-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, m33GDuPaMsdbDIDjuX2StGTkMf4hsEb/sy8LeN5zUbpkyQx3iGHqNxNhfxuoiJXC 3lTkfRIAf3qB+9A36AHpfA== 0000950132-94-000176.txt : 19940701 0000950132-94-000176.hdr.sgml : 19940701 ACCESSION NUMBER: 0000950132-94-000176 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19940630 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST COMMONWEALTH FINANCIAL CORP /PA/ CENTRAL INDEX KEY: 0000712537 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 241428528 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 033-54381 FILM NUMBER: 94537384 BUSINESS ADDRESS: STREET 1: OLD COURTHOUSE SQUARE STREET 2: 22 N SIXTH ST CITY: INDIANA STATE: PA ZIP: 15701 BUSINESS PHONE: 4123497220 MAIL ADDRESS: STREET 1: 22 NORTH SIXTH STREET STREET 2: P.O. BOS 400 CITY: INDIANA STATE: PA ZIP: 15701 S-4 1 FORM S-4 As filed with the Securities and Exchange Commission on June 30, 1994 Registration No. 33- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM S-4 REGISTRATION STATEMENT Under The Securities Act of 1933 ---------------- 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 Identification No.) incorporation or organization) 6712 (Primary Standard Industrial Classification Code Number) Old Courthouse Square, 22 North Sixth Street, Indiana, Pennsylvania 15701-0400 412-349-7220 (Address, including ZIP Code, and telephone number, including area code, of registrant's principal executive offices) ---------------- DAVID R. TOMB, JR. Vice President, Secretary and Treasurer First Commonwealth Financial Corporation Old Courthouse Square 22 North Sixth Street Indiana, PA 15701-0400 412-349-7220 (Name, address, including ZIP Code, and telephone number, including area code, of agent for service) Copy To: DAVID L. DeNINNO Reed Smith Shaw & McClay 435 Sixth Avenue Pittsburgh, PA 15219 412-288-3214 ---------------- Approximate date of commencement of the proposed sale of the securities to the public: The date of mailing the Proxy Statement/Prospectus contained herein. ---------------- CALCULATION OF REGISTRATION FEE ================================================================================
Proposed Proposed Maximum Amount Maximum Aggregate Amount of Title of Securities to be Offering Price Offering Registration to be Registered Registered Per Unit(1) Price(1) Fee - ------------------------------------------------------------------------------- Common Stock, $1.00 par value..................... 2,274,448 $16.72 $38,025,927 $13,112.39
================================================================================ (1) Estimated solely for the purpose of calculating the registration fee and calculated in accordance with Rule 457(f)(1) based on the average of the bid and asked prices of the Common Stock, $.01 par value, of Reliable Financial Corporation as of June 27, 1994 and the maximum of 1,421,530 shares of such stock to be converted in the merger described herein into Common Stock of the registrant. ---------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ FIRST COMMONWEALTH FINANCIAL CORPORATION Cross-Reference Sheet between Items of Securities and Exchange Commission Form S-4 and Captions in the Proxy Statement/Prospectus
Securities and Exchange Caption(s) or Location Commission Form S-4 Item in Proxy Statement/Prospectus ------------------------ ----------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus............................. Outside Front Cover Page of Proxy Statement/Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.................... Available Information; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information.......... Summary; Outside Front Cover Page of Proxy Statement/Prospectus 4. Terms of the Transaction................ Plan of Reorganization; Comparison of FCFC Common Stock and Reliable Common Stock 5. Pro Forma Financial Information......... Comparative and Pro Forma Combined Financial Information 6. Material Contacts with the Company Being Acquired............................... Plan of Reorganization 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters.............. Not applicable 8. Interests of Named Experts and Counsel.. Management of FCFC--Board of Directors, Interests of Directors and Officers in Certain Transactions; Legal Opinions; Experts 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................ Not applicable 10. Information with Respect to S-3 Registrants............................ Not applicable 11. Incorporation of Certain Information by Reference.............................. Not applicable 12. Information with Respect to S-2 or S-3 Registrants............................ Not applicable 13. Incorporation of Certain Information by Reference.............................. Not applicable 14. Information with Respect to Registrants Other Than S-3 or S-2 Registrants ..... Information Concerning FCFC--Business and Properties of FCFC, FCFC and Subsidiaries Selected Financial Data, FCFC Management's Discussion and Analysis of Financial Condition and Results of Operations; Comparative and Pro Forma Combined Financial Information--Comparative Stock Prices and Dividends; Relationships with Independent Public Accounts--FCFC; Index to Financial Statements
Securities and Exchange Caption(s) or Location Commission Form S-4 Item in Proxy Statement/Prospectus ------------------------ ----------------------------- 15. Information with Respect to S-3 Companies.............................. Not applicable 16. Information with Respect to S-2 or S-3 Companies.............................. Not applicable 17. Information with Respect to Companies Other Than S-3 or S-2 Companies........ Information Concerning Reliable--Business and Properties of Reliable, Reliable and Subsidiaries Selected Financial Data, Reliable Management's Discussion and Analysis of Financial Condition and Results of Operations; Comparative and Pro Forma Combined Financial Information--Comparative Stock Prices and Dividends; Relationships with Independent Public Accountants-- Reliable; Index to Financial Statements 18. Information if Proxies, Consents or Authorizations are to be Solicited..... Introduction; Introduction--Voting and Revocation of Proxies, Solicitation of Proxies; Plan of Reorganization-- Dissenters' Rights of Reliable Shareholders, Required Vote; Management Recommendation, Management Following the Merger; Management of FCFC--Board of Directors, Compensation of Directors, Executive Officers, Compensation of Executive Officers, Interests of Directors and Officers in Certain Transactions; Management of Reliable--Board Directors, Compensation of Directors, Executive Officers, Compensation of Executive Officers, Interests of Directors and Officers in Certain Transactions; Certain Beneficial Owners of FCFC Common Stock; Certain Beneficial Owners of Reliable Common Stock 19. Information if Proxies, Consents or Authorizations are not to be Solicited or in an Exchange Offer................ Not applicable
[Letterhead of RELIABLE FINANCIAL CORPORATION] July , 1994 Dear Shareholder: A Special Meeting of the Shareholders of Reliable Financial Corporation ("Reliable") will be held on July , 1994 at 10:30 A.M., local time, in the Norwood Party House, 316 Station Street, Bridgeville, Pennsylvania. The purpose of the Special Meeting is to consider and vote upon the Agreement and Plan of Reorganization and the related Plan of Merger (collectively, the "Plan of Reorganization") providing for the merger of Reliable into a subsidiary of First Commonwealth Financial Corporation ("FCFC"). FCFC is a bank holding company with its principal office in Indiana, Pennsylvania. Through its subsidiary banks, FCFC currently maintains 70 community banking offices in 14 Pennsylvania counties. If the merger is approved, Reliable shareholders will receive 1.6 shares of FCFC Common Stock for each share of Reliable Common Stock owned by them. Your attention is directed to the attached Proxy Statement/Prospectus which contains a more complete description of the terms of the proposed merger and provides detailed financial, business and other information concerning Reliable and FCFC. The Board of Directors of Reliable has carefully considered the Plan of Reorganization and believes that the proposed merger is in the best interests of Reliable and its shareholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE PLAN OF REORGANIZATION. The affirmative vote of the holders of a majority of the issued and outstanding shares of Reliable Common Stock entitled to vote at the Special Meeting is necessary for approval of the Plan of Reorganization. Your vote is important regardless of the number of shares you own. We urge you to participate in this significant development by marking, signing, dating and returning promptly the enclosed proxy card in the accompanying postage paid, pre-addressed envelope, whether or not you plan to attend the Special Meeting. You will retain the right to vote your shares in person at the Special Meeting if you so desire. Sincerely yours, Stephen Grippi President [Letterhead of RELIABLE FINANCIAL CORPORATION] NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JULY , 1994 To the Shareholders of Reliable Financial Corporation: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Reliable Financial Corporation ("Reliable") will be held in the Norwood Party House, 316 Station Street, Bridgeville, Pennsylvania, on July , 1994 at 10:30 A.M., local time, to: 1. Consider and act upon the Agreement and Plan of Reorganization between Reliable and First Commonwealth Financial Corporation ("FCFC") and the related Plan of Merger between Reliable and Interim Reliable, Inc. ("Interim Reliable"), each of which is attached to and described in the accompanying Proxy Statement/Prospectus; and 2. Transact such other business as may properly come before the Special Meeting or any adjournment or adjournments thereof. The Plan of Reorganization provides for the merger of Reliable into Interim Reliable (the "Merger"). As a result of the Merger, Reliable will become a wholly-owned subsidiary of FCFC and the shareholders of Reliable will receive 1.6 shares of FCFC Common Stock for each share of Reliable Common Stock owned by them. The Board of Directors of Reliable has established June 30, 1994 as the record date for the Special Meeting, and only holders of record of Reliable Common Stock at the close of business on that date will be entitled to notice of and to vote at the Special Meeting. Approval of the first proposal described above requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Reliable Common Stock entitled to vote at the Special Meeting. By Order of the Board of Directors, Jean L. David Secretary Bridgeville, Pennsylvania July , 1994 PROXY STATEMENT/PROSPECTUS RELIABLE FINANCIAL CORPORATION FIRST COMMONWEALTH FINANCIAL 428 Station Street CORPORATION Bridgeville, Pennsylvania 15017 Old Courthouse Square (412) 221-7700 22 North Sixth Street Indiana, Pennsylvania 15701-0400 (412) 349-7220 This Proxy Statement/Prospectus serves as a Proxy Statement of Reliable Financial Corporation ("Reliable") and as a Prospectus of First Commonwealth Financial Corporation ("FCFC"). It is being furnished to the shareholders of Reliable in connection with the solicitation of proxies by the Board of Directors of Reliable for use at a Special Meeting of Shareholders to be held on July , 1994. The purpose of the Special Meeting is to consider and take action on the proposed merger (the "Merger") of Reliable into a newly formed Pennsylvania business corporation, which is a wholly-owned subsidiary of FCFC. In the Merger, each outstanding share of Reliable Common Stock will be converted into 1.6 shares of FCFC Common Stock. FCFC has filed this Proxy Statement/Prospectus with the Securities and Exchange Commission as part of a Registration Statement under the Securities Act of 1933 with respect to a maximum of 2,274,448 shares of FCFC Common Stock which may be issued to the shareholders of Reliable upon consummation of the Merger. THE SHARES OF FCFC COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF FCFC COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. No person has been authorized to give any information or to make any representation not contained in this Proxy Statement/Prospectus, and, if given or made, any such information or representation should not be relied upon as having been authorized by FCFC or Reliable. This Proxy Statement/Prospectus does not constitute an offer or solicitation by any person in any State in which such offer or solicitation is not authorized by the laws thereof or in which the person making such offer or solicitation is not qualified to make the same. Neither the delivery of this Proxy Statement/Prospectus at any time nor the distribution of FCFC Common Stock hereunder shall imply that the information contained herein is correct as of any time subsequent to its date. THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JULY , 1994 AVAILABLE INFORMATION FCFC and Reliable are subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by FCFC and Reliable can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Commission, Public Reference Section, Washington, D.C. 20549. In addition, material filed by FCFC can be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. Any statement contained in a document incorporated or deemed to be incorporated by reference herein or previously filed with the Commission shall be deemed to be modified or superseded by this Proxy Statement/Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to exist or constitute a part of this Proxy Statement/Prospectus. S U M M A R Y The following is a brief summary of certain information contained elsewhere in this Proxy Statement/Prospectus. This Summary is provided for convenience and should not be considered complete. It is qualified in its entirety by the more detailed information contained elsewhere in this Proxy Statement/Prospectus and in the Annexes hereto. The Parties First Commonwealth Financial Corporation ("FCFC") is a registered bank holding company. It conducts business principally through seven subsidiary banks (the "Subsidiary Banks") and a subsidiary trust company, all of which have principal offices located in central western Pennsylvania: Central Bank ("Central"), a Pennsylvania-chartered bank and trust company, has its principal office in Hollidaysburg; Cenwest National Bank ("Cenwest"), a national banking association in Johnstown; Deposit Bank ("Deposit"), a Pennsylvania-chartered bank and trust company in DuBois; First National Bank of Leechburg ("Leechburg"), a national banking association in Leechburg; National Bank of the Commonwealth ("NBOC"), a national banking association in Indiana; Peoples Bank and Trust Company ("PBTC"), a Pennsylvania-chartered bank and trust company in Jennerstown; Peoples Bank of Western Pennsylvania ("Peoples"), a Pennsylvania bank in New Castle; and First Commonwealth Trust Company ("FCTC"), a Pennsylvania-chartered trust company in Indiana. The Subsidiary Banks conduct their business through 70 community banking offices (including one that is approved and under construction) in 52 communities in the counties of Armstrong (3 offices), Beaver (1), Bedford (3), Blair (8), Cambria (11), Centre (2), Clearfield (6), Elk (3), Huntingdon (1), Indiana (9), Jefferson (4), Lawrence (7), Somerset (7) and Westmoreland (5). See "Information Concerning FCFC-- Business and Properties of FCFC." At March 31, 1994, FCFC reported total consolidated assets of approximately $1,972,633,000. Reliable Financial Corporation ("Reliable") is a Delaware corporation and a savings and loan holding company with its principal office in Bridgeville, Allegheny County, Pennsylvania. Reliable has one wholly-owned subsidiary, Reliable Savings and Loan Association of Bridgeville, Pa., doing business as Reliable Savings Bank, PaSA ("Reliable Savings Bank"). See "Information Concerning Reliable--Business and Properties of Reliable." Following the Merger described herein, Reliable will continue its business as a wholly-owned subsidiary of FCFC. Its name will continue to be "Reliable Financial Corporation", and it will have the same assets, liabilities, directors, officers and employees as it had immediately prior to the Merger. Each of the Reliable and the Reliable Savings Bank Board of Directors will be increased by two members upon the effectiveness of the Merger, with one current Director and one current officer of FCFC becoming members thereof. See "Plan of Reorganization--The Merger." At March 31, 1994, Reliable reported total consolidated assets of approximately $150,401,000. Interim Reliable, Inc. ("Interim Reliable") is a newly-created Pennsylvania business corporation formed by FCFC for purposes of the Merger. Prior to the proposed merger with Reliable described herein, Interim Reliable will not engage in any business activities. Interim Reliable will survive the Merger and operate under the name "Reliable Financial Corporation." See "Plan of Reorganization--The Merger." The Special Meeting A Special Meeting of Shareholders of Reliable will be held at 10:30 A.M., local time, on July 27, 1994, in the Norwood Party House, 316 Station Street, Bridgeville, Pennsylvania. Only holders of record of the Common Stock of Reliable, par value $.01 per share ("Reliable Common Stock"), at the close of business on June 28, 1994 will be entitled to notice of and to vote at the meeting. On that date, 1,410,194 shares of Reliable Common Stock were outstanding and held of record by approximately 1,300 persons, each share entitling the holder thereof to one vote on each matter submitted for action at the Special Meeting. See "Introduction." i Proposed Merger At the Special Meeting, the shareholders of Reliable will be asked to approve an Agreement and Plan of Reorganization between Reliable and FCFC and a related Plan of Merger between Reliable and Interim Reliable (collectively, the "Plan of Reorganization"). The Plan of Reorganization provides for the merger of Reliable into Interim Reliable (the "Merger"). As a result of the Merger, Interim Reliable, to be renamed Reliable Financial Corporation, will be a wholly-owned subsidiary of FCFC, and the shareholders of Reliable will receive 1.6 shares of FCFC Common Stock for each share of Reliable Common Stock owned by them. See "Plan of Reorganization--The Merger; Conversion of Reliable Shares." The currently outstanding shares of FCFC Common Stock will remain outstanding without change by reason of the Merger. Approval of the Plan of Reorganization requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Reliable Common Stock entitled to vote at the Special Meeting. See "Plan of Reorganization--Required Vote; Management Recommendation." Reasons for the Merger The managements of both Reliable and FCFC believe that the combined entity resulting from the Merger, by virtue of its increased financial, managerial, technological and other resources, will be better able to meet increased competition, to profit from the opportunities resulting from the changed legal and regulatory environment facing banks, savings associations and bank holding companies, to offer new services or expand into additional markets and to offer existing services with increased efficiency. See "Plan of Reorganization-- Reasons for the Merger." Market Price Table The following sets forth the last reported sales prices per share of the FCFC Common Stock and the Reliable Common Stock on the New York Stock Exchange Composite Transactions Tape and in the Nasdaq National Market System, respectively, on March 11, 1994, the last trading day before announcement of the Merger, and on June 24, 1994, the last practicable trading day before printing this Proxy Statement/ Prospectus; and the equivalent per share prices for the Reliable Common Stock based on the FCFC Common Stock prices:
Market Price FCFC Reliable Reliable Per Share At Common Stock Common Stock Equivalents (a) ------------ ------------ ------------ --------------- March 11, 1994............... $17.75 $26.50 $28.40 June 24, 1994................ 18.00 27.25 28.80
- -------- (a) Represents the equivalent of one share of Reliable Common Stock calculated by multiplying the sales prices per share of FCFC Common Stock by 1.6. Management Recommendation and Vote The Board of Directors of Reliable unanimously recommends that the Reliable shareholders vote "FOR" approval of the Plan of Reorganization. Executive officers and directors of Reliable hold, in the aggregate, approximately 114,394 shares of Reliable Common Stock, constituting approximately 8.11% of all such shares outstanding. Such officers and directors have advised Reliable of their intention to vote such shares "FOR" the proposal to approve the Plan of Reorganization. See "Plan of Reorganization--Required Vote; Management Recommendation." Management Following the Merger Following the Merger, the Board of Directors of FCFC will remain unchanged. See "Plan of Reorganization--Management Following the Merger." ii Certain Tax Aspects of the Merger The Merger will qualify as a nontaxable reorganization for federal and Pennsylvania income tax purposes, and no gain or loss will be recognized to the Reliable shareholders upon the exchange of their Reliable Common Stock for FCFC Common Stock. For a more complete description of the federal and Pennsylvania income tax consequences of the exchange, see "Plan of Reorganization--Certain Tax Aspects of the Merger." No Dissenters' Rights Under Section 262 of the Delaware General Corporation Law, the rights and remedies of a dissenting shareholder are not available to a holder of Reliable Common Stock who objects to the Merger. Conditions; Amendment; Termination In addition to shareholder approval of the Plan of Reorganization, consummation of the Merger is contingent upon the approval of the Merger by the Pennsylvania Department of Banking, the Board of Governors of the Federal Reserve System and the Office of Thrift Supervision, as well as the satisfaction of a number of other conditions. See "Plan of Reorganization-- Conditions to the Merger." Notwithstanding prior shareholder approval, the Plan of Reorganization may be amended, by a written agreement between the parties, in any respect other than the rate of conversion of Reliable Common Stock into FCFC Common Stock. The Plan of Reorganization may also be terminated and the Merger abandoned, notwithstanding prior shareholder approval, by written and mutual agreement of FCFC and Reliable or by either of them in the event of failure by the other to satisfy certain conditions to the Merger. See "Plan of Reorganization-- Amendment, Waiver and Termination." Effective Date of the Merger It is presently anticipated that if the Plan of Reorganization is approved, the Merger will become effective at the close of business on September 26, 1994. However, there can be no assurance that all conditions necessary to the consummation of the Merger will be satisfied or that, if satisfied, such conditions will be satisfied in time to permit the Merger to become effective by that date. See "Plan of Reorganization--Effective Date of the Merger." Exchange of Reliable Certificates Instructions on how to effect the exchange of Reliable Common Stock certificates for FCFC Common Stock certificates will be sent as promptly as practicable after the effective date of the Merger to each Reliable shareholder of record immediately prior to the Merger. See "Plan of Reorganization-- Conversion of Reliable Shares." Reliable shareholders should not send in stock certificates until they receive written instructions to do so. United National Bancorporation Merger FCFC has signed an Agreement and Plan of Reorganization, and a related Plan of Merger (collectively, the "United Plan of Reorganization"), dated as of March 25, 1994 with United National Bancorporation ("United"), a Pennsylvania business corporation and a bank holding company for Unitas National Bank, a national banking association ("Unitas Bank"), with its principal place of business in Chambersburg, Pennsylvania. The United Plan of Reorganization provides for the merger of United into FCFC (the "United Merger"). On the effective date of the United Merger, each share of United Common Stock will be converted into 2 shares of FCFC Common Stock for an aggregate of 1,538,294 shares of FCFC Common Stock to be issued in the United Merger. In connection with the United Merger, FCFC will assume the outstanding stock options covering 49,643 shares of United Common Stock. After the effective date of the United Merger these iii options will be exercisable for FCFC Common Stock at the rate of 2 shares of FCFC Common Stock for each share of United Common Stock covered by the option, for an aggregate of 99,286 shares of FCFC Common Stock to be issued by FCFC if all the options are exercised. See the United Consolidated Financial Statements and the notes thereto appearing elsewhere in this Proxy Statement/Prospectus. United's subsidiary, Unitas Bank, conducts its business through 12 community banking offices in 11 communities in the counties of Adams (1 office), Bedford (1), Centre (2), Franklin (2) and Huntingdon (6). See "Information Concerning United." At March 31, 1994, United reported total consolidated assets of approximately $145,522,000. It is contemplated that the United Merger and the Reliable Merger will be consummated at the same time if all required regulatory approvals have been received and all conditions precedent have been satisfied; however, the United Merger and the Reliable Merger are separate and independent transactions. The information presented in this Proxy Statement/Prospectus concerning United is intended only to provide the holders of Reliable Common Stock an understanding of United and the United Merger. The holders of Reliable Common Stock have no rights to approve or reject the consummation of the United Merger. The consummation of the Reliable Merger is not a condition precedent to the United Merger, and the consummation of the United Merger is not a condition precedent to the Reliable Merger. It is contemplated that each Merger will be consummated as soon as its conditions precedent have been satisfied. Selected Financial Data (Unaudited) The following table sets forth certain historical and pro forma combined financial information for the three month periods ended March 31, 1994 and for the year ended December 31, 1993 for FCFC and United and for the three month period ended March 31, 1994 and the year ended September 30, 1993 for Reliable. This table should be read in conjunction with the separate historical balance sheets and statements of income for FCFC, United and Reliable and the pro forma combined financial statements appearing elsewhere in this Proxy Statement/Prospectus.
