 Net increase in loans............................ (156,133) (16,775) Purchases of premises and equipment.............. (3,736) (5,841) Net cash used by investing activities....... (261,106) (272,348) Financing Activities Repayments of long-term debt..................... (204) (19,804) Proceeds from issuance of long-term debt......... 9,000 304,800 Proceeds from issuance of company obligated mandatorily redeemable capital securities of subsidiary trust............................... 35,000 -0- Discount on dividend reinvestment plan purchases. (296) (757) Dividends paid................................... (20,256) (17,776) Net increase (decrease) in Federal funds purchased....................................... 39,025 (108,650) Net increase in other short-term borrowings...... 151,389 12,648 Net increase in deposits......................... 7,196 47,136 Purchase of treasury stock....................... -0- (2,123) Proceeds from sale of treasury stock............. 1,190 2,199 Net cash provided by financing activities... 222,044 217,673 Net increase (decrease) in cash and cash equivalents................................ (5,603) (16,745) Cash and cash equivalents at January 1............. 97,615 112,380 Cash and cash equivalents at September 30.......... $92,012 $ 95,635 The accompanying notes are an integral part of these consolidated financial statements. 6 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (Unaudited) NOTE 1 Management Representation In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of financial position as of September 30, 1999 and the results of operations for the three month and nine month periods ended September 30, 1999 and 1998, and statements of cash flows and changes in shareholders' equity for the nine month periods ended September 30, 1999 and 1998. The results of the three and nine months ended September 30, 1999 and 1998 are not necessarily indicative of the results to be expected for the entire year. The interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements of First Commonwealth Financial Corporation and Subsidiaries, including the notes thereto. NOTE 2 Cash Flow Disclosures (dollar amounts in thousands) 1999 1998 Cash paid during the first nine months of the year for: Interest $113,426 $104,913 Income Taxes $ 14,850 $ 10,424 Noncash investing and financing activities: ESOP borrowings $ -0- $ 4,000 ESOP loan reductions $ 996 $ 429 Loans transferred to other real estate owned and repossessed assets $ 3,351 $ 4,777 NOTE 3 Comprehensive Income Disclosures The following table identifies the related tax effects allocated to each component of other comprehensive income in the Statements of Changes in Shareholders' Equity: (dollar amounts in thousands)
September 30, 1999 September 30, 1998 Tax Net of Tax Net of Pre-tax (Expense) Tax Pre-tax (Expense) Tax Amount Benefit Amount Amount Benefit Amount Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period $(44,110) $15,439 $(28,671) $8,535 $(2,965) $5,570 Less: reclassification adjustment for gains realized in net income (563) 197 (366) (2,614) 915 (1,699) Net unrealized gains (losses) (44,673) 15,636 (29,037) 5,921 (2,050) 3,871 Other comprehensive income $(44,673) $15,636 $(29,037) $5,921 $(2,050) $3,871
7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (Unaudited) NOTE 4 Business Combination Effective December 31, 1998, the Corporation acquired all of the outstanding shares of Southwest National Corporation ("Southwest"), a Pennsylvania-chartered bank holding company headquartered in Greensburg, Pennsylvania. Each of the 3,043,738 outstanding shares of Southwest National Corporation were exchanged for 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. NOTE 5 New Accounting Pronouncements Effective January 1, 1999, the Corporation adopted the Financial Accounting Standards Board Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("FAS No. 134"). FAS No. 134 amends FAS No. 65 "Accounting for Certain Mortgage Banking Activities". FAS No. 65 required that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities as trading securities while FAS No. 134 requires the resulting mortgage-backed securities or other retained interests be classified based on the entity's ability and intent to sell or hold those investments. On the date FAS No. 134 is initially applied, an enterprise may reclassify mortgage backed securities and other beneficial interests retained after the securitization of mortgage loans held for sale from the trading category, except for those with sales commitments in place. The Corporation currently holds no mortgage backed securities or other beneficial interests retained after the securitization of mortgage loans held for sale. The adoption of FAS No. 134 did not have a material impact on the Corporation's financial condition or results of operations. In June 1998, the Financial Accounting Standards Board ("FASB") issued statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities which require that an entity recognize all derivatives as either assets or liabilities in a balance sheet and measure those instruments at fair value. FAS No. 133 was amended by FASB statement No. 137 in June 1999. FAS No. 137 delays the effective date of FAS No. 133 to the first quarter of years beginning after June 15, 2000. Management believes that adoption of FAS No. 133 will not have a material impact on the Corporation's financial condition or results of operations. 