Pro Forma (2)(4) FCFC (1) United Reliable Combined ---------------- ---------------- --------------- ---------------- 3/31/94 12/31/93 3/31/94 12/31/93 3/31/94 9/30/93 3/31/94 12/31/93 ------- -------- ------- -------- ------- ------- ------- -------- Net income (in thousands) (3)......... $5,130 $22,690 $ 418 $1,820 $ 651 $3,155 $6,199 $27,665 Net income per share (3).................... 0.28 1.22 0.54 2.37 0.46 2.21 0.29 1.23 Net income per 1.6 FCFC shares................. 0.45 1.95 -- -- -- -- 0.46 1.97 Cash dividends declared. 0.14 0.51 0.13 0.47 0.80 1.15 -- -- Cash dividends declared per 1.6 FCFC shares.... 0.22 0.82 -- -- -- -- -- -- Book value per share.... 9.82 10.00 16.28 15.97 21.54 21.31 10.07 10.21 Book value per 1.6 FCFC shares................. 15.71 16.00 -- -- -- -- 16.11 16.34
- -------- (1) FCFC per share data reflects the two-for-one stock split on January 18, 1994. (2) The pro forma amounts assume that none of the holders of outstanding shares of United Common Stock exercises his or her dissenters' rights with respect to the Merger. It is a condition to the Merger that the total number of shares of United Common Stock, if any, as to which such holders exercise their rights as dissenting shareholders shall not be greater than 9% of the United Common Stock outstanding. The pro forma information would not be materially affected if the 9% threshold were reached. The Reliable shareholders do not have dissenters' rights. (3) For purposes of this pro forma data, net income and net income per share exclude the cumulative effects of accounting changes. (4) For the pro forma data combining only FCFC and Reliable, see "Comparative Per Share Data." iv TABLE OF CONTENTS
PAGE ---- INTRODUCTION.............................................................. 1 Record Date; Voting Rights............................................... 1 Purpose of the Special Meeting........................................... 1 Voting and Revocation of Proxies......................................... 2 Solicitation of Proxies.................................................. 2 PLAN OF REORGANIZATION.................................................... 2 The Merger............................................................... 2 Reasons for the Merger................................................... 3 Opinion of Financial Advisor............................................. 4 Required Vote; Management Recommendation................................. 9 Conversion of Reliable Shares............................................ 9 Conversion of Reliable Stock Options..................................... 10 Management Following the Merger.......................................... 10 Conditions to the Merger................................................. 10 Representations and Warranties........................................... 10 Amendment, Waiver and Termination........................................ 11 No Dissenters' Rights of Reliable Shareholders........................... 11 Certain Tax Aspects of the Merger........................................ 11 Restrictions on Resales of FCFC Common Stock by Reliable Affiliates...... 12 Expenses................................................................. 12 Effective Date of the Merger............................................. 13 UNITED NATIONAL BANCORPORATION MERGER..................................... 13 COMPARATIVE AND PRO FORMA COMBINED FINANCIAL INFORMATION.................. 14 Comparative Stock Prices and Dividends................................... 14 Certain Information About the Pro Forma Combined Financial Data.......... 15 Comparative Per Share Data............................................... 16 Pro Forma Combined Financial Statements.................................. 17 INFORMATION CONCERNING FCFC............................................... 20 Business and Properties of FCFC.......................................... 20 FCFC Selected Financial Data............................................. 23 FCFC Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 24 MANAGEMENT OF FCFC........................................................ 39 Board of Directors....................................................... 39 The Board and Its Committees............................................. 42 Compensation of Directors................................................ 43 Executive Officers....................................................... 43 Compensation of Executive Officers....................................... 44 Executive Compensation Committee Interlocks and Insider Participation.... 44 Interests of Nominees, Directors and Officers in Certain Transactions.... 44 CERTAIN BENEFICIAL OWNERS OF FCFC COMMON STOCK............................ 46 INFORMATION CONCERNING RELIABLE........................................... 47 Business and Properties of Reliable...................................... 47 Reliable Selected Financial Data......................................... 48 Reliable Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 49
PAGE ---- MANAGEMENT OF RELIABLE.......................................................... 64 Board of Directors............................................................. 64 The Board and Its Committees................................................... 65 Compensation of Directors...................................................... 66 Executive Officers............................................................. 66 Compensation of Executive Officers............................................. 66 Compensation Committee Interlocks and Insider Participation.................... 67 401(k) Profit Sharing Plan..................................................... 68 Interests of Nominees, Directors and Officers in Certain Transactions.......... 68 INFORMATION CONCERNING UNITED................................................... 69 The United Merger.............................................................. 69 Business and Properties of United.............................................. 69 United Selected Financial Data................................................. 71 United Management's Discussion of Operations and Financial Condition........... 72 REGULATION AND SUPERVISION...................................................... 84 FCFC........................................................................... 84 Reliable....................................................................... 85 Subsidiary Banks and Reliable Savings Bank..................................... 85 Reciprocal Interstate Banking.................................................. 86 EFFECTS OF GOVERNMENTAL POLICIES................................................ 86 COMPARISON OF FCFC COMMON STOCK AND RELIABLE COMMON STOCK....................... 87 General........................................................................ 87 Voting Rights.................................................................. 87 Procedures to Bring Business Before a Meeting.................................. 88 Liabilities and Indemnification of Directors and Officers...................... 89 Qualifications for Directors................................................... 89 "Anti-Takeover" Provisions..................................................... 90 Dividend Reinvestment Plan..................................................... 91 Miscellaneous.................................................................. 91 Preferred Stock................................................................ 91 RELATIONSHIPS WITH INDEPENDENT PUBLIC ACCOUNTANTS............................... 92 FCFC........................................................................... 92 Reliable....................................................................... 92 LEGAL OPINIONS.................................................................. 92 EXPERTS......................................................................... 92 SHAREHOLDER PROPOSALS........................................................... 93
INDEX TO FINANCIAL STATEMENTS......................................... F-1 ANNEXES I Agreement and Plan of Reorganization............................. A-I-1 Appendix A--Plan of Merger........................................ App. A-1 II Fairness Opinion................................................. A-II-1
PROXY STATEMENT/PROSPECTUS FOR SPECIAL MEETING OF SHAREHOLDERS OF RELIABLE FINANCIAL CORPORATION TO BE HELD ON JULY 27, 1994 INTRODUCTION This Proxy Statement/Prospectus is furnished in connection with the solicitation by the Board of Directors of Reliable Financial Corporation ("Reliable") of proxies to be voted at a Special Meeting of Shareholders of Reliable to be held in the Norwood Party House, 316 Station Street, Bridgeville, Pennsylvania on July 27, 1994 at 10:30 A.M., local time (the "Special Meeting"), and at any adjournment or adjournments thereof. The approximate date on which this Proxy Statement/Prospectus shall first be mailed to the shareholders of Reliable is July , 1994. Record Date; Voting Rights The Board of Directors of Reliable has fixed the close of business on June 28, 1994 as the record date for determining which shareholders of Reliable shall be entitled to notice of and to vote at the Special Meeting. On that date, 1,410,194 shares of Common Stock of Reliable, par value $.01 per share ("Reliable Common Stock"), were outstanding. Each such share entitles its holder of record at the close of business on the record date to one vote on each matter properly submitted for action to the shareholders at the Special Meeting. Reliable has no other outstanding class of capital stock. Purpose of the Special Meeting At the Special Meeting, the shareholders of Reliable will be asked to consider and vote upon a proposal to approve the Agreement and Plan of Reorganization dated as of April 21, 1994 between Reliable and First Commonwealth Financial Corporation ("FCFC"), a bank holding company, and the related Plan of Merger dated April 21, 1994 between Reliable and Interim Reliable, Inc. ("Interim Reliable"), a newly-created, wholly-owned subsidiary of FCFC. Complete copies of the Plan of Reorganization and the Plan of Merger (collectively, the "Plan of Reorganization") are attached hereto as Annex I and Appendix A to Annex I, respectively. As more fully described below under "Plan of Reorganization", the Plan of Reorganization provides for the merger of Reliable into Interim Reliable (the "Merger"). The surviving corporation will be renamed "Reliable Financial Corporation" and will exist as a wholly-owned subsidiary of FCFC. Following the Merger, Reliable Savings Bank, a wholly-owned subsidiary of Reliable, will continue its business as a savings association. In the Merger, each issued and outstanding share of Reliable Common Stock will be converted into 1.6 shares of Common Stock of FCFC, par value $1 per share ("FCFC Common Stock"). See "Plan of Reorganization--Conversion of Reliable Shares." On the effective date of the Merger (the "Effective Date"), the Board of Directors of FCFC will remain unchanged. Following the Merger, the Board of Directors of Reliable Savings Bank and Reliable will consist of all of the current directors thereof plus E. James Trimarchi, who is currently Chairman of the Board, President and Chief Executive Officer of FCFC, and Joseph E. O'Dell, who is currently Senior Executive Vice President and Chief Operating Officer of FCFC. See "Plan of Reorganization--Management Following the Merger." 1 THE BOARD OF DIRECTORS OF RELIABLE BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF RELIABLE AND ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF RELIABLE VOTE TO APPROVE THE PLAN OF REORGANIZATION. Voting and Revocation of Proxies All properly executed proxies not theretofore revoked will be voted at the Special Meeting in accordance with the instructions thereon. Proxies containing no voting instructions regarding the proposal to approve the Plan of Reorganization will be voted in favor thereof. As to any other matter brought before the Special Meeting and submitted to a shareholder vote, proxies will be voted in accordance with the judgment of the proxyholders named thereon. Approval of the Plan of Reorganization requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Reliable Common Stock entitled to vote at the Special Meeting. A shareholder who has executed and returned a proxy may revoke it at any time before it is voted by giving written notice to the Secretary of Reliable, by submitting a later-dated proxy or by attending the Special Meeting and voting in person. Solicitation of Proxies In addition to solicitation by mail, directors, officers and employees of Reliable may, for no additional compensation, solicit proxies from the shareholders of Reliable in person or by telephone or otherwise. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward proxy soliciting materials to the beneficial owners of shares held of record by them and will be reimbursed for their expenses. It is anticipated that all expenses in connection with the solicitation of proxies for the Special Meeting will be borne by Reliable. PLAN OF REORGANIZATION This section of the Proxy Statement/Prospectus describes certain of the more important aspects of the Plan of Reorganization. The following description does not purport to be complete and is qualified in its entirety by reference to the Plan of Reorganization and the Plan of Merger, which are set forth as Annex I and Appendix A to Annex I, respectively, in the back of this Proxy Statement/Prospectus. All shareholders are urged to read the Plan of Reorganization and the Plan of Merger in their entirety. The Merger The Plan of Reorganization provides for the merger of Reliable into Interim Reliable, a newly-created, wholly-owned subsidiary of FCFC. FCFC is a bank holding company, the principal business of which is the ownership of all the outstanding stock of seven banks (the "Subsidiary Banks"), a trust company, and a data processing company and 50% of the outstanding stock of an insurance company. See "Information Concerning FCFC." Interim Reliable was created specifically for the purpose of the Merger and prior to the Merger will not have engaged in any business. Reliable is a Delaware corporation and a savings and loan holding company, the principal business of which is the ownership of all the outstanding stock of Reliable Savings Bank, a Pennsylvania savings association in Bridgeville, Pennsylvania. See "Business and Properties of Reliable." On the Effective Date, Reliable will be merged into Interim Reliable, and Reliable's separate corporate existence will cease. The Articles of Incorporation and By-Laws of Interim Reliable will remain in effect, except that, as a result of the Merger, Article 1 of Interim Reliable's Articles of Incorporation will be amended to provide that its name shall be Reliable Financial Corporation. The Articles of Incorporation of 2 Interim Reliable are set forth as Appendix B to Annex I to this Proxy Statement/Prospectus. Upon the effectiveness of the Merger, each outstanding share of Reliable Common Stock will be converted into 1.6 shares of FCFC Common Stock. Following the Merger, Interim Reliable will continue its present business as a wholly-owned subsidiary of FCFC. At that time, its Board of Directors will consist of all current Reliable Directors plus one current Director and one current officer of FCFC. It is presently contemplated that following the Merger, Reliable Savings Bank will continue to operate the same offices it currently operates and will continue to provide the same services to its customers as those currently provided. See "Information Concerning Reliable--Business and Properties of Reliable." Each outstanding share of Reliable Common Stock held of record on the Effective Date will, by virtue of the Merger and without any action on the part of the holder thereof, be converted into 1.6 shares of FCFC Common Stock. Each holder of Reliable Common Stock will therefore receive 1.6 shares of FCFC Common Stock for each share of Reliable Common Stock held of record on the Effective Date. NO REPRESENTATION IS MADE HEREBY AS TO THE VALUE OF THE 1.6 SHARES OF FCFC COMMON STOCK OFFERED FOR EACH SHARE OF RELIABLE COMMON STOCK. There are currently 1,410,194 shares of Reliable Common Stock outstanding. Once all of the outstanding shares of Reliable Common Stock are converted into shares of FCFC Common Stock in the Merger, 2,256,310 shares of FCFC Common Stock would be issued in the Merger to the shareholders of Reliable. Reasons for the Merger In 1982, the Pennsylvania Banking Code of 1965, as amended (the "Pennsylvania Banking Code"), was amended to permit Pennsylvania banks to expand into counties bicontiguous to the counties of their principal offices and to permit bank holding companies to own more than one Pennsylvania bank. All legislative restrictions on statewide banking in Pennsylvania were eliminated as of March 4, 1990. See "Regulation and Supervision." The 1982 legislation resulted in an increased volume of merger activity among Pennsylvania banks and bank holding companies as the larger metropolitan banking organizations sought to position themselves to enter into statewide banking, and smaller nonmetropolitan banking organizations sought to increase their size in order to be able to remain competitive on a regional basis. Since adoption of the legislation, both FCFC and Reliable have seen acquisitions of bank and savings association competitors by large Philadelphia-based, Harrisburg-based and Pittsburgh-based bank and savings and loan holding companies and mergers of other bank competitors with banks and savings associations outside their market areas. At the same time, deregulation of the banking and savings industries has both increased the opportunities available to banks, savings associations and bank and savings and loan holding companies to offer new types of financial services and increased the potential for competition in the area of traditional banking services from nonbank financial institutions. The managements of FCFC and Reliable believe that combining the resources of Reliable with those of the Subsidiary Banks under common holding company ownership and control will enable Reliable and the Subsidiary Banks to more effectively meet the increased competition and to profit from the opportunities made available by the elimination of legislative restrictions on statewide banking in Pennsylvania. The increased financial, managerial, technological and other resources available to the parties will place each bank in a better position to offer the expanding variety of financial services that will be necessary to meet the competition from larger bank and nonbank financial institutions. FCFC's holding company structure will provide additional opportunities for the expansion of services. Under federal law, a bank holding company is permitted to engage, either directly or through subsidiaries, in the provision of certain types of mortgage, consumer finance, factoring, leasing, loan servicing, credit insurance, investment and other financial services, some of which either cannot be provided by banks or savings associations or can be provided more efficiently by a holding company or nonbank subsidiary. 3 The increased resources of the combined entity following the Merger and the flexibility afforded by FCFC's holding company structure will also place FCFC in a better position to take advantage of the opportunities for expansion into new markets, either through expansion of the service areas of the Subsidiary Banks or through the acquisition of additional banks and savings associations. FCFC remains receptive to and continues to evaluate potential opportunities for such expansion and acquisitions. See "United National Bancorporation Merger." The Merger will also enable the Subsidiary Banks and Reliable to increase their efficiency and competitiveness in providing existing banking services. For example, each bank will be better able to profit from the lending opportunities in the combined area served by them by drawing upon the other banks' knowledge of their market areas and by combining lending limits through loan participations to make loans that none of the banks could make individually or in which they might otherwise have to involve their competitors. Each bank will also be able to draw upon the combined skills and experience of the holding company, Reliable and all of the Subsidiary Banks following the Merger in other areas such as marketing, investments, asset/liability management and deposit and trust services. In addition, economies of scale may be achieved by combining purchases of supplies and services, eliminating duplication of contract services and combining certain internal management, accounting and other functions under one holding company. While the combined holding company and its shareholders will benefit from the increased size and strength and the diversification of assets, liabilities and revenue sources resulting from the ownership of several banks having different geographical markets, the separate corporate identities of the Subsidiary Banks will be maintained so long as it is advantageous to do so. As a result, each bank will be able to maintain its regional market identification and its inherent advantage, in competing with larger financial institutions, of greater flexibility in tailoring its services to respond to the particular needs of the communities it serves. Ryan, Beck & Co., Inc. ("Ryan Beck") was retained by the Reliable Board of Directors on May 26, 1992 to act as its consultant and financial advisor in connection with various matters, including the possible sale of Reliable, a business combination with any other entity, merger and acquisition trends, and planning, forecasting and competitive strategy. On February 20, 1994, the Reliable Board of Directors commenced discussions with FCFC on the feasibility of a possible combination with FCFC. After review and deliberation, the Reliable Board of Directors decided that it would be in the best interests of the Reliable shareholders to merge with FCFC. This conclusion was based on a consideration of the reasons described above, including the advantages and disadvantages of remaining independent, the proposed terms and conditions of the transaction and the opinion of Ryan Beck, Reliable's independent financial advisor, that the terms of the merger were fair to the shareholders of Reliable from a financial point of view. Opinion of Financial Advisor In April 1993, Reliable renewed a pre-existing agreement with Ryan Beck pursuant to which Ryan Beck acts as its financial advisor and as such, among other things, advised the Reliable Board of Directors on the enhancement of shareholder value, including the possible sale of Reliable to a third party. The Reliable Board of Directors retained Ryan Beck based upon its experience and expertise. Ryan Beck is regularly engaged in the valuation of banks, bank holding companies, savings and loan associations, and savings and loan holding companies in connection with mergers, acquisitions and other securities transactions. Ryan Beck has knowledge of, and experience with, the Pennsylvania banking market and banking organizations operating in that market and was selected by Reliable because of its knowledge of, experience with, and reputation in the financial services industry, and because of its past relationship with Reliable. In such capacity, Ryan Beck participated in the negotiations with respect to the pricing and other terms and conditions of the Reliable Merger, but the decision as to which offer to accept and the final price of the offer was ultimately made by the Board of Directors of Reliable. Ryan Beck rendered its oral opinion to the Reliable Board of Directors on April 20, 1994, and rendered its written opinion on June 29, 1994 that, in its 4 opinion, as of April 20, 1994 and as of June 29, 1994, the financial terms of FCFC's offer are "fair" to Reliable and to its shareholders from a financial point of view. No limitations were imposed by the Reliable Board of Directors upon Ryan Beck with respect to the investigations made or procedures followed by it in arriving at its opinion. The full text of the written opinion of Ryan Beck dated as of June 29, 1994, which sets forth assumptions made and matters considered, is attached as Annex II to this Proxy Statement/Prospectus. Reliable shareholders are urged to read this opinion in its entirety. Ryan Beck's opinion is directed only to the consideration to be received by Reliable shareholders in the merger and does not constitute a recommendation to any Reliable shareholder as to how such shareholder should vote at the Reliable Special Meeting. The summary of the opinion of Ryan Beck set forth in this Proxy Statement/Prospectus is qualified in its entirety by reference to the full text of such opinion. Ryan Beck's oral opinion as of April 20, 1994 was to the same effect as the opinion attached hereto. In arriving at its written opinion, Ryan Beck reviewed certain publicly available business and financial information relating to Reliable, United and FCFC. For purposes of such opinion and in connection with its review of the proposed Reliable Merger, Ryan Beck: (i) reviewed the Reliable Plan of Merger, (ii) reviewed the United Plan of Merger, (iii) reviewed this Proxy Statement/Prospectus; (iv) reviewed FCFC's Annual Reports to Shareholders and Annual Reports on Form 10-K for the years ended December 31, 1991 through 1993 and the Quarterly Reports on Form 10-Q for the period ended March 31, 1994; (v) reviewed Reliable's Annual Reports to Shareholders and Annual Reports on Form 10-K for the years ended September 30, 1991 through 1993, and the Quarterly Reports on Form 10-Q for the periods ended March 31, 1994 and December 31, 1993; (vi) reviewed United's Annual Reports to Shareholders and Annual Reports on Form 10-K for the years ended December 31, 1991 through 1993, and the Quarterly Reports on Form 10-Q for the period ended March 31, 1994; (vii) reviewed certain operating and financial information provided to Ryan Beck by the management of each of Reliable, United and FCFC relating to their respective business and prospects; (viii) met separately with certain members of Reliable, United and FCFC senior management to discuss their respective operations, historical financial statements and future prospects; (ix) reviewed the historical stock prices and trading volume of the common stock of Reliable and FCFC; (x) reviewed the publicly-available financial data and stock market performance data of publicly-traded savings institutions and banking institutions which Ryan Beck deemed generally comparable to Reliable and FCFC; (xi) reviewed the terms of recent acquisitions of publicly-traded savings institutions which Ryan Beck deemed generally comparable to Reliable; and (xii) conducted such other studies, analyses, inquiries and examinations as Ryan Beck deemed appropriate. Ryan Beck also reviewed the budget of Reliable for the fiscal year ending September 30, 1994 and met with management of Reliable to discuss Reliable's past and current business operations and financial condition. In rendering its opinion, Ryan Beck also considered the future prospects of Reliable in the event it remained independent. As more fully described below, Ryan Beck also considered certain financial and stock market data relating to Reliable and compared it to similar data relating to other publicly-held savings associations, savings and loan holding companies, banks and bank holding companies and considered financial terms of comparable transactions which have been either recently announced or effected. In connection with its review, Ryan Beck relied upon and assumed, without independent verification, the accuracy and completeness of the financial and other information regarding FCFC, United and Reliable provided to Ryan Beck by the companies and their representatives. Ryan Beck also did not independently verify but instead assumed that the allowances for loan losses set forth in the balance sheets of Reliable, United and FCFC at March 31, 1994 were adequate and complied fully with applicable law, regulatory policy and sound banking practice as of the date of such financial statements. Ryan Beck was not retained to nor did it conduct a physical inspection of any of the properties or facilities of FCFC, Reliable or United nor was it retained to nor did Ryan Beck make any independent evaluation or appraisal of FCFC's, Reliable's or United's assets or liabilities. Ryan Beck also assumed that the Reliable Merger in all respects is, and will be, 5 undertaken and consummated in compliance with all laws and regulations that are applicable to FCFC and Reliable. In rendering its opinion, Ryan Beck assumed that, in the course of obtaining the necessary regulatory approvals for the Reliable Merger and the United Merger and in preparation of this Proxy Statement/Prospectus, no conditions will be imposed that will have a material adverse effect on the contemplated benefits of the Reliable Merger or the United Merger, on a pro forma basis, to FCFC. In arriving at its opinion, Ryan Beck performed a variety of financial analyses. Ryan Beck believes that its analyses must be considered as a whole and that consideration of portions of such analyses and the factors considered therein, without all factors and analyses, could create an incomplete view of the analyses and the process underlying Ryan Beck's opinion. The preparation of a fairness opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analysis and summary description. In its analyses, Ryan Beck made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond FCFC's or Reliable's control. Any estimates contained in Ryan Beck's analyses are not necessarily indicative of future results or values, which may be significantly more or less favorable than such estimates. Estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities may actually be sold. The following is a brief summary of the analyses and procedures performed by Ryan Beck in the course of arriving at its April 20, 1994 oral opinion, which analyses and procedures were presented to the Reliable Board of Directors on that date: Impact Analysis--Ryan Beck analyzed the changes in the amount of earnings, book value and indicated dividends represented by the issuance of 1.6 shares of FCFC Common Stock and the number of outstanding shares of Reliable Common Stock, Ryan Beck assumed a price of $28.80 per share of Reliable Common Stock. The analysis evaluated, among other things, possible dilution in earnings and book value per share for FCFC and the dividends to be received by Reliable shareholders. This analysis was based upon December 31, 1993 data for FCFC and Reliable and future earnings estimates for each, and December 31, 1993 data for United and constitutes a prospective analysis. Accordingly, the data used in this analysis is not comparable to the historical data as of or for the three months ended March 31, 1994 incorporated by reference or appearing elsewhere herein. See "Summary-Comparative Per Share Data (unaudited)." At the time performed, this analysis indicated that the Reliable Merger would be approximately 1.64% dilutive to FCFC's earnings per share (after giving pro forma effect to the United Merger). Ryan Beck's analysis also evaluated, among other things, the Reliable Merger's approximate 5.00% accretive effect on FCFC's book value per share, the percentage of reserves to non-performing loans and the pro forma capitalization of FCFC after the Reliable Merger and the United Merger. In addition, Ryan Beck's analysis considered dividends paid by Reliable to date and FCFC's annualized dividend of $0.56 per share. This impact analysis was based upon data available at the time performed and should not be construed as indicative of the actual impact of the Reliable Merger when consummated. Impact per Share Analysis. Ryan Beck also analyzed the impact of the Reliable Merger on certain FCFC values (giving pro forma effect to the United Merger) per Reliable share based on the exchange ratio of 1.6 shares of FCFC Common Stock for one share of Reliable. That analysis, which was based on certain assumptions made by Ryan Beck found that, based on the proposed exchange ratio, FCFC's equivalent earnings per share would be $1.94 or 13.88% greater than existing Reliable earnings per share; that FCFC's equivalent tangible book value would be $15.12 or 29.64% less than the existing Reliable tangible book value per share; and that FCFC's equivalent dividend income would be $0.90 per share or 10.40% less than Reliable's current dividend income per share. 6 Comparable Companies and Comparable Acquisitions Analysis. Ryan Beck also compared the financial data of Reliable as of December 31, 1993 to median data calculated from a selected group of 36 peer savings institutions with assets as of December 31, 1993 between $50 million and $300 million, equity to assets greater than 10%, non-performing assets to total assets less than 3.0% and a return on average assets of greater than 1% that Ryan Beck deemed comparable to Reliable. Reliable's tangible equity to assets ratio of 20.12%, non-performing assets to total assets of 1.98% and year-to-date (annualized) return on average equity of 12.42% (7.88%, net of securities gains) were compared to the median ratios for the selected thrifts described above. The median ratios were as follows: tangible equity to assets: 14.46%; non-performing assets to total assets: 0.35%; and year-to-date (annualized) return on average equity of 9.43%. Ryan Beck compared Reliable's December 31, 1993 total assets of $150 million, tangible equity to total assets of 20.12%, year-to-date (annualized) return on average assets of 2.51%, year-to-date (annualized) return on average equity of 12.42% and non-performing assets to total assets of 1.98% with medians of selected thrifts that had announced acquisition transactions since January 1, 1993 that Ryan Beck deemed comparable. These medians included tangible equity to total assets of 11.27%, year-to-date (annualized) return on average assets of 1.53%, year-to-date (annualized) return on average equity of 13.76% and non- performing assets to total assets of 0.14%. The comparable companies consisted of 14 savings institutions having assets between $50 and $300 million with non- performing assets less than 3.0%, return on average assets greater than 0.75% and equity to assets greater than 10.0% which had announced acquisition transactions since January 1, 1993. However, Ryan Beck did not assign greater weight to any specific transaction. Ryan Beck also calculated certain ratios based on the proposed transaction price for the Reliable shares of $28.80 per share, or an aggregate of $40.7 million, and certain of Reliable's results for the quarter ended December 31, 1993. Those ratios included the proposed transaction price to Reliable's stated book value: 133.50%; the proposed transaction price to Reliable's stated book value: 133.50%; the proposed transaction price to Reliable's tangible book value; 133.50%; the proposed transaction price to Reliable's earnings per share: 11.8 times Reliable's latest twelve-month earnings (net of securities gains); and the proposed transaction price premium over tangible book value as a percentage of core deposits: 8.94%. Ryan Beck then compared these ratios to the median ratios for the selected thrifts described above. The median ratios were as follows: transaction price to stated book value: 135.37%; transaction price to tangible book value: 135.37%; transaction price to earnings per share: 11.92 times and the proposed transaction price as a percentage of the premium over tangible book value to core deposits: 5.64%. Ryan Beck also compared Reliable's tangible equity to assets ratio of 20.12% to that of the selected thrifts of 11.27% and then analyzed Reliable's adjusted tangible capital to account for Reliable's excess capital over its comparable peer group and the proposed transaction price premium to the resultant Reliable's adjusted tangible capital. Ryan Beck also compared FCFC's stock price multiple of 14.04 times earnings and 198.02% of tangible book value, tangible capital as a percentage of assets of 8.75% and non-performing assets plus accruing loans 90 days past due of 1.04% of total assets, with those for selected U.S. banks and bank holding companies that Ryan Beck deemed to be comparable to FCFC. The comparable range of stock prices was 7.71 to 53.98 times earnings and the median stock price was 11.65 times earnings. The comparable range of tangible book value to range of stock prices was 96.1% to 248.0% and the median stock price to tangible book value ratio was 154.76%. The median ratio of tangible capital as a percentage of assets was 7.95% and the median ratio of non-performing assets plus accruing loans 90 days past due to total assets was 0.67%. Ryan Beck compared FCFC's return on average equity of 12.91% to the median return on average equity of 12.63%. Ryan Beck also compared other income, expense and balance sheet information of such companies with similar information about FCFC. The selected companies included 46 banks and bank holding companies with total assets between $1 billion and $2 billion whose stock is traded on a national exchange or quoted on NASDAQ. No company or transaction used in this composite analysis is identical to Reliable, FCFC or the Reliable Merger, and Ryan Beck did not assign greater weight to any specific company or transaction. Accordingly, 7 an analysis of the results of the foregoing is not mathematical; rather, it involves complex considerations and judgment concerning differences in financial and operating characteristics of the companies involved and other factors that could affect the public trading values of the securities of the company or companies to which they are being compared. Discounted Cash Flow Analysis: Ryan Beck estimated the future earnings per share and the future dividend stream that Reliable could produce over a five- year period, assuming the satisfaction of minimum capital requirements and growth rates of 5%, 10% and 15% in earnings per share. Ryan Beck also estimated the terminal value of the Reliable Common Stock after the five-year period by applying a range of 10 to 15 times Reliable's terminal year earnings. Using a discounted cash flow analysis, the dividend streams and terminal values were then discounted to present values using discount rates ranging from 8% to 20%, which reflects different assumptions regarding the required rates of return of holders and prospective buyers of Reliable Common Stock. The range of present values per fully diluted share of Reliable Common Stock resulting from these assumptions was from $12.13 to $40.97. The low end of this range was based upon assumptions of a 5% rate of growth of earnings per share, an earnings per share multiple of 10 and a 20% discount rate, while the high end of the range was based on a 15% growth rate, a multiple of 15 times earnings per share and 8% discount rate. In connection with its written Opinion dated as of June 29, 1994, Ryan Beck confirmed the appropriateness of its reliance on the analyses used to render its April 20, 1994 oral opinion by performing procedures to update certain of such analyses and by reviewing the assumptions on which such analyses were based and the factors considered in connection herewith. Ryan Beck's written opinion dated as of June 29, 1994 was based solely upon the information available to it and the economic, market and other circumstances as they existed as of the date of such opinion, including the market price of FCFC Common Stock. Events occurring after that date, including a material change in the market price of FCFC Common Stock, could materially affect the assumptions and conclusions contained in this opinion. Ryan Beck has not undertaken to reaffirm or revise its opinion or otherwise comment upon any events occurring after the date thereof. The summary set forth above does not purport to be a complete description, but is a brief summary, of the material analyses and procedures performed by Ryan Beck in the course of arriving at its opinions. For Ryan Beck's services in connection with the Reliable Merger, Reliable agreed to pay Ryan Beck a contingent cash fee equal to 1.00% of the aggregate dollar value of the consideration received by the Reliable shareholders as of the date of the Definitive Agreement. Accordingly, Ryan Beck's fee would be approximately $406,000. This fee is payable 50% upon the execution of the definitive agreement and 50% upon the closing of the Reliable Merger. In addition, Reliable has agreed to reimburse Ryan Beck for its reasonable out-of- pocket costs and expenses incurred in connection with the services rendered to Reliable pursuant to its engagement, including the fees and expenses of its legal counsel. Reliable has agreed to indemnify Ryan Beck against certain liabilities, including liabilities under federal securities laws, incurred in connection with its services. Reliable has paid Ryan Beck $203,279 of its fee to date. The amount of all of Ryan Beck's fees were determined by negotiation between Reliable and Ryan Beck. Ryan Beck has been Reliable's financial advisor from time to time since 1992. Ryan Beck has actively engaged in making a market in the Reliable Common Stock. Ryan Beck has not had an investment banking relationship with FCFC or United for the past three years, nor has it actively engaged in making a market in the Common Stock of either FCFC or United. Ryan Beck's equity research department compiles and publishes statistical data on Pennsylvania bank and thrift stocks, including FCFC, United and Reliable but has not issued a research report or produced on earnings estimate on FCFC, United or Reliable during the past three years. 8 Required Vote; Management Recommendation Approval of the Plan of Reorganization by the shareholders of Reliable requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Reliable Common Stock entitled to vote at the Special Meeting. The Board of Directors of Reliable has carefully considered the Plan of Reorganization and believes that the proposed Merger is in the best interests of Reliable and its shareholders. Executive officers and directors of Reliable hold, in the aggregate, approximately 114,394 shares of Reliable Common Stock, constituting approximately 8.11% of all such shares outstanding. ACCORDINGLY, THE BOARD OF DIRECTORS OF RELIABLE UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF RELIABLE VOTE TO APPROVE THE PLAN OF REORGANIZATION. Conversion of Reliable Shares On the Effective Date, each outstanding share of Reliable Common Stock will, by virtue of the Merger and without any action on the part of the holder thereof, be converted into 1.6 shares of FCFC Common Stock. Surrender and Exchange of Reliable Stock Certificates. As promptly as practicable after the Effective Date, FCFC will send or cause to be sent to each Reliable shareholder of record as of the close of business on the Effective Date transmittal materials containing instructions on how to effect the exchange of Reliable Common Stock certificates for certificates representing shares of FCFC Common Stock. HOLDERS OF RELIABLE COMMON STOCK CERTIFICATES SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE SUCH TRANSMITTAL MATERIALS AND INSTRUCTIONS. However, certificates should be surrendered promptly after instructions to do so are received. Any dividends declared on FCFC Common Stock after the Effective Date will apply to all whole shares of FCFC Common Stock into which shares of Reliable Common Stock have been converted by virtue of the Merger. HOWEVER, NO FORMER RELIABLE SHAREHOLDER WILL BE ENTITLED TO RECEIVE ANY SUCH DIVIDEND UNTIL SUCH SHAREHOLDER'S RELIABLE COMMON STOCK CERTIFICATES HAVE BEEN SURRENDERED FOR EXCHANGE AS PROVIDED IN THE LETTER OF TRANSMITTAL. Upon such surrender, the former Reliable shareholder will be entitled to receive all such dividends payable on the whole shares of FCFC Common Stock issuable in exchange for the surrendered certificate or certificates (without interest thereon and less the amount of taxes, if any, which may have been imposed or paid thereon). NO INTEREST WILL ACCRUE OR BE PAYABLE IN RESPECT OF ANY CASH PAYABLE UPON SURRENDER FOR EXCHANGE OF RELIABLE COMMON STOCK CERTIFICATES, AND NO SUCH CASH WILL BE PAID TO ANY FORMER RELIABLE SHAREHOLDER UNTIL SUCH SHAREHOLDER'S RELIABLE COMMON STOCK CERTIFICATES ARE SURRENDERED FOR EXCHANGE AS PROVIDED IN THE LETTER OF TRANSMITTAL. Payment for Fractional Shares. No fractional shares of FCFC Common Stock will be issued in connection with the Merger. Instead, each Reliable shareholder who surrenders for exchange Reliable Common Stock certificates which would otherwise entitle such shareholder to receive a fraction of a share of FCFC Common Stock will be entitled to receive, in addition to a certificate for the whole shares of FCFC Common Stock to which such shareholder is entitled, cash in an amount equal to such fractional part of a share multiplied by the value of $19 for one whole share of FCFC Common Stock. Unexchanged Certificates. On the Effective Date, the stock transfer books for Reliable Common Stock will be closed, and no further transfers of Reliable Common Stock will be made or recognized. Certificates for Reliable Common Stock which are surrendered for exchange after the Effective Date will entitle the holder only to receive, upon surrender as provided in the letter of transmittal, a certificate for the number of shares of FCFC Common Stock into which the shares represented by such Reliable Common Stock certificates were converted by virtue of the Merger. 9 Conversion of Reliable Stock Options In connection with the Merger, FCFC will assume the outstanding stock options covering 11,336 shares of Reliable Common Stock. After the effective date of the Reliable Merger these options will be exercisable for FCFC Common Stock at the rate of 1.6 shares of FCFC Common Stock for each share of Reliable Common Stock covered by the option, for an aggregate of 18,137 shares of FCFC Common Stock to be issued by FCFC if all the options are exercised. Management Following the Merger On the Effective Date, the Boards of Directors of Reliable and Reliable Savings Bank will consist of all those persons who are, respectively, the current Directors of these institutions, plus E. James Trimarchi, Chairman of the Board, President and Chief Executive Officer of FCFC, and Joseph E. O'Dell, Senior Executive Vice President and Chief Operating Officer of FCFC. At that time, all officers and employees of Reliable and Reliable Savings Bank will continue to hold the positions they held with these institutions prior to the Effective Date. Following the Merger, the Board of Directors of FCFC will remain unchanged. Conditions to the Merger In addition to approval by the shareholders of Reliable, the Merger is contingent upon the satisfaction of a number of other conditions, including: (i) approval of the Merger by the Pennsylvania Department of Banking; (ii) approval of the Merger by the Office of Thrift Supervision ("OTS") and the Board of Governors of The Federal Reserve System (the "Federal Reserve Board") and the absence of any action or suit to enjoin or prohibit the Merger under the antitrust laws filed by the United States within the 30-day period following Federal Reserve Board approval; (iii) the continued effectiveness of FCFC's registration statement filed with the Securities and Exchange Commission (the "SEC") with respect to the shares of FCFC Common Stock issuable in connection with the Merger; (iv) receipt of a favorable tax opinion described below from the law firm of Reed Smith Shaw & McClay, special counsel to Reliable and FCFC; (v) authorization of the shares of FCFC Common Stock issuable to Reliable shareholders pursuant to the Merger for listing on the New York Stock Exchange upon official notice of issuance; (vi) receipt by FCFC from each of the affiliates of Reliable of an executed agreement referred to below under "Restrictions on Resales of FCFC Common Stock by Reliable Affiliates"; (vii) receipt by FCFC of a favorable opinion from Jarrett * Stokes & Co., certified public accountants, that the Merger meets the requirements for pooling of interests accounting treatment; and (viii) receipt by Reliable of a favorable opinion from Ryan, Beck & Co., that the terms of the Merger are fair, from a financial point of view, to Reliable and its shareholders. In addition, unless waived, each party's obligation to consummate the Merger is subject to the performance by the other party of its obligations under the Plan of Reorganization, the accuracy of the representations and warranties of the other party contained therein and the receipt of certain certificates and opinions from the other party and its counsel. Representations and Warranties The representations and warranties of FCFC and Reliable are set forth in Sections 3 and 4, respectively, of the Agreement and Plan of Reorganization. The representations and warranties relate to, among other things, the organization and good standing of FCFC and Reliable; the capitalization of FCFC and Reliable and ownership of their subsidiaries; the authorization by FCFC and Reliable of the Plan of Reorganization and the absence of conflict with other agreements; the accuracy of financial statements furnished to the other party; the absence of undisclosed liabilities and the absence of material adverse changes subsequent to December 31, 1993; payment of taxes and title to properties; compliance with laws and the absence of undisclosed material litigation; compliance by employee benefit plans with the terms thereof and laws applicable thereto; and the accuracy of the information furnished by FCFC and Reliable for inclusion in this rProxy Statement/Prospectus. Except for the representations and warranties relating to the accuracy of the information furnished by the parties for inclusion herein, none of the representations and warranties contained in the Plan of Reorganization will survive the consummation of the Merger. 