8 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (Unaudited) NOTE 6 Sale of Subsidiary Effective April 1, 1999 the Corporation sold all of the outstanding common stock of BSI Financial Services Inc. ("BSI"), a wholly-owned subsidiary of the Corporation, to First Bank Richmond headquartered in Richmond, Indiana. Cash proceeds in the amount of $1.7 million were received, resulting in a loss on sale of $202 thousand which has been reflected in the financial statements. BSI provided mortgage banking, loan servicing and collection services to the Corporation's subsidiary banks and unaffiliated organizations. Services performed by BSI for the subsidiary banks have been transferred to the subsidiary banks or other nonbank subsidiaries of the Corporation. NOTE 7 Capital Securities Offering The Corporation established First Commonwealth Capital Trust I ("the Trust"), a Delaware business trust on August 16, 1999. The Trust issued 25,000 capital securities (liquidation amount of $25 million) on September 8, 1999 and 10,000 capital securities (liquidation amount of $10 million) on September 22, 1999 through a private offering to qualified investors. Additionally, the Trust issued common securities to the Corporation. The Trust used the proceeds from these sales to buy a series of 9.50% junior subordinated deferrable interest debentures due 2029 from the Corporation with the same economic terms as the capital securities. The Trust will distribute the cash payments it receives from the Corporation on the debentures to the holders of the capital securities and the common securities. For each capital security, the investor will receive cumulative cash distributions accumulating from September 8, 1999 at an annual rate of 9.50% of the liquidation amount of $1,000 per capital security, on March 1 and September 1 of each year, beginning March 1, 2000. The Corporation may defer interest payments on the debentures at any time, and from time to time, for up to ten consecutive semi-annual periods with respect to each deferral period. If the Corporation does defer interest payments, the Trust will also defer payment of distributions on the capital securities to the investors. However, deferred distributions will themselves accumulate distributions at an annual rate of 9.50%. The Trust will redeem all of the outstanding capital securities when the debentures are paid at maturity on September 1, 2029. Subject to receiving prior approval of the Board of Governors of the Federal Reserve System the Corporation may redeem the debentures, in whole or in part, at any time on or after September 1, 2009, at a redemption price equal to 104.750% of the principal amount of the debentures on September 1, 2009, declining ratably on each September 1, thereafter to 100% on or after September 1, 2019, plus accrued and unpaid interest to the date of redemption. The Corporation may also redeem the debentures prior to September 1, 2009, upon the occurrence of certain tax and bank regulatory events, subject to receiving prior approval of the Board of Governors of the Federal Reserve 9 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (Unaudited) NOTE 7 Capital Securities Offering (Continued) System. If the Corporation redeems any debentures before their maturity, the Trust will use the cash it receives on the redemption of the debentures to redeem, on a pro rata basis, capital securities and common securities having an aggregate liquidation amount equal to the aggregate principal amount of the debentures redeemed. The net proceeds (after deduction of offering expenses and the initial purchaser's commission) from the sale of the debentures to the Trust were approximately $34.2 million. The Corporation used the net proceeds from the issuance of the debentures to partially finance the purchase of 1,909,710 shares of its outstanding common stock (approximately 6.5% of its outstanding shares of common stock) pursuant to a "modified Dutch auction" tender offer. NOTE 8 Stock Buy-Back On July 13, 1999, the Corporation announced that the Board of Directors authorized a repurchase of up to 2 million shares of its outstanding common stock. On August 31, 1999, the Corporation commenced a "modified Dutch Auction" tender offer to purchase up to 2 million shares of its outstanding common stock. The Corporation offered to purchase each share in the tender offer at a price of not less than $23.00 nor in excess of $26.00 per share, net to the seller. The offer expired on September 29, 1999. The Corporation repurchased 1,909,710 shares of its common stock in the offer at a purchase price of $26.00 per share, net to the seller. The aggregate amount paid by the Corporation in connection with the repurchase was $49.7 million. The repurchase reduced the number of the Corporation's outstanding shares of common stock by approximately 6.1%. The 1,909,710 shares purchased by the Corporation were excluded from outstanding common shares and included as treasury shares as of October 5, 1999. NOTE 9 Stock Split On October 19, 1999, the Corporation's Board of Directors approved a 2-for-1 stock split effected in the form of a 100% stock dividend. Shareholders of record at the close of business November 4, 1999, will receive one additional share for each share held. The additional shares will be distributed on November 18, 1999. Pursuant to the foregoing stock split an additional 31,262,706 common shares will be issued, and the sum of $31,262,706 ($1 per share) will be transferred to the Corporation's common stock account, and such amount will be charged against the Corporation's additional paid-in capital account. The effect of the stock dividend will be reflected in the Corporation's consolidated balance sheet for November 1999. 10 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (Unaudited) NOTE 9 Stock Split For comparative purposes the following average share and earnings per share data represent amounts after restatement for the stock split.