10 Amendment, Waiver and Termination Subject to applicable law, at any time before the Effective Date, the Plan of Reorganization may, by written instrument signed by an authorized officer of FCFC and Reliable, be amended in any respect, except that after shareholder approval no amendment may change the rates of exchange of FCFC Common Stock for Reliable Common Stock in connection with the Merger. FCFC or Reliable may also (i) extend the time for performance of any of the obligations of the other; (ii) waive any inaccuracies in the representations and warranties of the other; (iii) waive compliance by the other with any of its covenants or agreements under the Plan of Reorganization and the performance of any obligations contained therein; and (iv) waive any condition precedent to its obligations under the Plan of Reorganization other than shareholder approval of the Plan of Reorganization, governmental regulatory approvals required to consummate the Merger, registration requirements incident to the issuance of FCFC Common Stock and authorization of the FCFC Common Stock for listing on the New York Stock Exchange. The Plan of Reorganization may be terminated by the mutual written consent of the Boards of Directors of FCFC and Reliable at any time prior to the Effective Date without liability of any party, notwithstanding prior approval by the shareholders of Reliable. Notwithstanding prior shareholder approval, either FCFC or Reliable, by written notice to the other, may terminate the Plan of Reorganization without liability of any party in the event of failure to satisfy prior to June 30, 1995 any condition precedent to its obligation to consummate the Merger, if such failure occurs despite the good faith effort of the terminating party to perform all agreements and covenants and satisfy all conditions required of such party. No Dissenters' Rights of Reliable Shareholders Under Section 262 of the Delaware General Corporation Law, the rights and remedies of a dissenting shareholder are not available to a holder of Reliable Common Stock who objects to the Merger. Certain Tax Aspects of the Merger Federal Income Tax. FCFC and Reliable have been advised by their special counsel, Reed Smith Shaw & McClay, that for federal income tax purposes, it is their opinion that: (1) The Merger will constitute a reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986 (the "Code"); Reliable, Interim Reliable and FCFC will each be a party to the reorganization within the meaning of Section 368(b) of the Code; (2) No gain or loss will be recognized to Reliable, Interim Reliable or FCFC as a result of the Merger; (3) No gain or loss will be recognized to the Reliable shareholders upon the exchange of their Reliable Common Stock for FCFC Common Stock (including fractional share interests to which they may be entitled); (4) The basis of the FCFC Common Stock (including fractional share interests to which they may be entitled) to be received by the Reliable shareholders will be the same as the basis of the Reliable Common Stock surrendered in exchange therefor; (5) The holding period of the FCFC Common Stock (including fractional share interests to which they may be entitled) to be received by the Reliable shareholders will include the holding period of the Reliable Common Stock surrendered in exchange therefor, provided that the United Common Stock was held as a capital asset in the hands of the Reliable shareholders on the date of the exchange; and (6) The payment of cash in lieu of fractional share interests of FCFC Common Stock will be treated as if the fractional shares were distributed as part of the exchange and then were redeemed by FCFC; these cash payments will be treated as having been received in full payment in exchange for the share redeemed as provided in Section 302(a) of the Code. 11 Pennsylvania Personal Income Tax. Reliable and FCFC have been advised by their special counsel, Reed Smith Shaw & McClay, that for Pennsylvania Personal Income Tax purposes, it is their opinion that no gain or loss will be recognized to the Reliable shareholders who are subject to the Pennsylvania Personal Income Tax upon the receipt by them of FCFC Common Stock (including fractional share interests to which they may be entitled) in exchange for their Reliable Common Stock, and that the state tax basis for the FCFC Common Stock (including fractional share interests to which they may be entitled) to be received by the Reliable shareholders will be the same as the state tax basis of the Reliable Common Stock surrendered in exchange therefor. Cash received in lieu of a fractional share of FCFC Common Stock by a Reliable shareholder who is subject to the Pennsylvania Personal Income Tax will be treated as if the fractional share had actually been received by the Reliable shareholder and then immediately sold by him to FCFC for the cash received and taxed accordingly. Pennsylvania Personal Property Tax. Reliable and FCFC have been advised by their special counsel, Reed Smith Shaw & McClay, that it is their opinion that the shares of FCFC Common Stock to be received by the Reliable shareholders are exempt from the Pennsylvania county personal property tax. The foregoing opinions cover only certain federal, Pennsylvania and local Pennsylvania tax aspects and are based upon existing law and regulations, as presently interpreted by judicial decisions and administrative rulings, all of which are subject to change without notice and any such change might be applied retroactively to the transactions contemplated by the Merger. Among other things, the foregoing opinions do not address the federal or state income tax considerations that may affect the treatment of a shareholder who acquired his Reliable Common Stock pursuant to an employee or nonemployee stock option. Accordingly, each Reliable shareholder should consult his personal tax advisor with specific reference to his own tax situation and potential changes in the applicable law as to all federal, state and local tax matters in connection with the Merger. Restrictions on Resales of FCFC Common Stock by Reliable Affiliates The shares of FCFC Common Stock to be issued in the Merger have been registered under the Securities Act of 1933, as amended (the "Securities Act"), but this registration does not cover resales by shareholders of Reliable who may be deemed to control or be under common control with Reliable and who therefore may be deemed "affiliates" of Reliable as that term is used in Rule 145 promulgated under the Securities Act. Such affiliates may not sell their shares of FCFC Common Stock acquired in the Merger except pursuant to: (i) an effective registration statement under the Securities Act covering the shares to be sold; (ii) the conditions contemplated by Rules 144 and 145 promulgated under the Securities Act; or (iii) another applicable exemption from the registration requirements of the Securities Act. The management of Reliable will notify those persons whom it believes may be such affiliates. The Plan of Reorganization requires as a condition to the obligation of FCFC to consummate the Merger that each such Reliable affiliate enter into an agreement with FCFC not to sell, assign, pledge, transfer or otherwise dispose of any of his Reliable Common Stock or any of the shares of FCFC Common Stock acquired by such affiliate in the Merger except (i) in accordance with the requirements of the Securities Act and the regulations promulgated thereunder and (ii) in order to permit the Merger to be accounted for as a pooling of interests, during the period 30 days prior to the Effective Date and thereafter until FCFC has published the financial results of at least 30 days of combined operations of FCFC and Reliable, at such times and in such quantities as are prescribed in Section 201.01 of the Commission's Codification of Financial Reporting Policies and Staff Accounting Bulletin Nos. 65 and 76. See "Conditions to the Merger." Expenses Each of FCFC and Reliable shall bear its own expenses incurred in connection with the Plan of Reorganization and all related transactions, including the fees of its accountants, regular attorneys and investment advisors. The fees and expenses of Reed Smith Shaw & McClay, special counsel to FCFC and 12 Reliable, will be borne equally by FCFC and Reliable, except that such fees and expenses related to the regulatory approvals referred to above under "Conditions to the Merger" will be borne by FCFC. Effective Date of the Merger It is presently anticipated that if the Plan of Reorganization is approved by the shareholders of Reliable, the Merger will become effective on or before September 30, 1994. However, consummation of the Merger is subject to the receipt of certain required regulatory approvals and to the expiration of the required 30-day waiting period following the date of the approval by the Federal Reserve Board, during which period no action to prohibit the Merger shall have been initiated by the United States. There can be no assurance that all required regulatory approvals will be received or that, if received, such approvals will be received in time to permit the Merger to become effective on the anticipated Effective Date. In addition, as also noted above, the Merger is subject to the satisfaction of certain other conditions, some of which may not be waived, and FCFC and Reliable retain the power to abandon the Merger or to extend the time for performance of conditions or obligations necessary to its consummation, notwithstanding prior shareholder approval of the Plan of Reorganization. UNITED NATIONAL BANCORPORATION MERGER FCFC has signed an Agreement and Plan of Reorganization, and a related Plan of Merger (collectively, the "United Plan of Reorganization"), dated as of March 25, 1994 with United National Bancorporation ("United"), a Pennsylvania business corporation and a bank holding company for Unitas National Bank, a national banking association ("Unitas Bank"), with its principal place of business in Chambersburg, Pennsylvania. The United Plan of Reorganization provides for the merger of United into FCFC (the "United Merger"). On the effective date of the United Merger, each share of United Common Stock will be converted into 2 shares of FCFC Common Stock for an aggregate of 1,538,294 shares of FCFC Common Stock to be issued in the United Merger. In connection with the United Merger, FCFC will assume the outstanding stock options covering 49,643 shares of United Common Stock. After the effective date of the United Merger these options will be exercisable for FCFC Common Stock at the rate of 2 shares of FCFC Common Stock for each share of United Common Stock covered by the option, for an aggregate of 99,286 shares of FCFC Common Stock to be issued by FCFC if all the options are exercised. See the United Consolidated Financial Statements and the notes thereto appearing elsewhere in this Proxy Statement/Prospectus. United's subsidiary, Unitas Bank, conducts its business through 12 community banking offices in 11 communities in the counties of Adams (1 office), Bedford (1), Centre (2), Franklin (2) and Huntingdon (6). See "Information Concerning United." At March 31, 1994, United reported total consolidated assets of approximately $145,522,000. It is contemplated that the United Merger and the Reliable Merger will be consummated at the same time if all required regulatory approvals have been received and all conditions precedent have been satisfied; however, the United Merger and the Reliable Merger are separate and independent transactions. The information presented in this Proxy Statement/Prospectus concerning United is intended only to provide the holders of Reliable Common Stock an understanding of United and the United Merger. The holders of Reliable Common Stock have no rights to approve or reject the consummation of the United Merger. The consummation of the Reliable Merger is not a condition precedent to the United Merger, and the consummation of the United Merger is not a condition precedent to the Reliable Merger. It is contemplated that each Merger will be consummated as soon as its conditions precedent have been satisfied. On June 17, 1994, FCFC filed a registration statement on Form S-4 with the SEC at No. 33-54193, containing a Proxy Statement/Prospectus for the shareholders meeting to be held by United to consider and act upon the FCFC Merger and for the shares of FCFC Common Stock to be issued in the United Merger. 13 COMPARATIVE AND PRO FORMA COMBINED FINANCIAL INFORMATION Comparative Stock Prices and Dividends Stock Prices FCFC Common Stock has been listed on the New York Stock Exchange ("NYSE") since June 10, 1992 under the symbol "FCF". FCFC Common Stock before that time was not listed on any national securities exchange but was traded to a limited extent in private trades and in the over-the-counter market. Reliable Common Stock has been listed on the Nasdaq National Market System since March 30, 1992 under the symbol "RESB". Before that time Reliable was not a stock company. The following table sets forth, for the periods indicated, the high and low sales prices per share of the FCFC Common Stock on the NYSE Composite Transactions Tape, the high and low sales prices per share of transactions known to FCFC management for FCFC Common Stock before June 10, 1992 and the high and low sales prices per share of the Reliable Common Stock as reported by the Nasdaq Stock Market. Prices per share for FCFC Common Stock have been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock distribution on the FCFC Common Stock declared on January 18, 1994.
FCFC Reliable Common Stock Common Stock --------------- --------------- 1992 High Low High Low ---- ------- ------- ------- ------- January through March........................... $10.500 $10.000 $14.500 $13.000 April through June.............................. 12.250 10.250 17.500 13.750 July through September.......................... 14.875 12.000 17.750 15.750 October through December........................ 15.688 13.688 20.250 16.750 1993 ---- January through March........................... 14.625 12.375 22.000 19.000 April through June.............................. 14.875 13.250 24.750 20.500 July through September.......................... 16.000 13.313 32.250 23.250 October through December........................ 17.625 14.875 30.000 26.500 1994 ---- January through March........................... 20.250 16.750 29.000 24.000 April through June 24........................... 18.250 15.500 27.250 24.750
The prices contained in the table for FCFC Common Stock for the periods before June 10, 1992 are limited to transactions known by FCFC's management, including inquiries made of local brokers, and are not necessarily indicative of the actual range of prices at which such stock was traded during the periods indicated. FCFC's Common Stock (before June 10, 1992) was traded from time to time by securities brokers, but management is not aware that bid and asked quotations were reported nationally or in newspapers of local circulation. The last reported sale price of FCFC Common Stock on the NYSE Composite Transactions Tape on March 11, 1994, the last trading day before announcement of the Merger, was $17.75, and the last reported sale price of Reliable Common Stock by the Nasdaq Stock Market on the same date was $26.50. As of June 24, 1994, the last reported sale price of FCFC Common Stock was $18.00 and the last reported sale price of Reliable Common Stock was $27.25. Dividends The following table sets forth, for the periods indicated, the quarterly cash dividends per share declared on FCFC Common Stock and Reliable Common Stock. During the second quarter of 1992, the Board of Directors of FCFC began the practice of declaring dividends at the end of the quarter instead of at the 14 beginning of the quarter. The payable dates continued to be in the period following the end of the quarter. This resulted in FCFC dividends being declared twice in the second quarter of 1992, but only one dividend was paid per quarter. Dividends per share of FCFC Common Stock have been adjusted to reflect the two-for-one stock split on January 18, 1994.
FCFC Reliable Common Stock Common Stock ------------ ------------ 1992 ---- January through March................................. $.105 N/A April through June.................................... .210 $.150 July through September................................ .105 .200 October through December.............................. .125 .250 1993 ---- January through March................................. .125 .250 April through June.................................... .125 .300 July through September................................ .125 .350 October through December.............................. .135 .400 1994 ---- January through March................................. .140 .400 April through June.................................... .140 .400
FCFC and Reliable have agreed in the Plan of Reorganization that, pending consummation of the Merger, Reliable will not declare, pay or set aside a dividend or other distribution in respect to its capital stock other than cash dividends declared prior to the date of the Agreement and regular quarterly cash dividends declared, each in an amount no greater than $.40 per share and each having both a record date and payment date the same as the regular quarterly cash dividend of FCFC. Certain Information About the Pro Forma Combined Financial Data On March 25, 1994, FCFC announced the proposed merger with United. Under the terms of the Agreement and Plan of Reorganization with United, the holders of 769,147 shares of United Common Stock will receive 2 shares of FCFC Common Stock for each share of United Common Stock. On April 21, 1994 the Corporation entered into a definitive agreement to merge with Reliable. Under the terms of the Agreement and Plan of Reorganization with Reliable, the holders of 1,410,194 shares of Reliable Common Stock will receive 1.6 shares of FCFC Common Stock for each share of Reliable Common Stock. The Plan of Reorganization with United also requires that the number of shares of United, if any, as to which the holders may exercise their rights as dissenting shareholders shall not be greater than 9% of the United Common Stock outstanding. The Reliable shareholders do not have dissenters' rights. The proposed United Merger is a separate and independent transaction from the proposed Reliable Merger. The consummation of either Merger is not a condition precedent to the consummation of the other Merger. The following pro forma combined financial statements and data assume that none of the holders of the outstanding Common Stock of United exercise dissenters' rights. The United Merger and the Reliable Merger will be accounted for as poolings of interests and, accordingly, all financial statements will be restated as though the companies had been combined as of the beginning of each period presented. Per share data for FCFC in the following pro forma combined financial statements and data has been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock distribution on the FCFC Common Stock declared on January 18, 1994. Per share data for United in the following pro forma combined financial statements and data has been adjusted to reflect 10% stock dividends declared on November 13, 1991, November 18, 1992 and November 17, 1993. These pro forma statements are presented for informational purposes only and should not be construed to be indicative of actual financial position and results of operations after the Mergers. 15 Comparative Per Share Data (Unaudited) The following table sets forth certain historical per share financial information for FCFC Common Stock, United Common Stock and Reliable Common Stock and pro forma per share financial information for FCFC, United and Reliable combined and for FCFC and Reliable combined. The calculations are based on the average number of shares outstanding. Net income per common share and pro forma net income per common share were calculated before the cumulative effect of accounting changes. The pro forma information is presented for informational purposes only and should not be construed as being indicative of the actual financial position, results of operations and dividends subsequent to the Mergers. See "Certain Information About the Pro Forma Combined Financial Data."
Three Months Ended March 31, Years Ended December 31, ---------------- ------------------------------ 1994 1993 1993 1992 1991 1990 1989 -------- ------- ------ ----- ----- ----- ----- Earnings Per Share: Historical: Net income per FCFC share.... $ 0.28 $0.32 $ 1.22 $1.14 $0.94 $0.85 $0.76 Net income per 1.6 FCFC shares...................... 0.45 0.51 1.95 1.82 1.50 1.36 1.22 Net income per Reliable share (a)......................... 0.46 0.56 2.21 1.61 -- -- -- Pro Forma Combined FCFC and Reliable per FCFC share (b).. 0.28 0.32 1.24 1.12 0.91 0.80 0.73 Pro Forma Combined FCFC and Reliable per 1.6 FCFC shares (b).......................... 0.44 0.51 1.98 1.79 1.46 1.28 1.17 Pro Forma Combined FCFC, United and Reliable per FCFC share (b).................... 0.29 0.32 1.23 1.11 0.89 0.79 0.70 Pro Forma Combined FCFC, United and Reliable per 1.6 FCFC shares (b).............. 0.46 0.51 1.97 1.78 1.42 1.26 1.12 Dividends Per Share: Historical: Dividends per FCFC share..... $ 0.14 $0.13 $0.51 $0.55 $0.38 $0.33 $0.30 Dividends per 1.6 FCFC shares...................... 0.22 0.21 0.82 0.88 0.61 0.53 0.48 Dividends per Reliable share (a)......................... 0.40 0.25 1.15 0.35 -- -- -- Book Value Per Share: Historical: Book value per FCFC share.... $ 9.82 $10.00 Book value per 1.6 FCFC shares...................... 15.71 16.00 Book value per Reliable share....................... 21.54 21.31 Pro Forma Combined FCFC and Reliable (b)................ 10.21 10.37 Pro Forma Combined FCFC and Reliable per 1.6 FCFC shares (b).......................... 16.34 16.59 Pro Forma Combined FCFC, United and Reliable per FCFC share (b).................... 10.07 10.21 Pro Forma Combined FCFC, United and Reliable per 1.6 FCFC shares (b).................... 16.11 16.34
- -------- (a) Reliable was not a stock company until March 30, 1992 when it changed from a mutual association. Reliable began paying quarterly cash dividends subsequent to the completion of the first full quarter ended June 30, 1992. (b) Pro Forma data is derived from the Pro Forma combined financial statements which follow. Pro Forma data include the historical financial information for FCFC, United and Reliable. For comparison purposes, the number of shares issued at Reliable's stock conversion date was used as the average number of shares outstanding for Reliable for periods prior to March 30, 1992. 16 PRO FORMA COMBINED CONDENSED BALANCE SHEET (FCFC, United and Reliable) March 31, 1994 (Unaudited) The following unaudited Pro Forma Combined Balance Sheet combines the historical balance sheets of FCFC, United and Reliable as if the Mergers had become effective on March 31, 1994. This balance sheet should be read in conjunction with the First Commonwealth Financial Corporation Consolidated Financial Statements, the United National Bancorporation Consolidated Financial Statements and the Reliable Financial Corporation Consolidated Financial Statements and the notes thereto appearing elsewhere in this Proxy Statement/Prospectus. See "Certain Information About the Pro Forma Combined Financial Data." The proposed Merger between FCFC and United is a separate and independent transaction from the proposed Merger between FCFC and Reliable. The consummation of the Reliable Merger is not a condition precedent to the United Merger, and the consummation of the United Merger is not a condition to the Reliable Merger.
Historical ------------------------------ Pro Forma FCFC United Reliable Adjustments Combined ---------- -------- -------- ----------- ---------- ASSETS Cash and due from banks................ $ 50,976 $ 4,089 $ 820 $ 55,885 Investment securities. 835,762 21,302 59,720 916,784 Money market investments.......... 2,025 236 -0- 2,261 Loans, net............ 1,016,842 114,759 86,365 1,217,966 Premises and equipment............ 22,189 2,597 2,484 27,270 Other assets.......... 44,839 2,539 1,012 48,390 ---------- -------- -------- ---------- ---------- Total assets........ $1,972,633 $145,522 $150,401 $ -0- $2,268,556 ========== ======== ======== ========== ========== LIABILITIES Deposits.............. $1,590,715 $128,003 $116,817 $1,835,535 Short-term borrowings. 174,471 3,347 -0- 177,818 Other liabilities..... 16,448 1,651 3,208 21,307 Long-term debt........ 7,911 -0- -0- 7,911 ---------- -------- -------- ---------- Total liabilities... 1,789,545 133,001 120,025 2,042,571 SHAREHOLDERS' EQUITY Common stock.......... 93,210 1,923 15 (a) (1,938) 112,183 (a) 18,973 Additional paid-in capital.............. -0- 4,115 13,657 (a)(17,772) 737 (a) 737 Retained earnings..... 98,579 6,562 17,702 (a) (998) 121,845 Treasury stock........ -0- -0- (998) (a) 998 -0- Unrealized gain (loss) on securities available for sale... (3,701) (79) -0- (3,780) Deferred compensation. (5,000) -0- -0- (5,000) ---------- -------- -------- ---------- Total shareholders' equity............. 183,088 12,521 30,376 225,985 ---------- -------- -------- ---------- ---------- Total liabilities and shareholders' equity............. $1,972,633 $145,522 $150,401 $ -0- $2,268,556 ========== ======== ======== ========== ========== Book value per common share................ $9.82 $16.28 $21.54 $10.07
- -------- (a) Reflects issuance of 1,538,294 shares of FCFC Common Stock for 769,147 shares of United Common Stock, and 2,256,310 shares of FCFC Common Stock for 1,410,194 shares of Reliable Common Stock. 17 PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (FCFC, United and Reliable) (Unaudited) The following unaudited Pro Forma Combined Condensed Statements of Income for the three months ended March 31, 1994, and the years ended December 31, 1993, 1992 and 1991 for FCFC and United, and the three months ended March 31, 1994 and the years ended September 30, 1993, 1992 and 1991 for Reliable combine the historical statements of income of FCFC, United and Reliable as if the Mergers had become effective on January 1, 1991 as described in "Certain Information About the Pro Forma Combined Financial Data." These income statements should be read in conjunction with the First Commonwealth Financial Corporation Consolidated Financial Statements, the United National Bancorporation Consolidated Financial Statements, the Reliable Financial Corporation Consolidated Financial Statements and the related notes thereto appearing elsewhere in this Proxy Statement/Prospectus. The proposed Merger between FCFC and United is a separate and independent transaction from the proposed Merger between FCFC and Reliable. The consummation of the Reliable Merger is not a condition precedent to the United Merger, and the consummation of the United Merger is not a condition to the Reliable Merger.
Three Months Years Ended December 31, Ended -------------------------------- March 31, 1994 1993 1992 1991 -------------- ---------- ---------- ---------- (in thousands, except per share amounts) Interest income Interest and fees on loans.... $25,551 $106,079 $105,971 $103,232 Interest and dividends on investment securities........ 12,233 48,360 47,164 41,337 Interest on money market securities................... 41 761 2,710 5,942 ------- -------- -------- -------- Total interest income........ 37,825 155,200 155,845 150,511 ------- -------- -------- -------- Interest expense Interest on deposits.......... 14,789 63,192 71,706 80,400 Interest on short-term borrowings................... 1,522 3,639 1,753 1,570 Interest on long-term debt.... 106 456 454 456 ------- -------- -------- -------- Total interest expense....... 16,417 67,287 73,913 82,426 ------- -------- -------- -------- Net interest income.......... 21,408 87,913 81,932 68,085 Provision for possible loan losses....................... 688 2,920 3,744 5,401 ------- -------- -------- -------- Net interest income after provision for possible loan losses................. 20,720 84,993 78,188 62,684 Net security gains............ 466 3,528 955 711 Other income.................. 2,867 10,972 9,410 7,497 Other expenses................ 14,991 59,367 54,958 46,050 ------- -------- -------- -------- Income before taxes.......... 9,062 40,126 33,595 24,842 Applicable income taxes....... 2,863 12,461 9,246 6,243 ------- -------- -------- -------- Net income................... $ 6,199 $ 27,665 $ 24,349 $ 18,599 ======= ======== ======== ======== Average common shares outstanding.................. 21,410,953 22,461,272 21,978,270 20,899,175 Net income per share.......... $0.29 $1.23 $1.11 $0.89
18 PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (FCFC and Reliable) (Unaudited) The following unaudited Pro Forma Combined Condensed Statements of Income for the three months ended March 31, 1994, and the years ended December 31, 1993, 1992 and 1991 for FCFC and the three months ended March 31, 1994 and the years ended September 30, 1993, 1992 and 1991 for Reliable combine the historical statements of income of FCFC and Reliable as if the Merger had become effective on January 1, 1991 as described in "Certain Information About the Pro Forma Combined Financial Data." These income statements should be read in conjunction with the First Commonwealth Financial Corporation Consolidated Financial Statements, the Reliable Financial Corporation Consolidated Financial Statements and the related notes thereto appearing elsewhere in this Proxy Statement/Prospectus. The proposed Merger between FCFC and Reliable is a separate and independent transaction from the proposed Merger between FCFC and United. The consummation of the United Merger is not a condition precedent to the Reliable Merger, and the consummation of the Reliable Merger is not a condition of the United Merger.
Three Months Years Ended December 31, Ended -------------------------------- March 31, 1994 1993 1992 1991 -------------- ---------- ---------- ---------- (in thousands, except per share amounts) Interest income Interest and fees on loans.... $22,911 $ 95,133 $ 95,149 $ 92,607 Interest and dividends on investment securities........ 11,952 46,759 45,750 40,007 Interest on money market securities................... 28 691 2,494 5,600 ------- -------- -------- -------- Total interest income........ 34,891 142,583 143,393 138,214 ------- -------- -------- -------- Interest expense Interest on deposits.......... 13,798 58,541 66,053 73,396 Interest on short-term borrowings................... 1,522 3,496 1,723 1,569 Interest on long-term debt.... 106 456 454 456 ------- -------- -------- -------- Total interest expense....... 15,426 62,493 68,230 75,421 ------- -------- -------- -------- Net interest income........... 19,465 80,090 75,163 62,793 Provision for possible loan losses....................... 589 2,447 3,419 5,101 ------- -------- -------- -------- Net interest income after provision for possible loan losses........ 18,876 77,643 71,744 57,692 Net security gains (losses)... 447 3,466 940 677 Other income.................. 2,708 10,158 8,897 7,014 Other expenses................ 13,585 53,819 50,045 41,790 ------- -------- -------- -------- Income before taxes.......... 8,446 37,448 31,536 23,593 Applicable income taxes..... 2,665 11,603 8,605 5,897 ------- -------- -------- -------- Net income................... $ 5,781 $ 25,845 $ 22,931 $ 17,696 ======= ======== ======== ======== Average common shares outstanding.................. 20,892,102 20,922,978 20,439,976 19,360,881 Net income per share........... $0.28 $1.24 $1.12 $0.91
19 INFORMATION CONCERNING FCFC Business and Properties of FCFC FCFC was incorporated as a Pennsylvania business corporation on November 15, 1982 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. After its incorporation it became affiliated as a result of statutory mergers with the following banks, all of which are now wholly-owned subsidiaries of FCFC with their principal places of business in central western Pennsylvania (the "Subsidiary Banks"). On April 29, 1983, FCFC became affiliated with National Bank of the Commonwealth ("NBOC"), a national bank in Indiana, Indiana County; on March 19, 1984, with Deposit Bank ("Deposit"), a Pennsylvania-chartered bank and trust company in DuBois, Clearfield County; on August 16, 1985, with Dale National Bank, now called Cenwest National Bank ("Cenwest"), a national bank in Johnstown, Cambria County; on December 14, 1985 with First National Bank of Leechburg ("Leechburg"), a national bank in Leechburg, Armstrong County; on May 31, 1990 with Peoples Bank and Trust Company ("PBTC"), a Pennsylvania-chartered bank and trust company in Jennerstown, Somerset County; on April 30, 1992 with Central Bank ("Central") a Pennsylvania-chartered bank and trust company in Hollidaysburg, Cambria County; and on December 31, 1993 with Peoples Bank of Western Pennsylvania ("Peoples"), a Pennsylvania-chartered bank in New Castle, Lawrence County. On December 31, 1986, FCFC merged with CNB CORP, INC. ("CNB"), a bank holding company with its principal office in Windber, Somerset County. CNB had one subsidiary, Citizens National Bank ("Citizens"), which was also located in Windber. On December 31, 1986, FCFC affiliated with Citizens by merging it directly into Cenwest. Commonwealth Systems Corporation ("CSC") was incorporated as a Pennsylvania business corporation in 1984 by FCFC to function as its data processing subsidiary and has its principal place of business in Indiana, Pennsylvania. Before August 1984, CSC had operated as the data processing department of NBOC. First Commonwealth Trust Company ("FCTC") was incorporated as a Pennsylvania trust company on January 18, 1991 to render general trust services and has its principal place of business in Indiana, Pennsylvania. Commonwealth Trust Credit Life Insurance Company ("Commonwealth Trust") was incorporated as an Arizona insurance corporation on March 27, 1989 to function as a credit life and credit accident and health reinsurer. FCFC and its subsidiaries currently employ approximately 906 persons (full-time equivalents). Through its Subsidiary Banks, FCFC traces its banking origins to 1880. The Subsidiary Banks conduct their business through 70 banking offices (including one that is approved and under construction) in 52 Pennsylvania communities in the counties of Armstrong (3 offices), Beaver (1), Bedford (3), Blair (8), Cambria (11), Centre (2), Clearfield (6), Elk (3), Huntingdon (1), Indiana (9), Jefferson (4), Lawrence (7), Somerset (7) and Westmoreland (5). The Subsidiary Banks engage in a general banking business and offer a full range of financial services. They offer such general retail banking services as demand, savings and time deposits; commercial, mortgage and consumer installment loans; and credit card operations through MasterCard and VISA. The Subsidiary Banks operate a network of 49 automated teller machines ("ATMs") which permit their customers to conduct routine banking transactions 24 hours a day. Of these ATMs, 29 are located on the premises of the main or branch offices of the Subsidiary Banks and 20 are in remote locations. All of the ATMs are part of the MAC network, which consists of over 14,000 ATMs owned by numerous banks, savings and loan associations and credit unions located in 16 states, of which 14 are east of the Mississippi River. The Subsidiary Banks' MAC customers may use the HONOR Network, which has 9,800 ATMs located primarily in the southeastern quadrant of the United States. The ATMs operated by the Subsidiary Banks are also part of the global MasterCard/Cirrus ATM Network which is comprised of more than 168,900 ATMs located in the United States, Canada and 58 other countries and territories, and which services over 365 million cards. Such networks allow the Subsidiary Banks' customers to withdraw cash and, in certain cases, conduct other banking transactions using ATMs of all participating financial institutions. 20 Each of the Subsidiary Banks faces intense competition, both from within and without its service area, in all aspects of its business. The Subsidiary Banks compete with numerous other commercial banks and savings banks doing business within their service areas for deposits, in such forms as checking, savings and NOW (negotiable order of withdrawal) accounts and certificates of deposit, and in making consumer loans and loans to smaller businesses. With respect to loans to larger businesses, the Subsidiary Banks also compete with much larger banks located outside of their service areas. They 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 located throughout the United States. Such funds pay dividends (which are the equivalent of the interest paid by banks on deposits) to their shareholders and are able to offer services and conveniences similar to those offered by the Subsidiary Banks. The effect of such competition has been to increase the cost to the Subsidiary Banks 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, as well as with national credit card companies such as MasterCard and VISA, whose cards, issued through financial institutions, are held by consumers throughout their service areas. 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. CSC is the data processing subsidiary of FCFC. It provides on-line general ledger accounting services and bookkeeping services for deposit and loan accounts to FCFC, the Subsidiary Banks and two other bank customers located in Pennsylvania. CSC is able to compete, 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 was incorporated on January 18, 1991 to acquire the trust business formerly conducted by the Subsidiary Banks. It is headquartered in Indiana, Pennsylvania and has six branch offices in the service areas of the Subsidiary Banks. It commenced operations on January 28, 1991 and has operated profitably since its formation. First Commonwealth Trust Company 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. Commonwealth Trust is 50% owned by FCFC, with the remaining 50% owned by another bank holding company based in Indiana, Pennsylvania. Commonwealth Trust provides reinsurance for credit life and credit accident and health insurance sold by the subsidiary banks of the two holding companies 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. Commonwealth Trust has been profitable since its formation. FCFC does not engage in any significant business activities other than holding the stock of its subsidiaries. FCFC 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 will consider other mergers and acquisitions and may actively seek out such mergers and acquisitions in the event opportunities which management considers advantageous to the development of FCFC'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. FCFC'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. FCFC, NBOC and CSC occupy this grand structure, which provides 32,000 square feet of floor space, under a 25- year restoration lease agreement with Indiana County, which NBOC entered into in 1973 and which 21 contains a 25-year renewal option. Under the lease, NBOC is obligated to pay all taxes, maintenance and insurance on the building and to restore it in conformity with historic guidelines. The building is now in excellent condition and provides space for the operations of FCFC, NBOC and CSC. The Subsidiary Banks have 70 banking facilities (including one under construction), of which 23 are leased and 47 are owned in fee, free of all liens and encumbrances. All of the facilities utilized by FCFC 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 FCFC and its subsidiaries for the immediate future. 22 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES 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 appearing elsewhere in this Proxy Statement/Prospectus. All amounts have been restated to reflect the pooling of interests.
Three Months Ended March 31, Years Ended December 31, ---------------------- ---------------------------------------------------------- 1994 1993 1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Interest Income Interest and fees on loans................. $ 21,021 $ 21,695 $ 86,121 $ 84,612 $ 81,357 $ 83,993 $ 79,422 Interest and dividends on investment securities............ 11,311 11,018 44,906 44,311 38,844 32,865 30,322 Interest on money market investments.... 28 302 691 2,494 5,600 7,906 8,014 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total interest income.. 32,360 33,015 131,718 131,417 125,801 124,764 117,758 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Interest Expense Interest on deposits... 12,759 13,794 54,041 59,906 65,484 66,060 64,059 Interest on short-term borrowings............ 1,522 663 3,496 1,723 1,569 3,001 3,291 Interest on long-term debt.................. 106 115 456 454 456 535 621 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total interest expense. 14,387 14,572 57,993 62,083 67,509 69,596 67,971 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income.... 17,973 18,443 73,725 69,334 58,292 55,168 49,787 Provision for possible loan losses........... 539 593 2,197 3,219 4,946 3,933 2,310 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for possible loan losses.. 17,434 17,850 71,528 66,115 53,346 51,235 47,477 Net securities gains (losses).............. 213 657 2,333 679 677 (269) (998) Other operating income. 2,606 2,329 9,792 8,695 6,852 6,650 5,622 Other operating expenses.............. 12,932 12,637 51,244 47,825 39,866 38,655 36,478 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before taxes and cumulative effect of change of accounting method................ 7,321 8,199 32,409 27,664 21,009 18,961 15,623 Applicable income taxes................. 2,191 2,360 9,719 7,076 5,025 4,475 2,749 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income before cumulative effect of change in accounting method................ 5,130 5,839 22,690 20,588 15,984 14,486 12,874 Cumulative effect of change in accounting method................ -0- 500 500 -0- -0- -0- -0- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income............. $ 5,130 $ 6,339 $ 23,190 $ 20,588 $ 15,984 $ 14,486 $ 12,874 ========== ========== ========== ========== ========== ========== ========== Per Share Data(a) Net income before cumulative effect of change in accounting method................ $ 0.28 $ 0.32 $ 1.22 $ 1.14 $ 0.94 $ 0.85 $ 0.76 Cumulative effect of change in accounting method................ $ 0.00 $ 0.02 $ 0.02 $ 0.00 $ 0.00 $ 0.00 $ 0.00 Net income............. $ 0.28 $ 0.34 $ 1.24 $ 1.14 $ 0.94 $ 0.85 $ 0.76 Dividends declared..... $ 0.14 $ 0.13 $ 0.51 $ 0.55 $ 0.38 $ 0.33 $ 0.30 Average shares outstanding........... 18,642,024 18,642,024 18,642,024 18,107,266 17,024,494 17,024,494 17,024,494 At End of Period Total assets........... $1,972,633 $1,830,619 $1,955,269 $1,787,548 $1,479,592 $1,346,028 $1,267,444 Securities............. 835,762 731,800 847,035 664,046 537,894 419,948 354,564 Loans and leases, net of unearned income.... 1,031,728 989,102 1,006,176 964,527 801,533 763,250 727,023 Reserve for possible loan losses........... 14,886 14,402 14,544 14,267 9,426 8,323 7,721 Deposits............... 1,590,715 1,536,705 1,575,624 1,544,823 1,279,988 1,149,863 1,088,910 Long-term debt......... 7,911 7,951 7,363 8,130 6,524 5,718 5,979 Shareholders' equity... 183,088 174,682 186,453 170,403 140,992 130,762 122,957 Key Ratios Return on average assets................ 1.06% 1.44% 1.25% 1.24% 1.14% 1.12% 1.10% Return on average equity................ 10.99% 14.76% 12.91% 12.91% 11.75% 11.59% 10.82% Net loans to deposit ratio................. 63.92% 63.43% 62.94% 61.51% 61.88% 65.65% 66.06% Dividend payout ratio.. 50.88% 34.69% 39.30% 45.11% 38.55% 36.88% 38.70% Average shareholders' equity as percentage of average assets..... 9.66% 9.72% 9.65% 9.60% 9.69% 9.66% 10.17%
- -------- (a) Average number of shares outstanding has been restated to reflect pooling of interests. Restatements also reflect two-for-one stock split on January 18, 1994. 23 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES 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 (the "Corporation") including its subsidiaries for the years ended December 31, 1993, 1992 and 1991 and are intended to supplement, and should be read in conjunction with, the consolidated financial statements and related footnotes. Effective December 31, 1993, the Corporation acquired all of the outstanding common stock of Peoples Bank of Western Pennsylvania, a state-chartered bank, headquartered in New Castle, Pennsylvania. 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. Effective April 30, 1992, the Corporation acquired all of the outstanding common stock of Central Bank ("Central"), a state-chartered bank headquartered in Hollidaysburg, Pennsylvania. The merger was accounted for as a purchase transaction, whereby the results of operations of Central from the date of acquisition were included in the financial statements. Results of Operations Net income in 1993 was $23.2 million, an increase of $2.6 million over the 1992 level of $20.6 million and compared to $16.0 million which was reported in 1991. Earnings per share before the cumulative effect of the change in accounting method increased $0.08 per share in 1993 to $1.22. This compared to $1.14 in 1992 and $0.94 in 1991. The cumulative effect of change in the method of accounting for income taxes added $0.02 per share to result in $1.24 earnings per share for 1993. Per share data has been restated to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on January 18, 1994. Return on average assets was 1.25% during the 1993 period compared to 1.24% for 1992. Return on average equity was 12.91% for both the 1993 and 1992 periods. During 1991 return on average assets was 1.14% and return on average equity was 11.75%. The following is an analysis of the impact of changes in net income on earnings per share:
1993 vs. 1992 1992 vs. 1991 ------------- ------------- Net income per share, prior year.................... $ 1.14 $ 0.94 Increase (decrease) from changes in: Net interest income............................... 0.07 0.30 Provision for possible loan losses................ 0.06 0.10 Security transactions............................. 0.09 0.00 Other income...................................... 0.04 0.05 Salaries and employee benefits.................... (0.08) (0.06) Occupancy and equipment costs..................... (0.03) (0.01) Settlement of lender liability claim.............. 0.08 (0.08) Other expenses.................................... (0.03) (0.06) Provision for Federal income taxes................ (0.13) (0.08) ------ ------ Subtotal............................................ 1.21 1.10 Inclusion of acquisition during year................ 0.01 0.04 Cumulative effect of change in accounting method.... 0.02 0.00 ------ ------ Net income per share................................ $ 1.24 $ 1.14 ====== ======
24 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $73.7 million in 1993 compared to $69.3 million in 1992 and $58.3 million in 1991. 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, 1993.