For the Quarter For the Nine Months Ended September 30, Ended September 30, 1999 1998 1999 1998 Average Shares Outstanding 61,290,373 61,503,207 61,215,994 61,551,868 Average Shares Outstanding Assuming Dilution 61,491,946 61,796,158 61,434,034 61,906,116 Per Share Data: Basic earnings per share $0.22 $0.19 $0.66 $0.52 Diluted earnings per share $0.22 $0.19 $0.66 $0.52 Cash dividends per share $0.130 $0.110 $0.375 $0.330
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS First Nine Months of 1999 as Compared to the First Nine Months of 1998 The Corporation acquired Southwest National Corporation 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. This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and results of operations of First Commonwealth Financial Corporation (the "Corporation") including its subsidiaries. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Net income in the nine months of 1999 was $40.6 million reflecting an increase of $8.6 million over 1998 results of $32.0 million. Net income excluding the impact of securities transactions and loan sales reflected an increase of $6.8 million or 22% when comparing the nine months of 1999 to the same period of 1998. Mortgage loans sold in the first quarter of 1999 resulted in a gain on sale of $890 thousand while the sale of 11 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Nine Months of 1999 as Compared to the First Nine Months of 1998 (Continued) retail credit card loans during the second quarter of 1999 resulted in a gain on sale of $4.0 million. Basic earnings per share of $1.33 for the nine months of 1999 increased $0.29 per share over basic earnings per share of $1.04 for the nine months of 1998. Changes in net interest income increased earnings by $0.27 per share during 1999 while the impact of loan sales increased earnings per share $0.16 during 1999. Return on average assets was 1.29% and return on average equity was 15.18% during the 1999 period, compared to 1.09% and 11.76%, respectively during the same period of 1998. 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 $108.9 million for the nine months of 1999 compared to $101.3 million for the same period of 1998. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) was 3.84% for the nine months of 1999 compared to 3.79% for the nine months of 1998. The following table shows the effect of changes in volumes and rates on interest income and interest expense. Analysis of Changes in Net Interest Income (dollar amounts in thousands) 1999 Change from 1998 Total Change Due Change Due Change To Volume To Rate Interest-earning assets: Time deposits with banks $ (55) $ (76) $ 21 Securities 17,233 16,901 332 Federal funds sold (1,214) (1,204) (10) Loans (8,041) (3,833) (4,208) Total interest income 7,923 11,788 (3,865) Interest-bearing liabilities: Deposits (8,666) 1,925 (10,591) Short-term borrowings (425) 516 (941) Long-term debt 9,356 10,167 (811) Total interest expense 265 12,608 (12,343) Net interest income $ 7,658 $ (820) $ 8,478 Interest and fees on loans decreased $8.0 million for 1999 over 1998 levels including decreases in interest on mortgage loans of $5.3 million and decreases in interest on indirect auto loans of $1.6 million. Average loans for the nine months of 1999 decreased $71.6 million compared to averages for the nine months of 1998, primarily in residential mortgage loans and indirect auto loans. The decrease in residential mortgage loans for the 1999 period resulted from the sale of $52.5 million and $42.2 million of 1-4 family residential mortgage loans in the fourth 12 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Nine Months of 1999 as Compared to the First Nine Months of 1998 (Continued) quarter of 1998 and the first quarter of 1999, respectively. The average balance of indirect auto loans for the nine months of 1999 reflected a decrease of $16.8 million over 1998 averages. The total yield on loans decreased 19 basis points (0.19%) for the nine months of 1999 compared to the nine months of 1998. Interest income on investments increased $17.2 million for the nine months of 1999 compared to the corresponding period of 1998 as average balances of U.S. government agency securities for the nine months of 1999 increased $220.8 million over 1998 averages, and average balances of asset backed securities increased $68.0 million over the same time period. These securities purchases were 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 and mortgage backed securities. Yields on investments for the 1999 period were 6.52% compared to 6.46% for the 1998 period. Interest on deposits decreased $8.7 million for the 1999 period compared to 1998, and included decreases in interest on time deposits of $6.1 million and decreases in interest on total savings deposits of $2.6 million, primarily as a result of active interest rate management. Cost of total savings deposits decreased 46 basis points (0.46%) and cost of time deposits decreased 42 basis points (0.42%) for the nine months of 1999 compared to the nine months of 1998. Interest expense on short-term borrowings decreased $425 thousand for the nine months of 1999 compared to the nine months of 1998 as the cost of short-term borrowings for the nine months of 1999 decreased 57 basis points (0.57%) compared to the nine months of 1998. Interest expense on long-term debt increased $9.4 million compared to the 1998 period as average long-term debt for the nine months of 1999 increased $241.9 million over 1998 averages. The long-term debt increase for 1999 was primarily 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 leveraging strategy. The average spread of this leverage strategy was 1.17% during the 1999 period. The provision for credit losses was $6.9 million for the nine month period of 1999 compared to $8.0 million during the 1998 period. Net charge-offs against the allowance for credit losses were $5.0 million in the 1999 period and $6.0 million in the 1998 period reflecting a decrease of $970 thousand. The 1999 decrease in net charge-offs included decreases in net charge-offs for non- real estate consumer loans of $797 thousand compared to 1998 charge-offs. The decreases in net charge-offs for the nine months of 1999 were partially offset by increases in net charge- offs of loans secured by residential real estate. See the "Credit Review" section for an analysis of the quality of the loan portfolio. 13 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Nine Months of 1999 as Compared to the First Nine Months of 1998 (Continued) Below is an analysis of the consolidated allowance for credit losses for the nine month periods ended September 30, 1999 and 1998. 