Average Balance Sheets and Net Interest Analysis ----------------------------------------------------------------------------------------- 1993 1992 1991 ----------------------------- ----------------------------- ----------------------------- 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 (Dollar Amounts in Thousands) Interest-earning assets: Time deposits with banks....... $ 10,294 $ 483 4.69% $ 29,902 $ 1,844 6.17% $ 50,100 $ 3,990 7.96% Investment securities.......... 762,562 44,906 6.10 622,869 44,311 7.45 477,168 38,844 8.59 Federal funds sold............. 6,832 208 3.04 18,265 650 3.56 28,151 1,610 5.72 Loans (b) (c), net of unearned income........................ 986,596 86,121 8.88 902,486 84,612 9.59 770,795 81,357 10.78 ---------- -------- ---- ---------- -------- ---- ---------- -------- ----- Total interest-earning assets. 1,766,284 131,718 7.63 1,573,522 131,417 8.61 1,326,214 125,801 9.78 ---------- ======== ==== ---------- ======== ==== ---------- ======== ===== Noninterest-earning assets: Cash........................... 45,496 41,104 36,083 Reserve for loan losses........ (14,683) (13,113) (8,723) Other assets................... 64,766 59,726 49,554 ---------- ---------- ---------- Total noninterest-earning assets....................... 95,579 87,717 76,914 ---------- ---------- ---------- Total Assets................. $1,861,863 $1,661,239 $1,403,128 ========== ========== ========== Liabilities and Shareholders' Equity Interest-bearing liabilities: Interest-bearing demand deposits...................... $ 169,423 3,050 1.80% $ 143,478 3,799 2.65% $ 104,632 4,006 3.83% Savings deposits............... 421,626 9,681 2.30 396,733 12,150 3.06 317,904 13,312 4.19 Time deposits.................. 816,920 41,310 5.06 763,264 43,957 5.76 681,662 48,166 7.07 Short-term borrowings.......... 95,925 3,496 3.64 38,459 1,723 4.48 25,610 1,569 6.13 Long-term debt................. 7,985 456 5.71 7,803 454 5.82 6,338 456 7.19 ---------- -------- ---- ---------- -------- ---- ---------- -------- ----- Total interest-bearing liabilities.................. 1,511,879 57,993 3.84 1,349,737 62,083 4.60 1,136,146 67,509 5.94 ---------- -------- ---- ---------- -------- ---- ---------- -------- ----- Noninterest-bearing liabilities and capital: Noninterest-bearing demand deposits...................... 157,653 139,831 119,143 Other liabilities.............. 12,660 12,196 11,832 Shareholders' equity........... 179,671 159,475 136,007 ---------- ---------- ---------- Total noninterest-bearing funding sources.............. 349,984 311,502 266,982 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity........ $1,861,863 $1,661,239 $1,403,128 ========== ========== ========== Net Interest Income and Net Yield On Interest-earning Assets......................... $ 73,725 4.35% $ 69,334 4.66% $ 58,292 4.69% ======== ==== ======== ==== ======== =====
- -------- (a) Yields on interest-earning assets have been computed on a tax equivalent basis using the 35% Federal income tax statutory rate in 1993, and 34% in 1992 and 1991. (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. 25 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Both interest income and interest expense increased as volumes increased. Average interest earning assets increased $192.8 million in 1993 to $1,766,284 which is 94.9% of average total assets. Included in the 1993 growth was $41.8 million in investments, primarily mortgage-backed securities, and these purchases were funded with borrowings from the Federal Home Loan Bank and other banks. This leveraging strategy added approximately $1.0 million to net interest income during 1993. Excluding the earning assets resulting from the Central acquisition, average earning assets grew $111.2 million in 1992. Average earning assets were 94.7% of average total assets during 1992, compared to 94.5% during 1991. Average interest-bearing liabilities increased $162.1 million during 1993, which included $41.8 million related to the previously mentioned leveraging strategy. The remainder of the increase occurred primarily through deposit growth. Average interest-bearing liabilities grew $213.6 million during 1992 which included $90.7 million in addition to the Central acquisition. Both asset yields and the cost of funds declined in 1993 and 1992 as the interest rates were generally lower during those periods when compared to previous years. Asset yields, on a tax-equivalent basis, decreased 98 basis points (0.98%) during 1993 and 117 basis points (1.17%) during 1992. The cost of funds declined 76 basis points (0.76%) during 1993 and 134 basis points (1.34%) during 1992. Earning asset yields declined in 1993 faster than liability costs primarily because of lower mortgage rates. Mortgage borrowers have been refinancing loans during the low interest rate environment reducing loan yields. Additionally, mortgage loan refinancing on a national scale had accelerated the repayments of mortgage backed securities in excess of projections. Reinvestment of the proceeds at the then current rates lowered the investment portfolio yields. This trend should stabilize if interest rates remain constant or rise. Deposit customers tended to extend maturities which locked in rates as deposit rates fell, thereby preventing the cost of funds to decline as fast as asset yields. Net interest margin, on a tax-equivalent basis, was 4.35% during 1993 compared to 4.66% in 1992 and 4.69% during 1991. The Corporation's use of computer modeling to manage interest rate risk is further 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 ------------------------------------------------------------- 1993 Change from 1992 1992 Change from 1991 ------------------------------ ------------------------------ Total Change Due Change Due Total Change Due Change Due Change to Volume to Rate Change to Volume to Rate ------- ---------- ---------- ------- ---------- ---------- (Dollar Amounts in Thousands) Interest-earning assets: Time deposits with banks................ $(1,361) $(1,209) $ (152) $(2,146) $(1,608) $ (538) Securities............ 595 10,407 (9,812) 5,467 12,516 (7,049) Federal funds sold.... (442) (407) (35) (960) (565) (395) Loans................. 1,509 8,066 (6,557) 3,255 14,196 (10,941) ------- ------- -------- ------- ------- -------- Total interest income. 301 16,857 (16,556) 5,616 24,539 (18,923) ------- ------- -------- ------- ------- -------- Interest-bearing liabilities: Deposits.............. (5,865) 4,807 (10,672) (5,578) 11,817 (17,395) Short-term borrowings. 1,773 2,575 (802) 154 787 (633) Long-term debt........ 2 11 (9) (2) 105 (107) ------- ------- -------- ------- ------- -------- Total interest expense.............. (4,090) 7,393 (11,483) (5,426) 12,709 (18,135) ------- ------- -------- ------- ------- -------- Net interest income... $ 4,391 $ 9,464 $ (5,073) $11,042 $11,830 $ (788) ======= ======= ======== ======= ======= ========
The provision for possible loan losses is an amount added to the reserve against which loan 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 reserve in relation to the risks inherent within the loan portfolio. The provision for possible loan losses was $2.2 million in 1993 and $3.2 million and $4.9 million in 1992 and 1991, respectively. Net charge-offs against the reserve for possible loan losses were $1.9 million, or 0.19% of average total loans in 1993. This is compared to $2.9 million in 1992. Charge-offs were 26 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS $510 thousand less during 1993 while recoveries of previously charged off loans increased $449 thousand. Net charge-offs were $3.8 million in 1991. Net charge- offs were 0.32% and 0.50% of average total loans during 1992 and 1991, respectively. For an analysis of credit quality, see the "Credit Review" section of this discussion. The following table presents an analysis of the consolidated reserve for possible loan losses for the five years ended December 31, 1993:
Summary of Loan Loss Experience -------------------------------------------------- 1993 1992 1991 1990 1989 ---------- -------- -------- -------- -------- (Dollar Amounts in Thousands) Loans outstanding at end of year...................... $1,006,176 $964,527 $801,533 $763,250 $727,023 ========== ======== ======== ======== ======== Average loans outstanding.. $ 986,596 $902,486 $770,795 $746,898 $706,858 ========== ======== ======== ======== ======== Reserve for possible loan losses: Balance, beginning of year. $ 14,267 $ 9,426 $ 8,323 $ 7,721 $ 7,294 Addition as result of ac- quisition................. 0 4,501 0 0 0 Loans charged off: Commercial, financial and agricultural............ 731 816 1,981 1,883 1,226 Loans to individuals..... 1,662 1,840 1,849 2,055 1,006 Real estate.............. 1,011 1,281 803 367 358 Lease financing receivables............. 80 57 35 205 9 ---------- -------- -------- -------- -------- Total loans charged off................... 3,484 3,994 4,668 4,510 2,599 Recoveries of loans previously charged off: Commercial, financial and agricultural............ 559 360 153 447 369 Loans to individuals..... 552 388 595 506 124 Real estate.............. 453 364 74 148 222 Lease financing receivables............. 0 3 3 78 1 ---------- -------- -------- -------- -------- Total recoveries....... 1,564 1,115 825 1,179 716 ---------- -------- -------- -------- -------- Net loans charged off.. 1,920 2,879 3,843 3,331 1,883 ---------- -------- -------- -------- -------- Provision charged to expense................... 2,197 3,219 4,946 3,933 2,310 ---------- -------- -------- -------- -------- Balance, end of year....... $ 14,544 $ 14,267 $ 9,426 $ 8,323 $ 7,721 ========== ======== ======== ======== ======== Ratios: Net charge-offs as a percentage of average loans outstanding....... 0.19% 0.32% 0.50% 0.45% 0.27% Reserve for possible loan losses as a percentage of average loans out- standing................ 1.47% 1.58% 1.22% 1.11% 1.09%
Total other operating income increased $2.7 million in 1993 to $12.1 million. Net security gains increased $1.7 million to $2.3 million during 1993 compared to $679 thousand during 1992 and $677 thousand in 1991. Security transactions during 1993 and 1992 were primarily the sale of U.S. Treasury securities maturing within a year. Proceeds were reinvested in U.S. Treasury securities and U.S. Government agency securities with maturities of 2-3 years to continue to lock in yields while interest rates were falling. Additionally, during 1993 marketable equity securities with a book value of $1.6 million were sold for a $1.0 million gain. During 1991 the Corporation also sold low and marginal quality securities which improved the marketability and liquidity of the portfolio. Gross gains of $2.3 million and gross losses of $17 thousand were recognized during 1993. Gross gains of $803 thousand and $1.5 million were recognized during 1992 and 1991, respectively, while gross losses of $124 thousand and $779 thousand were recognized in the corresponding periods. 27 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Trust income increased $227 thousand during 1993 to $2.2 million as estate fees decreased $67 thousand, and core revenues increased. Trust income increased $664 thousand during 1992 as the 1991 restructuring of the subsidiary banks' trust departments into a single trust company began to produce benefits. Management of the trust company allows an opportunity to focus on growth, since the specialized areas and back-office operations were centralized. Service charges on deposits increased $320 thousand in 1993 and $1.0 million in 1992 primarily as a result of average total deposits increasing. Additionally, new fee schedules established during the fourth quarter of 1991 provided higher revenues during 1992. Total other operating expenses increased $3.4 million to $51.2 million in 1993 and compared to $47.8 million and $39.9 million in 1992 and 1991, respectively. Results for the 1992 period did not reflect any of Central's results until the merger date of April 30, 1992. Operating expenses related to Central in the first four months of 1993 were $2.2 million. Employee costs experienced an increase of $2.4 million to $25.4 million. Of this increase $946 thousand was a result of including Central for the full year of 1993. Total employee costs were $23.0 million and $20.2 million in 1992 and 1991, respectively. Salary levels are generally maintained through attrition management programs. Employee costs as a percentage of average assets was 1.36% in 1993, reduced from 1.38% in 1992 and 1.44% in 1991. Net occupancy expense and furniture and equipment increased over the three year period primarily as the costs of maintaining branch operations, including utilities, repairs and depreciation continued to increase. Additionally, equipment depreciation increased as computer equipment that was previously being leased was purchased and is being depreciated over a shorter life than the original lease. Additionally, the process of automating loan documentation and the branch network increased depreciation costs but is expected to improve platform productivity and reduce loan documentation risks. The deposit insurance assessment from the Federal Deposit Insurance Corporation ("FDIC") increased as a result of deposit increases. This assessment is not scheduled to increase again in 1994, but the possibility of future increases cannot be eliminated. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") has established a risk-based assessment system which went into effect January 1, 1993. This system designates an assessment rate for each insured institution based on a combination of its capital and supervisory condition. Because of the Corporation's strong capital position and supervisory condition, only future rate changes will cause a significant change in the related expense. A lender liability claim for which a subsidiary of the Corporation was a defendant, was settled out of court in October 1992 in the amount of $1.4 million. Other operating expenses increased $1.3 million in 1993 over the 1992 related period to $15.0 million. The inclusion of Central for the entire period of 1993 increased this category $829 thousand. An increase in the amortization of core deposit intangibles as a result of the implementation of FAS No. 109 was $715 thousand. One of the subsidiary banks agreed to a settlement of a PA shares tax claim resulting in a refund of $298 thousand. The 1992 increase was primarily a result of including Central for eight months. Cost increases occurred in the process of the collection of loans or the disposition of real estate acquired in lieu of loan repayment but was partially responsible for the increased recovery of previously charged off loans. Federal income tax expense was $9.7 million during 1993 representing an increase of $2.6 million over the 1992 total of $7.1 million. Taxable income increased nearly $7.0 million during 1993. On August 10, 1993 President Clinton signed into law the Omnibus Budget Reconciliation Act of 1993 ("the Act"). The Act made several changes that will affect financial institutions such as the Corporation and its subsidiaries. While it is difficult to determine the short and long-range effects of the Act on the Corporation and whether it will be able to change its operations and make adaptations to maintain net income levels that would otherwise have prevailed if the Act had not passed, it should be noted that the primary focus of the Act was to raise taxes. One provision of the Act increased the tax rate for corporate taxable income in excess of $10 million to 35 percent from 34 percent. This provision was retroactively applied to taxable income earned after January 1, 1993. The tax rate change increased the Corporation's Federal income tax expense by $259 thousand. 28 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 and borrowings from the Federal Reserve Bank. Additionally, six of the seven banking subsidiaries are members of the Federal Home Loan Bank and may borrow up to ten percent of their total assets at any one time. 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. Deposits increased $30.8 million in 1993 primarily in core customer deposit relationships. Non-core deposits, which are time deposits in denominations of $100 thousand or more represented only 6.1% of total deposits at December 31, 1993. Time deposits of $100 thousand or more at December 31, 1993, 1992 and 1991 had remaining maturities as follows:
Maturity Distribution of Large Certificates of Deposit ------------------------------------------------- 1993 1992 1991 --------------- ---------------- ---------------- Amount Percent Amount Percent Amount Percent ------- ------- -------- ------- -------- ------- (Dollar Amounts in Thousands) Remaining Maturity: 3 months or less............. $19,734 21% $ 25,289 25% $ 53,945 51% Over 3 months through 6 months...................... 12,543 13 15,906 15 24,726 23 Over 6 months through 12 months...................... 16,542 17 11,140 11 13,196 12 Over 12 months............... 47,006 49 49,731 49 14,784 14 ------- --- -------- --- -------- --- Total...................... $95,825 100% $102,066 100% $106,651 100% ======= === ======== === ======== ===
Net loans increased $41.4 million during 1993 as consumer loans and real estate secured loans were the primary categories of increased volume reflecting a strengthening of loan demand. An additional source of liquidity are certain 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, 1993, securities available for sale had an amortized cost of $462.8 million and a market value of $465.2 million. Gross unrealized gains were $3.7 million and gross unrealized losses were $1.3 million. Below is a schedule of loans by classification for the five years ended December 31, 1993 and a schedule of the maturity distribution of investment securities at December 31, 1993.
Loans by Classification ------------------------------------------------------------------------------------------- 1993 1992 1991 1990 1989 ------------------- ----------------- ----------------- ----------------- ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ---------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollar Amounts in Thousands) Commercial, financial, agricultural and other. $ 153,039 15% $196,979 20% $255,525 31% $221,575 28% $204,933 27% Real estate............. 643,321 62 573,076 58 394,002 47 384,347 48 358,000 48 Loans to individuals.... 239,904 23 220,085 22 177,390 21 179,610 23 184,152 24 Net leases.............. 1,411 -0- 4,628 -0- 3,802 1 5,622 1 6,285 1 ---------- --- -------- --- -------- --- -------- --- -------- --- Gross loans and leases. 1,037,675 100% 994,768 100% 830,719 100% 791,154 100% 753,370 100% === === === === === Unearned income........ (31,499) (30,241) (29,186) (27,904) (26,347) ---------- -------- -------- -------- -------- Total loans, and leases net of unearned income................ $1,006,176 $964,527 $801,533 $763,250 $727,023 ========== ======== ======== ======== ========
29 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Maturity Distribution of Investment Securities --------------------------------------------------------- U.S. Treasury and other U.S. Government States and Total Weighted Agencies and Political Other Book Average Corporations Subdivisions Securities Value Yield* --------------- ------------ ---------- -------- -------- (Dollar Amounts in Thousands) Within 1 year........... $ -0- $14,322 $ 3,289 $ 17,611 7.58% After 1 but within 5 years.................. 94,612 22,105 9,953 126,670 5.73 After 5 but within 10 years.................. 81,550 27,058 1,566 110,174 5.93 After 10 years.......... 116,758 9,880 718 127,356 5.95 -------- ------- ------- -------- ---- Total................. $292,920 $73,365 $15,526 $381,811 5.95% ======== ======= ======= ======== ====
- -------- * Yields are calculated on a tax-equivalent basis Interest Sensitivity The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances. While no single number can accurately describe the impact of changes in interest rates on net interest income, interest rate sensitivity positions, or "gaps" when measured over a variety of time periods may be helpful. An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period. If interest-sensitive assets ("ISA") exceeds interest-sensitive liabilities ("ISL") during a prescribed time period, a positive gap results. Conversely, when ISL exceeds ISA during a time period, a negative gap results. A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively when interest rates fall during the 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 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, 1993 and 1992:
1993 1992 -------------------------------- -------------------------------- 0- 0- 0-90 Days 180 Days 0-365 Days 0-90 Days 180 Days 0-365 Days --------- --------- ---------- --------- --------- ---------- (Dollar Amounts in Thousands) Loans................... $ 384,639 $ 458,967 $ 593,225 $ 395,097 $ 463,995 $ 615,796 Investments............. 162,510 210,823 276,518 72,879 114,000 185,784 Other interest-earning assets................. 1,974 2,172 2,469 34,403 37,692 46,859 --------- --------- ---------- --------- --------- ---------- Total interest- sensitive assets..... 549,123 671,962 872,212 502,379 615,687 848,439 --------- --------- ---------- --------- --------- ---------- Certificates of deposit. 160,487 278,868 404,764 156,655 288,295 389,704 Other deposits.......... 503,288 503,288 503,288 583,307 583,807 584,648 Short-term borrowings... 155,518 165,096 168,803 44,801 50,135 51,492 --------- --------- ---------- --------- --------- ---------- Total interest- sensitive liabilities.......... 819,293 947,252 1,076,855 784,763 922,237 1,025,844 --------- --------- ---------- --------- --------- ---------- Gap................... $(270,170) $(275,290) $ (204,643) $(282,384) $(306,550) $ (177,405) ========= ========= ========== ========= ========= ========== ISA/ISL................. 0.67 0.71 0.81 0.64 0.67 0.83 Gap/Total assets........ 13.82% 14.08% 10.47% 15.80% 17.15% 9.92%
30 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Final loan maturities and rate sensitivity of the loan portfolio excluding consumer installment and mortgage loans and before unearned income at December 31, 1993 are as follows:
Within One One to After Year 5 Years 5 Years Total ---------- ------- -------- -------- (Dollar Amounts in Thousands) Commercial and industrial................. $ 92,566 $19,544 $ 14,403 $126,513 Financial institutions.................... -0- 162 -0- 162 Real estate-construction.................. 7,199 1,147 1,372 9,718 Real estate-commercial.................... 99,684 40,003 81,119 220,806 Other..................................... 9,276 6,050 11,219 26,545 -------- ------- -------- -------- Totals.................................. $208,725 $66,906 $108,113 $383,744 ======== ======= ======== ======== Loans at fixed interest rates............. 43,902 49,367 Loans at variable interest rates.......... 23,004 58,746 ------- -------- Totals.................................. $66,906 $108,113 ======= ========
The Corporation has not experienced the kind of earnings volatility indicated from the gap analysis. This is because assets and liabilities with similar contractual repricing characteristics may not reprice at the same time or to the same degree. Therefore, to more precisely measure the impact of interest rate changes on the Corporation's net interest margin, management simulates the potential effects of changing interest rates through computer modeling. The Corporation is then better able to implement strategies which would include an acceleration of a deposit rate reduction or a lag in a deposit rate increase. The repricing strategies for loans would be inversely related. The analysis at December 31, 1993, indicated that a 200 basis point movement in interest rates in either direction would not have a significant impact on the Corporation's anticipated net interest income over the next twelve months. Credit Review Maintaining a high quality loan portfolio is of great importance to the Corporation. The Corporation manages the risk characteristics of the loan portfolio through the use of prudent lending policies and procedures and monitors risk through a periodic review process provided by external auditors, 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 a reserve for possible credit losses that may exist in the portfolio at a point in time, but have not been specifically identified. 31 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Since all identified losses are immediately charged off, no portion of the reserve is restricted to any individual credit or groups of credits, and the entire reserve is available to absorb any and all credit losses. However, for analytical purposes, the following table sets forth an allocation of the reserve for possible loan losses at December 31 according to the categories indicated:
Allocation of the Reserve for Possible Loan Losses ---------------------------------------------------------- 1993 1992 1991 1990 1989 ------- ------- ------- ------- ------- (Dollar Amounts in Thousands) Commercial, industrial, financial, agricultural and other.............. $ 2,177 $ 5,109 $ 4,226 $ 2,074 $ 2,536 Real estate............. 7,176 4,627 2,597 2,725 2,285 Loans to individuals.... 1,879 1,806 1,182 1,765 1,672 Lease financing receivables............ 32 39 21 28 25 Unallocated............. 3,277 2,686 1,400 1,731 1,203 ------- ------- ------- ------- ------- Total................. $14,541 $14,267 $ 9,426 $ 8,323 $ 7,721 ======= ======= ======= ======= ======= Reserve as percentage of average total loans.... 1.47% 1.58% 1.22% 1.11% 1.09% ======= ======= ======= ======= =======
Other than those described below, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. The following table identifies nonperforming loans at December 31. A loan is placed in a nonaccrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt. Past due loans are those which were contractually past due 90 days or more as to interest or principal payments. Renegotiated loans are those 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.