1999 1998 (Amounts in thousands) Balance January 1, $32,304 $25,932 Loans charged off: Commercial, financial and agricultural 447 623 Real estate-construction -0- -0- Real estate-commercial 212 648 Real estate-residential 763 279 Loans to individuals 4,651 5,581 Lease financing receivables 78 298 Total loans charged off 6,151 7,429 Recoveries of previously charged off loans: Commercial, financial and agricultural 264 364 Real estate-construction -0- -0- Real estate-commercial -0- 26 Real estate-residential 26 73 Loans to individuals 841 974 Lease financing receivables 0 2 Total recoveries 1,131 1,439 Net charge offs 5,020 5,990 Provision charged to operations 6,913 7,957 Balance September 30, $34,197 $27,899 Net securities gains decreased $2.1 million during the 1999 period from $2.6 million reported in 1998. The securities gains during 1999 resulted in part from the sales of fixed rate U.S. government agency securities and U.S. Treasury securities classified as securities "available for sale" having book values of $15.0 million and $21.9 million, respectively, which resulted in security gains of $167 thousand and $317 thousand, respectively. Proceeds from the sale of U.S. Treasury Securities in 1999 were the primary funding source for the acquisition of $20 million of bank owned life insurance during the first quarter. The securities gains during 1998 resulted in part from the third quarter sale of floating collateralized mortgage obligations classified as securities "available for sale" having a book value of $87.9 million. These securities were sold to 14 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Nine Months of 1999 as Compared to the First Nine Months of 1998 (Continued) 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. 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. During the nine months of 1999 gains on the sale of loans were $5.0 million compared to gains on sale of loans of $178 thousand for the nine months of 1998. Gains on sale of loans for the 1999 period resulted primarily from the sale of $42.2 million of residential mortgage loans during the first quarter of 1999 and the sale of $20.4 million of consumer credit card loans during the second quarter of 1999 which generated gains of $890 thousand and $4.0 million respectively. Other income for the first nine months of 1999 was $7.8 million, representing an increase of $2.0 million compared to the first nine months of 1998. Other income for the 1999 period reflected increases in the cash surrender value of bank owned life insurance of $547 thousand and insurance commissions of $470 thousand. Additional increases included in other income for the nine months of 1999 over the 1998 period occurred in merchant discount and ATM fees. Noninterest expense was $70.6 million for the nine months of 1999 reflecting an increase of $1.8 million over the 1998 level of $68.8 million. Although total noninterest expense for 1999 increased over 1998 levels, total noninterest expense as a percent of average assets on an annualized basis declined from 2.34% for the nine months of 1998 to 2.24% for the same period of 1999. Employee costs were $37.6 million in 1999, representing 1.19% of average assets on an annualized basis compared to $36.7 million and 1.25% of average assets on an annualized basis for 1998. Salary and benefit costs increased only 2.5% for 1999 over the corresponding period of 1998 and were favorably impacted by the early retirement plan offered to employees during the fourth quarter of 1998. The success of the early retirement plan accelerated the process of right-sizing the Corporation beyond normal attrition management by adjusting employment levels quickly while continuing the Corporation's tradition of not laying off employees due to merger activity. The number of full time equivalent employees at September 30, 1999 was 1,438 compared to 1,510 at September 30, 1998. 15 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Nine Months of 1999 as Compared to the First Nine Months of 1998 (Continued) Employee benefit costs for the first nine months of 1999 reflected increases of $445 thousand over the first nine months of 1998 and included increases in disability and health insurance of $100 thousand, increases in the cost of the employee stock ownership plan of $116 thousand and increases in the cost of the 401(k) plan of $186 thousand. Increases in employee benefit expenses are anticipated in 2000 due to rate increases for health insurance of approximately 23% compared to 1999 rates. Outside data processing expenses for the first nine months of 1999 increased $146 thousand over the first nine months of 1998 and will continue to be controlled in future periods through centralized management of these costs by the Corporation's data processing subsidiary. Other operating expenses for the 1999 period were $18.6 million reflecting an increase of $950 thousand over the 1998 amount of $17.6 million. Other operating expenses for the first nine months of 1999 included an increase in the write-down of mortgage servicing rights in the amount of $336 thousand related to the disposition of BSI. The disposition of BSI in 1999 also resulted in a loss on sale of $202 thousand. Advertising, software maintenance and charge card interchange fees reflected increases for the first nine months of 1999 of $180 thousand, $220 thousand and $206 thousand, respectively compared to the 1998 period. Other professional fees for the first nine months of 1999 decreased compared to 1998 levels as outside professionals contracted during 1998 under limited engagements to review the Corporation's asset/liability management model, analyze fee structures, and provide research and consulting services for marketing, customer profitability analysis and branch automation initiatives were not extended into the 1999 period. Income tax expense was $15.3 million for the nine months of 1999 compared to $11.8 million for the same period of 1998. The Corporation's effective tax rate was 27.3% for the 1999 period compared to 27.0% for the 1998 period. Three Months ended September 30, 1999 as Compared to the Three Months Ended September 30, 1998 Net income was $13.8 million for the third quarter of 1999, an increase of $2.2 million over 1998 results of $11.5 million. Basic earnings per share was $0.45 during the 1999 quarter compared to $0.38 for the same period of 1998. Net income excluding the impact of securities transactions reflected an increase of $3.3 million or 31% when comparing the third quarter of 1999 to the third quarter of 1998. Basic earnings per share excluding the impact of securities transactions was $0.45 during the 1999 quarter compared to $0.34 for the same period of 1998, 16 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) Three Months ended September 30, 1999 as Compared to the Three Months Ended September 30, 1998 (Continued) reflecting an increase of 32%. Return on average assets was 1.28% and return on average equity was 15.65% during the 1999 quarter, compared to 1.14% and 12.44%, respectively during the 1998 quarter. Net interest income for the third quarter of 1999 of $37.2 million represented an increase of $3.2 million over the third quarter of 1998. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) for the 1999 period was 3.85%, reflecting an increase of 14 basis points (0.14%) from 3.71% reported in 1998. Total interest and fees on loans for the three months ended September 30, 1999 decreased $2.1 million compared to the three months ended September 30, 1998. Average loans outstanding for the third quarter of 1999 were $52.7 million lower than average loans outstanding for the third quarter of 1998. This decrease resulted from the sale of $52.5 million and $42.2 million of 1-4 family residential mortgage loans in the fourth quarter of 1998 and first quarter of 1999, respectively and partially offset by loan growth. The total yield on loans (including fees on loans) for the three months ended September 30, 1999 was 8.25%, a decrease of 16 basis points (0.16%) over yields for the three months ended September 30, 1998 as all loan categories experienced decreases reflecting lower short-term market interest rates. Interest income on investments for the three months ended September 30, 1999 was $26.1 million, reflecting an increase of $5.5 million over the three months ended September 30, 1998. The primary factor which generated an increase in interest income on investments was the increased average asset related to the capital management leverage strategy as previously described. Yields on investments for the 1999 quarter were 6.68% compared to 6.46% for the same period of 1998. Interest expense on deposits for the third quarter of 1999 was $25.8 million reflecting a decrease of $2.9 million compared to the third quarter of 1998. Interest on total savings deposits for the three months ended September 30, 1999 decreased $985 thousand compared to the same period of 1998, primarily as a result of rate decreases. The cost of total savings deposits decreased 44 basis points (0.44%) for the third quarter of 1999 compared to the third quarter of 1998. Interest on time deposits for the 1999 quarter decreased $1.9 million over 1998 levels of $21.0 million. The cost of time deposits decreased 50 basis points (0.50%) for the third quarter of 1999 compared to the third quarter of 1998. Total cost of deposits for the third quarter of 1999 was 3.44% compared to 3.90% for the third quarter of 1998, a decrease of 46 basis points (0.46%). 17 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) Three Months ended September 30, 1999 as Compared to the Three Months Ended September 30, 1998 (Continued) Interest on short-term borrowings for the third quarter of 1999 increased $547 thousand compared to the third quarter of 1998 as the average Federal funds purchased increased $50.0 million over 1998 averages. Interest on long-term debt for the three months ended September 30, 1999 increased $2.1 million over the three months ended September 30, 1998, primarily as a result of increases in average long-term debt of $167.1 million for the third quarter of 1999 compared to the 1998 quarter. Long-term debt increases were primarily borrowings from the Federal Home Loan Bank with maturities of up to ten years to be utilized as part of the previously discussed capital management leveraging strategy. Provision for credit losses was $2.4 million for the three months ended September 30, 1999 compared to $2.9 million for the three months ended September 30, 1998. Net charge-offs for both the third quarter of 1999 and the third quarter of 1998 were $1.8 million. Securities gains were $2 thousand for the third quarter of 1999 compared to the third quarter 1998 gains of $1.7 million. The securities gains during the three months of 1998 resulted from the sale of floating collateralized mortgage obligations classified as securities "available for sale" having a book value of $87.9 million. The $89.6 million proceeds from the sale of securities in the third quarter of 1998 were used to reduce outstanding federal funds purchased. Other income of $2.7 million for the third quarter of 1999 represented an increase of $1.0 million over 1998 levels. Other income for the third quarter of 1999 included increases in merchant discount, income from bank owned life insurance and insurance commissions over the same period of 1998. Total noninterest expense for the three months ending September 30, 1999 was $22.9 million reflecting a decrease of $135 thousand over the $23.0 million that was reported for the corresponding period of 1998. Employee costs were $12.0 million during the third quarter of 1999 reflecting a decrease of $203 thousand over 1998 levels. Salary expense for the third quarter of 1999 compared to the 1998 quarter was positively impacted by the sale of BSI in the second quarter of 1999 and the early retirement plan offered to employees. Occupancy and furniture and equipment expenses for the third quarter of 1999 reflected reductions due in part to the sale of two branches during the fourth quarter of 1998. Other operating expenses for the three months ended September 30, 1999 included increases in charge card interchange expense, software maintenance and stationery and supplies expense which were partially offset by decreases in 18 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) Three Months ended September 30, 1999 as Compared to the Three Months Ended September 30, 1998 (Continued) advertising, collection and repossession expenses and filing and recording fees compared to 1998 levels. Income taxes increased $741 thousand for the third quarter of 1999 compared to the 1998 quarter. The Corporation's effective tax rate was 25.9% for the 1999 period compared to 26.0% for the 1998 period. 