Nonperforming Loans and Effect on Interest Income Due to Nonaccrual ------------------------------------------------------------------------- 1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- ---------- (Dollar Amounts in Thousands) Loans on nonaccrual basis................. $ 8,166 $ 8,223 $ 5,458 $ 5,392 $ 6,281 Past due loans.......... 6,011 4,881 4,561 3,065 4,536 Renegotiated loans...... 1,186 1,002 1,086 3,185 221 -------- -------- -------- -------- -------- Total nonperforming loans................ $ 15,363 $ 14,106 $ 11,105 $ 11,642 $ 11,038 ======== ======== ======== ======== ======== Nonperforming loans as a percentage of total loans.................. 1.53% 1.46% 1.38% 1.53% 1.52% ======== ======== ======== ======== ======== Gross income that would have been recorded at original rates......... $ 706 $ 936 $ 521 $ 687 $ 425 Interest that was reflected in income.... 76 106 41 166 57 -------- -------- -------- -------- -------- Net reduction to interest income due to nonaccrual............. $ 630 $ 830 $ 480 $ 521 $ 368 ======== ======== ======== ======== ========
The reduction of income due to renegotiated loans was less than $50 thousand in any year presented. The level of nonperforming loans has increased in recent years, principally as nonaccrual loans increased. These loans are primarily secured by residential and commercial real estate and no significant loss is expected. Management believes that the reserve for possible loan losses and nonperforming loans remained safely within acceptable levels during 1993. 32 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources Equity capital increased $16.0 million in 1993. Dividends declared decreased equity by $8.9 million. The retained net income remains in permanent capital to fund future growth and expansion. Payments by the Corporation's Employee Stock Ownership Plan ("ESOP") to reduce debt it incurred to acquire the Corporation's common stock for future distribution as employee compensation, net of additional advances, increased equity capital by $464 thousand. The market value adjustment to securities available for sale added $1.6 million to capital while the tax benefit of dividends paid to the ESOP increased equity by $84 thousand and amounts paid to fund the discount on reinvested dividends and optional cash payments reduced equity by $159 thousand. A capital base can be considered adequate when it enables the Corporation to intermediate funds responsibly and provide related services while protecting against future uncertainties. The evaluation of capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings history and prospects, internal controls and management caliber. In consideration of these factors, management's primary emphasis with respect to the Corporation's capital position is to maintain an adequate and stable ratio of equity to assets. The Federal Reserve Board has issued risk-based capital adequacy guidelines which went into effect in stages through 1992. The risk-based capital standard is 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 certain other "core" equity capital ("Tier I Capital"); (2) assets and off- balance sheet items must 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 total assets. The minimum leverage ratio is not specifically defined, but is generally expected to be 4-5 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 December 31, 1993:
Percent Amount of Adjusted (in thousands) Assets -------------- ----------- Tier I Capital.................................. $169,546 16.29 Risk-Based Requirement.......................... 41,642 4.00 Total Capital................................... 182,989 17.58 Risk-Based Requirement.......................... 83,285 8.00 Minimum Leverage Capital........................ 169,546 8.88 Minimum Leverage Requirement.................... 76,384 4.00
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. 33 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES Quarterly Summary of Financial Data--Unaudited (Dollar Amounts in Thousands, except per share data) The unaudited quarterly results of operations for the years ended December 31, 1993 and 1992 are as follows:
1993 ------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Interest income................................ $33,014 $33,098 $32,623 $32,983 Interest expense............................... 14,572 14,562 14,351 14,508 ------- ------- ------- ------- Net interest income.......................... 18,442 18,536 18,272 18,475 Provision for possible loan losses............. 593 519 484 601 ------- ------- ------- ------- Net interest income after provision for possible loan losses.......................... 17,849 18,017 17,788 17,874 Other operating income......................... 2,999 2,914 2,578 3,633 Other operating expenses....................... 12,649 12,967 12,676 12,952 ------- ------- ------- ------- Income before taxes and cumulative effect of change in accounting method.............. 8,199 7,964 7,690 8,555 Applicable income taxes........................ 2,360 2,292 2,474 2,592 ------- ------- ------- ------- Net income................................... $ 5,839 $ 5,672 $ 5,216 $ 5,963 ======= ======= ======= ======= Earnings per share(a).......................... $ 0.31 $ 0.30 $ 0.28 $ 0.32 1992 ------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Interest income................................ $30,733 $33,188 $33,937 $33,559 Interest expense............................... 15,275 16,042 15,741 15,030 ------- ------- ------- ------- Net interest income.......................... 15,458 17,146 18,196 18,529 Provision for possible loan losses............. 977 847 601 794 ------- ------- ------- ------- Net interest income after provision for possible loan losses.......................... 14,481 16,299 17,595 17,735 Other operating income......................... 2,267 2,684 2,213 2,213 Other operating expenses....................... 10,701 11,578 13,106 12,438 ------- ------- ------- ------- Income before taxes and cumulative effect of change in accounting method.............. 6,047 7,405 6,702 7,510 Applicable income taxes........................ 1,458 1,837 1,801 1,980 ------- ------- ------- ------- Net income................................... $ 4,589 $ 5,568 $ 4,901 $ 5,530 ======= ======= ======= ======= Earnings per share(a).......................... $ 0.27 $ 0.31 $ 0.26 $ 0.30
- -------- (a) Average number of shares outstanding have been restated to reflect two-for- one stock split effected in the form of a 200% stock dividend declared January 18, 1994. 34 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations First Three Months of 1994 as Compared to the First Three Months of 1993 Net income in the first three months of 1994 was $5.1 million, a decrease of $709 thousand from the 1993 period before the change in the method of accounting for income taxes which added $500 to the 1993 amount. Earnings per share were $0.28 during the first three months of 1994 compared to $0.34 during the 1993 period. Earnings per share during the 1993 period were $0.32 before the effect of change in the method of accounting for income taxes. Return on average assets was 1.06% and return on average equity was 10.99% during the 1994 period, compared to 1.44% and 14.76%, respectively during the same period of 1993. Included in the 1993 period results was the change in accounting method which added 11 basis points (0.11%) to the return on average assets and 116 basis points (1.16%) to the return on average equity for 1993. 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 for the 1994 period was $18.0 million compared to $18.4 million during the same time period in 1993. Interest income, on a tax-equivalent basis, decreased 90 basis points (0.90%) as a percentage of average earning assets to 7.19% in 1994, from 8.09% in the 1993 period. This represented a decline in all categories of interest earning assets, reflecting lower rates in general. Mortgage borrowers had been refinancing loans during the lower rate environment existing in 1993, resulting in a decline in yields that carried forward into 1994. Mortgage loan refinancings on a national scale had accelerated the repayments of mortgage backed securities. As proceeds were reinvested in securities yielding lower rates, portfolio yields declined. The recent rise in interest rates should stabilize prepayments of the portfolio. The cost of funds was 3.65% and 4.06% in the first three months of 1994 and 1993, respectively as deposit costs, the predominant category of interest- bearing liabilities, decreased only 37 basis points (0.37%) to 3.28%. This was expected as deposit customers tended to extend maturities over the previous 18 months as interest rates declined, thereby preventing the cost of funds to decline as fast as asset yields. Although interest yields and costs of funds have continued to decline during the first quarter of 1994, the decline has slowed. Net interest income on a tax-equivalent basis was 4.06% of earning assets during 1994, compared to 4.61% in the 1993 related period. Average earning assets were 95.1% of average total assets in the 1994 period and 94.9% during the 1993 time frame. Average interest-bearing liabilities increased as a percentage of average total assets to 81.5% in the first three months of 1994 and 81.3% during the 1993 period. Provision for possible loan losses was $539 thousand in 1994, compared to $593 thousand in the same period of 1993. Net charge-offs against the reserve for possible loan losses were $197 thousand in the 1994 period and can be compared to $458 thousand during the 1993 period. Nonperforming loans were 1.50% of loans at March 31, 1994 compared to 1.52% of loans at March 31, 1993. Nonperforming loans include loans past due 90 days or more, loans on a nonaccrual basis and renegotiated loans. Other operating income decreased $167 thousand in 1994 to $2.8 million. Net security gains decreased $444 thousand. During the 1994 period, U.S. Treasury securities and U.S. Government agency securities totaling $43.1 million with remaining maturities of one year or less were sold and reinvested in similar securities with maturities of 3-5 years. These securities were classified as "securities available for sale" in accordance with Financial Accounting Standards Board Statement No. 115. Other income increased $288 thousand in the 1994 period primarily as the gain on the sale of loans and other assets increased. Income from the credit life reinsurance joint venture increased as did service charges on club accounts. Increased 35 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS consumer loan volumes will tend to improve the income from credit life reinsurance. Fees related to club accounts should tend to level out since customer promotions occurred during the previous two quarters. Noninterest expense was $12.9 million in the first three months of 1994 which reflected an increase of $295 thousand over the 1993 period. Employee costs were $6.6 million in 1994, an increase of $327 thousand over the 1993 related period. Employee costs (annualized) as a percentage of average assets was 1.38% in the 1994 period, reduced from 1.43% (annualized) in the 1993 period. Furniture and equipment expense increased primarily as a result of increased depreciation on computer equipment acquired to automate new customer loan and deposit processes. Other operating expenses decreased $153 thousand to $3.6 million in the first three months of 1994 when compared to the 1993 related period as loan collection costs and professional fees decreased. Loan collection costs should continue to be favorable throughout the remainder of the year. Professional fees are expected to increase as pending acquisitions progress. Federal income tax expense was $2.2 million during the first three months of 1994 compared to $2.4 million during the 1993 related period. Income before taxes decreased $878 thousand in the 1994 period as compared to the same time period of 1993. Taxable income decreased only $519 thousand as tax-free income reduced $359 thousand. Liquidity Liquidity is a measure of the Corporation's ability to meet normal cash flow requirements of both borrowers and depositors efficiently. In the ordinary course of business, funds are generated from deposits (primary source), and 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 and borrowings from the Federal Reserve Bank. Additionally, each of the subsidiary banks are members of the Federal Home Loan Bank and may borrow up to ten percent of their total assets at any one time. Net loans increased $25.2 million in the first three months of 1994 as all major categories of loans increased. Total deposits increased $15.1 million, mostly as time deposits increased. Time deposits in denominations of $100 thousand or more remained stable, indicating that the growth is primarily from core customer relationships. Investment securities held to maturity declined $8.2 million through maturities and repayments. Federal funds sold increased $1.4 million and interest-bearing bank deposits declined $2.0 million while short-term borrowings increased $3.0 million. An additional source of liquidity are certain 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 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 March 31, 1994 securities available for sale had an amortized cost of $467.9 million and an approximate market value of $462.2 million. Securities available for sale decreased $3.0 million in 1994, primarily as the market values declined with rising interest rates. 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. 36 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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 rates 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 March 31, 1994 and December 31, 1993.
March 31, 1994 December 31, 1993 -------------------------------- -------------------------------- 0-90 0-180 0-365 0-90 0-180 0-365 Days Days Days Days Days Days --------- --------- ---------- --------- --------- ---------- Interest-sensitive assets................. $ 542,219 $ 649,561 $ 865,416 $ 549,123 $ 671,962 $ 872,212 Interest-sensitive liabilities............ 819,396 918,560 1,040,865 819,293 947,252 1,076,855 --------- --------- ---------- --------- --------- ---------- Gap..................... $(277,177) $(268,999) $ (175,449) $(270,170) $(275,290) $ (204,643) ========= ========= ========== ========= ========= ========== ISA/ISL................. 0.66 0.71 0.83 0.67 0.71 0.81 Gap/Total assets........ 14.05% 13.64% 8.89% 13.82% 14.08% 10.47%
The Corporation has not experienced the kind of earnings volatility indicated from the gap analysis. This is because assets and liabilities with similar contractual repricing characteristics may not reprice at the same time or to the same degree. Therefore, to more precisely measure the impact of interest rate changes on the Corporation's net interest income, management simulates the potential effects of changing interest rates through computer modeling. The Corporation is then better able to implement strategies which would include an acceleration of a deposit rate reduction or a lag in a deposit rate increase. The repricing strategies for loans would be inversely related. The analysis at March 31, 1994, indicated that a 200 basis point 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. Rising interest rates should tend to have a favorable impact, while declining rates will tend to affect net interest income negatively. 37 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Credit Quality Risk 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. Renegotiated loans are those which terms had 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 March 31, -------------------- 1994 1993 ---------- -------- (amounts in thousands) Nonperforming Loans: Loans in nonaccural status............................. $ 8,689 $ 7,294 Past due loans......................................... 6,176 3,537 Renegotiated loans..................................... 604 4,206 ---------- -------- Total nonperforming loans............................ $ 15,469 $ 15,037 ========== ======== Other real estate owned (including in-substance foreclosures)........................................... $ 2,758 $ 4,929 Loans outstanding at end of period....................... $1,031,728 $989,102 Average loans outstanding (year-to-date)................. $1,016,546 $975,764 Nonperforming loans as percent of total loans............ 1.50% 1.52% Provision for possible loan losses....................... $ 539 $ 593 Net charge-offs.......................................... $ 197 $ 458 Net charge-offs as percent of average loans.............. 0.02% 0.05% Provision for possible loan losses as percent of net charge-offs............................................. 273.6% 129.5% Reserve for possible loan losses as percent of average loans outstanding....................................... 1.46% 1.48%
Capital Resources Equity capital decreased $3.4 million in 1994. Earnings retention was $2.5 million, representing an earnings retention rate of 49.1%. The retained net income remains in permanent capital to fund future growth and expansion. Stock purchased by the Employee Stock Ownership Plan (the "ESOP"), subject to the debt of the Corporation, reduced equity by $730 thousand while the loan repayment by the ESOP of debt guaranteed by the Corporation increased equity by $179 thousand. Amounts paid to fund the discount on reinvested dividends reduced equity by $49 thousand. The market value adjustment to securities available for sale reduced equity by $5.3 million resulting from market values declining as interest rates increased. A capital base can be considered adequate when it enables the Corporation to intermediate funds responsibly and provide related services, while protecting against future uncertainties. The evaluation of capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings history and prospects, internal controls and management caliber. In consideration of these factors, management's primary emphasis with respect to the Corporation's capital position is to maintain an adequate and stable ratio of equity to assets. The Federal Reserve Board 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 has not been specifically defined, but is generally expected to be 4-5 percent for all but the most highly rated banks, as determined by a regulatory rating system. As of March 31, 1994, the Corporation had a Tier I Capital to risk-weighted assets ratio and total capital to risk-weighted assets ratio of 15.96% and 17.25%, respectively, and a minimum leverage ratio of 8.77%. 38 MANAGEMENT OF FCFC Board of Directors The table below provides information concerning the present Board of Directors of FCFC and named executive officers who are not directors. The By- Laws of FCFC provide that the Board of Directors may fix the number of directors, and such number is currently fixed at 20. The Board of Directors of FCFC is divided into three classes, with one class elected at each Annual Meeting of Shareholders and each class serving a term of three years. Each of the directors of FCFC named below will serve until the Annual Meeting of FCFC held in the year indicated in the table or until his successor is elected and has been qualified. Following the Effective Date and as a result of the Merger, the number of directors of FCFC will be increased by one and Robert C. Williams, who is currently Vice Chairman of the Board, President and Chief Executive Officer of United, will fill such vacancy, becoming a director of FCFC until the annual meeting of FCFC shareholders in 1997. Mr. Williams is age 50, has been a director of United since 1989 and is the beneficial owner of 21,168 shares of United Common Stock. Upon consummation of the United Merger, these shares will be converted into 42,336 shares of FCFC Common Stock, which is less than 1% of the outstanding FCFC Common Stock. Share ownership information contained in the table reflects beneficial ownership (see note (1) to the table) of FCFC Common Stock as of June 24, 1994, and is based upon information furnished by or on behalf of the persons named in the table.