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. Net loans increased by $60.6 million in the first nine months of 1999 as increases in commercial loans secured by real estate were partially offset by decreases in loans secured by residential real estate and decreases in loans to individuals. The reduction in residential mortgage loans was primarily the result of the sale of $42.2 million of residential mortgages in March of 1999. The mortgage loans were sold to reduce the Corporation's prepayment risk and to shorten the average life of the fixed rate loan portfolio. The reduction in loans to individuals was primarily the result of the sale of $20.4 million of consumer credit card loans in June of 1999. Growth of the commercial loan portfolio has been achieved in part through continued development of commercial lending specialists. Total deposits increased $3.6 million for the first nine months of 1999 and included decreases in noninterest bearing demand deposits of $23.8 million and increases in total savings deposits and time deposits of $1.2 million and $26.1 million, respectively. Deposit increases from the Corporation's American Dream Savings product were partially offset by decreases in other traditional savings types. Customers continue to reinvest traditional savings dollars in this product which offers higher interest rates than traditional savings accounts. This product was designed to build long-term customer relationships and is intended to produce a favorable impact on the Corporation's net interest margin over the long-term. 19 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY (Continued) Marketable securities that the Corporation holds in its investment portfolio are an additional source of liquidity. These securities are classified as "securities available for sale" and while the Corporation does not have specific intentions to sell these securities they have been designated as "available for sale" because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of September 30, 1999, securities available for sale had an amortized cost of $1,218.7 million and an approximate fair value of $1,177.5 million. Growth of the available for sale portfolio during the first nine months of 1999 in the amount of $134.8 million was funded primarily by short-term borrowings. The investment in bank owned life insurance of $20 million during the first quarter of 1999 was funded primarily from the liquidation of U.S. government agencies and U.S. treasury securities. Interest Sensitivity The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances. While no single number can accurately describe the impact of changes in interest rates on net interest income, interest rate sensitivity positions, or "gaps", when measured over a variety of time periods, may be helpful. An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period. If interest-sensitive assets ("ISA") exceed interest-sensitive liabilities ("ISL") during the prescribed time period, a positive gap results. Conversely, when ISL exceeds ISA during a time period, a negative gap results. A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively when interest rates fall during the time period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes. In other words, as interest rates fall, a negative gap should tend to produce a positive effect on earnings, and when interest rates rise, a negative gap should tend to affect earnings negatively. The primary components of ISA include adjustable rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and short-term borrowings. 20 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Sensitivity (Continued) The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated as of September 30, 1999 and December 31, 1998 (Dollar amounts in thousands): September 30, 1999 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 749,534 $125,411 $228,963 $1,103,908 Investments.............. 110,895 99,069 123,461 333,425 Other interest-earning assets.................. 26,172 2,813 6,156 35,141 Total interest-sensitive assets................ 886,601 227,293 358,580 1,472,474 Certificates of deposits. 260,211 248,644 327,194 836,049 Other deposits........... 1,088,805 -0- -0- 1,088,805 Borrowings............... 334,680 1,163 27,453 363,296 Total interest-sensitive liabilities........... 1,683,696 249,807 354,647 2,288,150 GAP....................$ (797,095) $(22,514) $ 3,933 $ (815,676) ISA/ISL.................. 0.53 0.91 1.01 0.64 Gap/Total assets......... 18.44% 0.52% 0.09% 18.87% December 31, 1998 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 765,948 $168,297 $293,082 $1,227,327 Investments.............. 59,942 87,042 149,497 296,481 Other interest-earning assets.................. 38,048 4,120 6,207 48,375 Total interest-sensitive assets................ 863,938 259,459 448,786 1,572,183 Certificates of deposits. 359,487 323,760 318,282 1,001,529 Other deposits........... 1,094,125 -0- -0- 1,094,125 Borrowings............... 142,509 1,085 2,413 146,007 Total interest-sensitive liabilities........... 1,596,121 324,845 320,695 2,241,661 GAP....................$ (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% 21 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Sensitivity (continued) Although the periodic gap analysis provides management with a method of measuring current interest rate risk, it only measures rate sensitivity at a specific point in time. Therefore, to more precisely measure the impact of interest rate changes on the Corporation's net interest income, management simulates the potential effects of changing interest rates through computer modeling. The income simulation model used by the Corporation captures all assets, liabilities, and off-balance sheet financial instruments, accounting for significant variables that are believed to be affected by interest rates. These variables include prepayment speeds on mortgage loans and mortgage backed securities, cash flows from loans, deposits and investments and balance sheet growth assumptions. The model also captures embedded options, such as interest rate caps/floors or call options, and accounts for changes in rate relationships as various rate indices lead or lag changes in market rates. The Corporation is then better able to implement strategies which would include an acceleration of a deposit rate reduction or lag in a deposit rate increase. The repricing strategies for loans would be inversely related. The Corporation's asset/liability management policy guidelines limit interest rate risk exposure for the succeeding twenty-four month period. Simulations are prepared under the base case where interest rates remain flat and most likely case where interest rates are defined using projections of economic factors. Additional simulations are produced estimating the impact on net interest income of a 300 basis point (3.00%) movement upward or downward from the base case scenario. The Corporation's current asset/liability management policy indicates that a 300 basis point (3.00%) change in interest rates up or down cannot result in more than a 7.5% change in net interest income when compared to a base case, without Board approval and a strategy in place to reduce interest rate risk below the established maximum level. The analysis at September 30, 1999, indicated that a 300 basis point (3.00%) movement in interest rates in either direction over the next twelve months would not have a significant impact on the Corporation's anticipated net interest income over that time frame nor over the next twenty-four months and the Corporation's position would remain well within current policy guidelines. The Corporation's "Asset/Liability Management Committee" ("ALCO") is responsible for the identification, assessment and management of interest rate risk exposure, liquidity, capital adequacy and investment portfolio position. The primary objective of the ALCO process is to ensure that the Corporation's balance sheet structure maintains prudent levels of risk within the context of currently known and forecasted economic conditions and to establish strategies which provide the Corporation with appropriate compensation for the assumption of those risks. The ALCO attempts to mitigate interest rate risk through the use of strategies such as asset disposition, asset and liability pricing and matched maturity funding. The ALCO strategies are established by the Corporation's senior management and are approved by the Corporation's board of directors. 22 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW The following table identifies amounts of loan losses and nonperforming loans. Past due loans are those which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower and are in compliance with the restructured terms. At September 30, 1999 1998 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ 10,184 $ 9,763 Past due loans 15,776 15,548 Renegotiated loans 63 65 Total Nonperforming Loans $ 26,023 $ 25,376 Other real estate owned $ 1,628 $ 2,363 Loans outstanding at end of period $2,437,391 $2,417,917 Average loans outstanding (year-to-date) $2,387,563 $2,459,123 Nonperforming loans as percent of total loans 1.07% 1.05% Provision for credit losses $ 6,913 $ 7,957 Net charge-offs $ 5,020 $ 5,990 Net charge-offs as percent of average loans outstanding 0.21% 0.24% Provision for credit losses as percent of net charge-offs 137.71% 132.84% Allowance for credit losses as percent of average loans outstanding 1.43% 1.13% Allowance for credit losses as percent of end-of-period loans outstanding 1.40% 1.15% Allowance for credit losses as percent of nonperforming loans 131.41% 109.94% 23 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW (Continued) The Corporation considers a loan to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect principal or interest due according to the contractual terms of the loan. Loan impairment is measured based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Payments received on impaired loans are applied against the recorded investment in the loan. For loans other than those that the Corporation expects repayment through liquidation of the collateral, when the remaining recorded investment in the impaired loan is less than or equal to the present value of the expected cash flows, income is recorded on a cash basis. Impaired loans include loans on a nonaccrual basis and renegotiated loans. The following table identifies impaired loans, and information regarding the relationship of impaired loans to the reserve for credit losses at September 30, 1999 and September 30, 1998. 1999 1998 (amounts in thousands) Recorded investment in impaired loans at end of period $10,247 $ 9,828 Year to date average balance of impaired loans $10,031 $11,037 Allowance for credit losses related to impaired loans $ 2,854 $ 1,889 Impaired loans with an allocation of the allowance for credit losses $ 4,833 $ 5,738 Impaired loans with no allocation of the allowance for credit losses $ 5,414 $ 4,090 Year to date income recorded on impaired loans on a cash basis $ 280 $ 167 Other than those described above, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. Additionally, the portfolio is well diversified and as of September 30, 1999, there were no significant concentrations of credit. Nonperforming loans at September 30, 1999 increased $647 thousand compared to 1998 levels and included increases in past due loans and nonaccrual loans of $228 thousand and $421 thousand, respectively. 24 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW (Continued) Nonperforming loans as a percent of total loans were 1.07% at September 30, 1999 compared to 1.05% at September 30, 1998. The allowance for credit losses as a percent of nonperforming loans at September 30, 1999 has increased over both September 30, 1998 and year-end 1998 levels. Net charge-offs in both dollars and as a percentage of average loans at September 30, 1999 have decreased over 1998 levels. The Corporation's loan portfolio continues to be monitored by senior management to identify potential portfolio risks and detect potential credit deterioration in the early stages. Credit risk is mitigated through the use of sound underwriting policies and collateral requirements. Management attempts to minimize loan losses by analyzing and modifying collection techniques on a periodic basis. Management believes that the allowance for credit losses and nonperforming loans remain safely within acceptable levels. CAPITAL RESOURCES Equity capital increased $9.3 million in the first nine months of 1999. Dividends declared reduced equity by $22.7 million during the 1999 period, while earnings retention was $17.8 million, representing an earnings retention rate of 44.0%. The retained net income remains in permanent capital to fund future growth and expansion. Payments by the Corporation's Employee Stock Ownership Plan ("ESOP") to reduce debt it incurred to acquire the Corporation's common stock for future distribution as employee compensation, net of fair value adjustments to Unearned ESOP shares, increased equity by $996 thousand. Amounts paid to fund the discount on reinvested dividends and optional cash payments reduced equity by $296 thousand. The market value adjustment to securities available for sale decreased equity by $29.0 million. Proceeds from the reissuance of treasury shares to provide for stock options exercised increased equity by $1.2 million. 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. 25 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CAPITAL RESOURCES (Continued) The Federal Reserve Board has issued risk-based capital adequacy guidelines which are designed principally as a measure of credit risk. These guidelines require: (1) at least 50% of a banking organization's total capital be common and other "core" equity capital ("Tier I Capital"); (2) assets and off-balance-sheet items be weighted according to risk; (3) the total capital to risk-weighted assets ratio be at least 8%; and (4) a minimum leverage ratio of Tier I capital to average total assets. The minimum leverage ratio is not specifically defined, but is generally expected to be 3-5 percent for all but the most highly rated banks, as determined by a regulatory rating system. The table below presents the Corporation's capital position at September 30, 1999: Percent Amount of Adjusted (in thousands) Assets Tier I Capital (a) $397,592 15.3% Risk-Based Requirement 104,149 4.0 Total Capital (a) 430,139 16.5 Risk-Based Requirement 208,298 8.0 Minimum Leverage Capital (a) 397,592 9.3 Minimum Leverage Requirement 127,809 3.0 (a) Includes $35,000 of Company obligated mandatorily redeemable capital securities of subsidiary trust described in NOTE 7 to the financial statements which qualify as Tier I Capital. At September 30, 1999 the Corporation's banking subsidiaries are considered well capitalized as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. YEAR 2000 UPDATE The Corporation's data processing subsidiary, Commonwealth Systems Corporation continued to address year 2000 issues during the third quarter of 1999. Renovation whereby code enhancements, hardware and software upgrades and system replacements are implemented was substantially complete for mission critical systems. 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, and implementation of mission critical systems were also substantially complete placing the Corporation within guidelines established by federal regulatory agencies. Regulatory agencies will continue to perform ongoing reviews of the Corporation's year 2000 readiness throughout 1999. Outside professionals engaged by the Corporation during 1998 to provide additional independent verification and validation processes and to assure the reliability of internal risk and cost estimates will continue their engagements during 1999. 26 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR 2000 UPDATE (Continued) The Corporation will continue to strengthen its remediation contingency plan for year 2000 events during the remainder of 1999. The 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 communication 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 the remainder of 1999. 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 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. Year 2000 expenditures which were expensed as incurred 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. 27 ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR 2000 UPDATE (Continued) The following table summarizes year 2000 expenditures incurred through the end of the third quarter of 1999 and estimated amounts to be incurred throughout the remainder of 1999. (Dollar amounts in thousands)
9 Months 12 Months 12 Months Estimate Ended Ended Ended for remainder 09/30/99 12/31/98 12/31/97 of 1999 Capitalized hardware and software $ 86 $ 250 $ 106 $ 5 Nonemployee expenses including testing 66 152 20 56 Employee related costs 632 1,003 163 250 Subtotal 784 1,405 289 311 Capitalized hardware and software replaced without acceleration due to year 2000 768 2,043 70 11 Total expenditures $1,552 $3,448 $359 $322
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information appearing in Item 2 of this report under the caption "Interest Sensitivity" is incorporated herein by reference in response to this item. 28 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There were no material legal proceedings to which the Corporation or its subsidiaries are a party, or of which any of their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have a material adverse effect on the consolidated operations or financial position of the Corporation and its subsidiaries. ITEM 2. CHANGES IN SECURITIES In a series of transactions commencing on September 8, 1999 and ending on September 22, 1999, the Company's subsidiary, First Commonwealth Capital Trust I, issued $35,000,000 in aggregate liquidation amount of the Trust's 9.50% Series A capital securities. The Trust also issued $1,083,000 of the Trust's common securities to the Company, and the Company issued to the Trust $36,083,000 of its Series A 9.50% junior subordinated deferrable interest debentures. The Company also issued a guarantee for the benefit of the holders of the Series A capital securities that guarantees payments under the capital securities. The capital securities were sold to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933. The junior subordinated deferrable interest debentures, guarantees and common securities were issued in reliance on an exemption provided by Section 4(2) of the Securities Act of 1933. The Company used the proceeds from the sale of the debentures to partially finance the repurchase of approximately 1,909,710 shares of its common stock pursuant to a "modified Dutch auction" tender offer that terminated on September 29, 1999. Keefe, Bruyette & Woods, Inc., as initial purchaser of the capital securities, received aggregate commissions of $525,000 in the Series A capital securities offering. The Company and the Trust filed a registration statement on Form S-4 (File No. 333-89277) in connection with an offer to exchange up to $35,000,000 aggregate liquidation amount of registered Series B capital securities for a like amount of the outstanding Series A 9.50% capital securities. The registration statement also covered an offer to exchange up to $35,000,000 in registered 9.50% Series B junior subordinated deferrable interest debentures for a like amount of the outstanding Series A debentures and an offer to exchange a registered Series B capital securities guarantee for the original Series A capital 29 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART II - OTHER INFORMATION (Continued ITEM 2. CHANGES IN SECURITIES (Continued) securities guarantee. The Commission declared this registration statement effective on September 29, 1999, and the Company and the Trust commenced the exchange offer on October 28, 1999. The offer period expires on November 29, 1999. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION On October 19, 1999, the Corporation's Board of Directors approved an increase from 5% to 10% in the discount on dividend reinvestment purchases. The discount is offered on shares purchased with reinvested dividends. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K Form 8k dated September 8, 1999 reporting the issuance of trust preferred securities to fund a buy-back of the registrant's common stock through a "modified dutch auction" tender offer. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) DATED: NOVEMBER 15, 1999 /S/ Joseph E. O'Dell Joseph E. O'Dell, President and Chief Executive Officer DATED: NOVEMBER 15, 1999 /S/ John J. Dolan John J. Dolan, Sr. Vice President and Chief Financial Officer EX-27 2
9 1,000 3-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 76,437 2,744 15,575 0 1,177,454 476,350 468,364 2,441,623 34,197 4,322,748 2,934,692 330,960 37,707 673,288 0 0 31,263 314,838 4,322,748 49,204 26,128 28 73,360 25,774 38,154 37,206 2,363 2 22,870 18,556 13,752 0 0 13,752 0.45 0.45 7.59 10,184 15,776 63 0 32,304 6,151 1,161 34,197 0 0 0
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