Amount and Nature of Beneficial Percentage of Name, Principal Occupation Director Ownership of Outstanding During the Past Five of FCFC FCFC Common FCFC Common Years, Other Directorships Age Since Stock(1) Stock -------------------------- --- -------- ------------ ------------- Term Ending in 1997: E. H. Brubaker........................ 64 1984 10,078(2) * Chairman of the Board and Director of Deposit A. B. Hallstrom....................... 65 1986 10,811(3) * Chairman, Hallstrom Construction Inc. (real estate development); Director of Deposit Thomas J. Hanford..................... 55 1984 48,258 * Investor; formerly President, Coca- Cola Bottling Co. of DuBois, Inc.; Director of 1st United BANCORP, Boca Raton, FL ("BANCORP") (bank holding company) H. H. Heilman, Jr..................... 77 1985 21,500 * Partner, Heilman & McClister (attorneys-at-law); Chairman of the Board and Director of Leechburg; previously President and Chief Executive Officer of Leechburg Charles J. Szewczyk................... 66 1990 269,755 1.45% (pronounced and sometimes known as Charles J. Sheftic) Chairman of the Board of PBTC; Managing Partner of County Amusement Co. (motion picture theatres and real estate holdings); Director of Westview, Inc. (motion picture theatre service company) John I. Whalley, Jr................... 48 1986 52,360(4) * President, Whalley Group, Inc. (various business enterprises) Term Ending in 1996: Sumner E. Brumbaugh................... 65 1992 145,990(2)(3) * Chairman of the Board and Chief Executive Officer of Central; President, Brumbaugh Insurance Group; Board Member, Pennsylvania National Mutual Casualty Insurance Co., and Central Pennsylvania Health Systems ("CPHS"); Advisory Board, Penn State University (Altoona Campus): President, Lexington One and Lexington Two (subsidiaries of CPHS)
39
Amount and Nature of Beneficial Percentage of Name, Principal Occupation Director Ownership of Outstanding During the Past Five of FCFC FCFC Common FCFC Common Years, Other Directorships Age Since Stock(1) Stock -------------------------- --- -------- ------------------ ------------- Edward T. Cote.................. 57 1984 100,400(5) * Associate, The Wakefield Group (Investment Banking); previously President, Benefits and Services Company (insurance holding company); Director of NBOC and New Mexico Banquest Investors Corp. ("NMB") (bank holding Company) Clayton C. Dovey, Jr............ 69 1985 23,134 * Chairman of the Board of Cenwest Johnston A. Glass............... 44 1986 19,587(3) * President and Director of NBOC Dale P. Latimer................. 63 1984 615,431(3)(5)(8) 3.30% President, R & L Development Co. (heavy construction); Director of FCTC, NMB and NBOC David R. Tomb, Jr............... 62 1983 295,420(2)(3)(5)(6) 1.58% Partner, Tomb and Tomb (attorneys-at-law); Vice President, Secretary and Treasurer of FCFC; Director of NBOC, Peoples, FCTC, CSC and Commonwealth Trust Term Ending in 1995: Thomas L. Delaney............... 63 1984 41,604(2) * Private Investor; formerly Chairman, Petrolec, Inc. (petroleum wholesaler); Director of Deposit and BANCORP Ronald C. Geiser................ 65 1985 18,544(3) * Retired; formerly President of Cenwest; Director of Cenwest David F. Irvin.................. 76 1984 63,204 * Sole Owner, The Irvin-McKelvy Company (sales and engineering for mining and industrial services); Director of NBOC David L. Johnson................ 64 1984 7,193(2) * Retired; formerly Vice President and Corporate Secretary, Pennsylvania Manufacturers' Corporation (insurance holding company); Director of NBOC Robert F. Koslow................ 58 1993 15,420(3)(9) * Chairman of the Board, President and Chief Executive Officer of Peoples; Director, Pennsylvania Bankers Association, Pennsylvania Independent Bank and Wheeling Jesuit College; Member of the Advisory Board to the President of the Federal Reserve Bank of Cleveland Joseph W. Proske................ 57 1984 10,787(2) * Vice President-Engineering, Stackpole Magnet Division (manufacturer of magnetic components); Director of Deposit and CSC
40
Amount and Nature of Beneficial Percentage of Name, Principal Occupation Director Ownership of Outstanding During the Past Five of FCFC FCFC Common FCFC Common Years, Other Directorships Age Since Stock(1) Stock -------------------------- --- -------- --------------------- ------------- E. James Trimarchi........... 71 1982 325,612(2)(3)(5)(6)(7) 1.75% Chairman of the Board, President and Chief Executive Officer of FCFC; Director of NBOC, Peoples, FCTC, NMB, CSC and Commonwealth Trust Executive Officers Who Are Not Directors: William Miksich.............. 58 -- 21,755 * President, Chief Executive Officer and Director of Deposit Joseph E. O'Dell............. 48 -- 9,415(2) * Senior Executive Vice President and Chief Operating Officer of FCFC; Director of Cenwest, FCTC, CSC and Delaware National Bancshares, Inc. Gerard M. Thomchick.......... 38 -- 6,293(2)(3) * Executive Vice President of FCFC; President, Chief Executive Officer and Director of Commonwealth Trust; Director of Central, Deposit and FCTC John J. Dolan................ 37 -- 4,666(3) * Senior Vice President, Comptroller and Chief Financial Officer of FCFC; Chief Financial Officer/Comptroller of Commonwealth Trust; Treasurer and Assistant Secretary, FCTC; Director of PBTC George E. Dash............... 44 -- 3,451 * Senior Vice President/Sales and Marketing of FCFC; Director of Central All directors and executive officers of FCFC as a group (24 persons)................ -- -- 1,681,350(2-10) 9.02%
- -------- * Less than one percent. (1) Under regulations of the Securities and Exchange Commission, a person who has or shares voting or investment power with respect to a security is considered a beneficial owner of the security. Voting power is the power to vote or direct the voting of shares, and investment power is the power to dispose of or direct the disposition of shares. Unless otherwise indicated in the other footnotes below, each director has sole voting power and sole investment power with respect to the shares indicated opposite his name in the table, and each member of a group has sole voting power and sole investment power with respect to the number of the shares indicated for the group. (2) Does not include the following shares held by spouses, either individually or jointly with other persons, as to which voting and investment power is disclaimed by the director or officer: Mr. Brubaker, 24,498; Mr. Brumbaugh, 132; Mr. Delaney, 8,616; Mr. Johnson, 816; Mr. O'Dell, 1,658; Mr. Proske, 31,530; Mr. Thomchick, 1,733; Mr. Tomb, 264; Mr. Trimarchi, 20,000; and all directors and officers as a group, 94,247. (3) Includes the following shares held jointly with spouses, as to which voting and investment power is shared with the spouse: Mr. Brumbaugh, 15,400; Mr. Geiser, 14,364; Mr. Glass, 11,466; Mr. Hallstrom, 9,468; Mr. Koslow, 9,400; Mr. Latimer, 12,165; Mr. Proske, 1,600; Mr. Thomchick, 2,547; Mr. Tomb, 31,846; Mr. Trimarchi, 8,482; and all directors and officers as a group, 115,138. 41 (4) Includes 51,860 shares held by the J. Irving Whalley Testamentary Trust, of which John I. Whalley, Jr. is co-trustee. (5) Includes 100,000 shares owned by Berkshire Securities Corporation. Berkshire is a Pennsylvania corporation organized in 1976 for the purpose of acquiring and holding the securities of Pennsylvania banks. The officers, directors or shareholders of Berkshire include Messrs. Cote, Latimer, Tomb and Trimarchi, each of whom is an officer or director of FCFC, among others. The shares were acquired by Berkshire when its shares of Dale National Bank (now Cenwest) were converted into shares of FCFC Common Stock as a result of the Dale merger in 1985. Each of the foregoing persons may be deemed to share voting and investment power with respect to these shares. (6) Includes 159,338 shares held by County Wide Real Estate, Inc., of which Messrs. Tomb and Trimarchi are each 50% owners and as to which shares they share voting and investment power. (7) Includes 29,652 shares held by family interests with respect to which shares Mr. Trimarchi exercises sole voting and investment power. (8) Includes 91,958 shares held by the R&L Development Company Pension & Profit Sharing Plan of which Mr. Latimer is Trustee. (9) Mr. Koslow became a member of the Board of Directors on the occasion of the merger of Peoples into FCFC on December 31, 1993. Each of the persons listed above has held the position described above or other executive positions with the same entity (or a subsidiary thereof) for at least the past five years. The Board and Its Committees During 1993 there were four meetings of the Board of Directors of FCFC. All directors attended at least 75% of the total number of meetings of the Board of Directors of FCFC and all committees of such Board of which they were members. The Board of Directors of FCFC has established four standing committees: Executive, Audit, Personnel and Compensation, and Executive Compensation. The Board has no standing Nominating Committee. When the Board of Directors is not in session, the Executive Committee, which is comprised of Messrs. Trimarchi (Chairman), Tomb (Secretary), Brubaker, Brumbaugh, Delaney, Geiser, Glass, Heilman, Latimer and Szewczyk, possesses and exercises all the powers of the Board, except for matters which are required by law to be acted upon by the full Board. The Executive Committee considers major policy matters and makes reports and recommendations to the Board. The Executive Committee met four times in 1993. The Audit Committee is comprised of Messrs. Latimer (Chairman), Hallstrom, Irvin, Cote and Proske and reviews the internal auditing procedures and controls of FCFC and its subsidiaries. The Audit Committee also reviews reports of examinations of the Subsidiary Banks received from state and federal regulators, as well as reports from internal and external auditors. The Audit Committee formally reports to the full Board of Directors its evaluations, conclusions and recommendations with respect to the condition of FCFC and its subsidiaries and the effectiveness of their policies, practices and controls. The Audit Committee met four times in 1993. The Personnel and Compensation Committee is comprised of Messrs. Cote, Dovey and Glass. Roy R. Fairman, deceased director, was chairman of this committee. A new chairman has not been appointed at this time. The Personnel and Compensation Committee reviews the general salary administration and employee benefit programs of FCFC and its subsidiaries and makes recommendations relating thereto to the Board of Directors. The Personnel and Compensation Committee met one time in 1993. 42 The Executive Compensation Committee is comprised of Messrs. Johnson (Chairman), Cote, Irvin and Latimer. The Executive Compensation Committee maintains on an on-going basis a comprehensive executive compensation program which seeks to maintain a position of "equity" with respect to balancing the interests of the shareholders with those of the executive officers. The minutes of Executive Compensation Committee meetings are submitted to the FCFC Board of Directors on a timely basis, and a report of the committee is included in the proxy statement delivered to all FCFC shareholders prior to the annual meeting. The Executive Compensation Committee met four times in 1993. The By-Laws of FCFC require that any shareholder who intends to nominate or cause to have nominated any candidate for election to the Board of Directors of FCFC (other than a candidate proposed by FCFC's then-existing Board of Directors) must notify the Secretary of FCFC in writing not less than 120 days prior to the date of FCFC's proxy statement released to its shareholders in connection with the previous year's annual shareholders' meeting called for the election of directors. Such notification must contain (to the extent known by the notifying shareholder) the name, address, age, principal occupation and number of shares of FCFC Common Stock owned by each proposed nominee; the name, residence address and number of shares of FCFC Common Stock owned by the notifying shareholder; the total number of shares of FCFC Common Stock that, to the knowledge of the notifying shareholder, will be voted for each proposed nominee; a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons pursuant to which the nomination or nominations are to be made by the shareholder; such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy roles of the Securities and Exchange Commission had the nominee been nominated by the Board of Directors; and the written consent of each nominee, signed by such nominee, to serve as a director of FCFC if so elected. The Board of Directors of FCFC as a whole considers nominations submitted by shareholders only if submitted in accordance with the By-Laws and otherwise in time for such consideration. Compensation of Directors Directors are compensated at the rate of $1,000 for each quarterly Board meeting attended for Board members presently serving in a management or Board capacity at any FCFC affiliate and $1,500 for each quarterly Board meeting attended for all other Board Members. Committee members receive $200 for attendance at each committee meeting. A Committee Chairman or Secretary is compensated $250 per meeting attended. Executive Officers The table below provides information concerning the present executive officers of FCFC.
Name Age Positions Held During the Past Five Years ---- --- ----------------------------------------- E. James Trimarchi...... 71 Chairman of the Board, President and Chief Executive Officer of FCFC Joseph E. O'Dell........ 48 Senior Executive Vice President and Chief Operating Officer of FCFC Gerard M. Thomchick..... 38 Executive Vice President of FCFC David R. Tomb, Jr....... 62 Vice President, Secretary and Treasurer of FCFC John J. Dolan........... 37 Senior Vice President, Comptroller and Chief Financial Officer of FCFC George E. Dash.......... 44 Senior Vice President/Sales and Marketing of FCFC
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. Executive officers of FCFC serve at the pleasure of the Board of Directors of FCFC and for a term of office extending through the election and qualification of their successors. 43 Compensation of Executive Officers The following table sets forth certain information regarding compensation received by the Chief Executive Officer and the remaining executive officers of FCFC whose annual compensation, including bonus, exceeded $100,000 for the period indicated. SUMMARY COMPENSATION TABLE Annual Compensation
Name and All Other/3/ Principal Position Year Salary Bonus Other/1/,/2/ Compensation ------------------ ---- -------- ------- ------------ ------------ E. James Trimarchi............ 1993 $305,000 $ 0 $21,006 $ 6,800 Chairman of the Board, 1992 270,000 32,500 28,122 12,000 President and Chief Executive Officer 1991 262,750 Joseph E. O'Dell.............. 1993 180,000 0 21,190 5,400 Senior Executive Vice Presi- dent 1992 145,000 30,000 19,737 5,700 and Chief Operating Officer 1991 135,000 Johnston A. Glass............. 1993 156,000 0 19,120 6,500 President and Chief Executive 1992 143,100 0 18,693 6,050 Officer of NBOC 1991 135,000 Gerard M. Thomchick........... 1993 145,000 0 17,800 16,200 Executive Vice President 1992 110,000 25,000 18,800 15,200 1991 100,000 William Miksich............... 1993 132,800 0 16,339 2,400 President and Chief Executive 1992 124,720 0 16,253 3,600 Officer of Deposit 1991 105,600
- -------- (1) In accordance with the transitional provisions applicable to the revised rules on executive officer and director compensation disclosure adopted by the Securities and Exchange Commission (the "Commission"), as informally interpreted by the Commission's Staff, amounts of Other Annual Compensation and All Other Compensation are excluded for FCFC's 1991 year. (2) Includes the matching and automatic contribution by FCFC to the individual's account in FCFC's 401(k) Plan as well as the allocation of shares to the individual's account in the Employee Stock Ownership Plan ("ESOP"). (3) Includes compensation for services on boards and committees of FCFC and various subsidiaries. Executive Compensation Committee Interlocks and Insider Participation No member of the Executive Compensation Committee was an officer or employee of FCFC during 1993, has ever been a former officer of FCFC or a subsidiary or has a transaction or relationship required to be disclosed under Item 404 of Regulation S-K of the Commission. During 1993, no executive officer served on a compensation committee (or other board committee performing equivalent functions) or Board of Directors of any entity related to the above named Committee members. Interests of Nominees, Directors and Officers in Certain Transactions Mr. Geiser served as President of Cenwest pursuant to an employment agreement providing that he shall continue to serve in that position until December 31, 1994. Mr. Geiser retired on May 31, 1994 as President of Cenwest but continues as a director of Cenwest and FCFC. The agreement provided that his salary shall not be less than $69,363 and was reviewed annually in accordance with Cenwest's past practices. Mr. Geiser has agreed that during the term of his employment and for a period of 10 years thereafter, he will not engage in any competing business within 10 miles of any of the banking facilities of FCFC or its subsidiaries or solicit any of their then existing customers. 44 Mr. Brumbaugh serves as Chairman of the Board and Chief Executive Officer of Central pursuant to an employment agreement for a period of 7 years, commencing May 1, 1992 and ending April 30, 1999. The agreement provides that Mr. Brumbaugh shall serve in an executive capacity and shall be the Chairman of the Board of Directors and Chief Executive Officer of Central and shall also perform such services for FCFC as from time to time are requested. As compensation to Mr. Brumbaugh for all services rendered to Central and FCFC as an officer, director or member of any committee of Central or any of FCFC's subsidiaries or affiliates, FCFC has agreed, in addition to director's fees and committee meeting fees, to pay or cause Central to pay to Mr. Brumbaugh a salary at an annual rate of $100,000, which sum shall be adjusted upward at the annual rate of 5%. Should Mr. Brumbaugh retire after at least one year of continuous service under the agreement, thereafter he shall be paid his retirement compensation for the remaining term of the agreement at an annual rate of $50,000, adjusted upwards annually for cost of living at the rate of 5%. Should Mr. Brumbaugh die at any time during the agreement, in lieu of the foregoing payments, FCFC shall pay his wife the sum of $25,000 per year if she is living at the time each payment is made. As a part of the agreement and for a period of 10 years thereafter, Mr. Brumbaugh will not engage in any competing business within 10 miles of any of the banking facilities of Central or its subsidiaries or solicit any of its then existing customers. Mr. Koslow serves as Chairman of the Board, President and Chief Executive Officer of Peoples under an employment agreement extending to July 19, 1998. The agreement provides that Mr. Koslow will serve in such executive capacity as may be designated from time to time by the Board of Directors. As compensation to Mr. Koslow, Peoples agrees to pay him a minimum annual salary equal to the annual salary in effect on July 20, 1988, such annual salary to be subject to annual review for possible increase. If Mr. Koslow's employment is terminated other than for cause, he is entitled to be paid annually in equal monthly amounts, for the greater of two years or the remaining term of the agreement, the annual salary and bonus paid to him for the full calendar year immediately preceding the year in which such termination occurs, plus the insurance premiums provided in a split dollar life insurance agreement between Peoples and Mr. Koslow. If there is a change in control of Peoples, such minimum annual salary shall be increased on January 1 of each year thereafter by an amount equal to the percentage increase in the Consumer Price Index for the preceding calendar year. If there is a change of control of Peoples and thereafter Mr. Koslow's responsibilities are changed without his consent, Mr. Koslow is entitled to resign within twelve months of such change of control, in which case he is entitled to receive annually in equal monthly amounts, for the greater of three years or the remaining term of the agreement, but not beyond his reaching age 65, the annual salary and bonus paid to him for the full calendar year immediately preceding such resignation, plus the split dollar life insurance premiums. As part of the agreement, Mr. Koslow has agreed that during the term of his employment and for a period of 10 years thereafter, he will not engage in any business in competition with Peoples or any of its subsidiaries within 20 miles of any of their banking facilities or solicit any of their then existing customers. During 1993, David R. Tomb, Jr., attorney-at-law, and the law firm of Tomb and Tomb of which Mr. Tomb is a partner performed legal services for FCFC, NBOC and CSC. Mr. Tomb is a director and executive officer of FCFC. The fees paid for services during 1993 were $65,000. See "Legal Opinions." One or more of the Subsidiary Banks (the "Lending Bank" or "Lending Banks") have extended credit to several directors and executive officers of FCFC, to members of their families and to corporations or organizations in which such persons have a beneficial interest or with which such persons are associated as officers, partners, directors or trustees. In all cases, except as described in the following paragraphs, these transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. As of December 31, 1993, total loans to FCFC's and its subsidiaries' directors, executive officers, principal shareholders and their related interests whose loan balances exceeded $60,000 during 1993 were $25,245,000. Mr. John I. Whalley, Jr. became an FCFC director in December 1986 and was reelected a director in 1990 and 1994. Since January 1, 1993 there has been outstanding from the Lending Banks to Mr. Whalley 45 and his related interests four loans having an aggregate original principal balance of $2,223,631, which bear interest rates from the prime rate (currently 7%) to 11.5% and are partially collateralized with marketable securities and motor vehicles. These loans were incurred principally to consolidate outstanding loans from the Lending Banks and other financial institutions and to strengthen the Lending Banks' collateral position. In his examination of the Lending Bank on September 30, 1992, the Comptroller of the Currency classified $621,092 of these loans as Substandard and $209,147 as Doubtful, leaving an aggregate unclassified balance of $554,164 secured by the marketable securities. At the Comptroller's instruction $1,138,291 of these loans were placed in nonaccrual status by the Lending Bank. Subsequent reexamination by the Comptroller of the Currency in 1993 resulted in $1,101,182 being classified substandard and with the balance remaining in nonaccrual. It is the opinion of the Lending Bank's management that the Comptroller has classified this indebtedness as Substandard and Doubtful due to the cessation of operations of Mr. Whalley's related business and the fact that loan collateral is being sold by the borrower to repay the indebtedness. The largest aggregate amount of indebtedness outstanding at any time from Mr. Whalley and his related interests since January 1, 1993 was $1,469,895, and the aggregate amount outstanding was $1,328,927 as of June 10, 1994. In June 1986 the Lending Bank granted credit of $600,000 to the purchasers of commercial real estate, the proceeds of which were paid to David F. Irvin, a director of FCFC. To facilitate the granting of this credit, Mr. Irvin gave a mortgage to the Lending Bank on a property and building adjacent to the subject real estate. In his September 30, 1992 examination, the Comptroller classified as Substandard $486,279 of the $518,279 balance of this loan. This loan was rewritten on August 31, 1993 at an interest rate of 8%. The loan balance was $490,117 as of June 10, 1994. It is the opinion of the Lending Bank's management that the Comptroller has classified this credit as Substandard as a result of difficulties experienced in the business operations of the purchaser. CERTAIN BENEFICIAL OWNERS OF FCFC COMMON STOCK As of June 24, 1994, FCTC, acting in a fiduciary capacity for various trusts and estates, including the FCFC ESOP and the FCFC 401(k) Plan, held an aggregate of 1,868,861 shares of FCFC Common Stock (10.3% of the outstanding shares). Of these shares, FCTC had sole voting power with respect to 594,462 shares, shared voting power with respect to 1,274,391 shares, had sole investment power with respect to 755,876 shares and shared investment power with respect to 1,112,985 shares. FCTC votes the shares over which it, acting in its fiduciary capacity, has voting power and, where voting power is shared, shares are voted by FCTC in consultation with the other persons having voting power. As of June 24, 1994, the FCFC ESOP held 879,337 shares (4.72%) of FCFC's Common Stock of which 461,984 shares were allocated to the accounts of participants and 417,353 shares were unallocated. Allocated shares are voted by the participants; unallocated shares, by the ESOP trustee in its discretion. 46 INFORMATION CONCERNING RELIABLE Business and Properties of Reliable Reliable was organized as a Delaware business corporation on November 7, 1991 at the direction of the Board of Directors of Reliable Savings Bank for the purpose of acquiring the Savings Bank and creating a savings and loan holding company. On March 30, 1992, the Savings Bank converted from the mutual to the stock form and became a wholly-owned subsidiary of Reliable. Reliable functions primarily as the holder of all of the outstanding stock of the Savings Bank. As used herein, "Reliable" refers collectively to Reliable and the Savings Bank. Reliable is registered as a savings and loan holding company under the Savings and Loan Holding Company Act, as amended, and it currently employs 28 employees (full-time equivalents). Through Reliable Savings Bank, Reliable traces its origins to a building and loan association incorporated on July 16, 1925 under the laws of Pennsylvania with the name Reliable Building and Loan Association of Bridgeville, Pa. The Saving Bank adopted its present name on July 21, 1989. Reliable presently conducts its business through three community banking offices in three communities, of which two are in Allegheny County and one is in Washington County, which is adjacent to Allegheny County. Reliable engages in a full-service savings association business within the vicinity of its service area. It offers various loan services, including secured and unsecured, commercial and consumer loans, construction and mortgage loans, lease financing, all types of deposit services, including passbook, interest bearing demand or NOW accounts and savings and time deposit accounts. As of September 30, 1993, approximately 94% of its loan portfolio consisted of loans secured by mortgages on 1-to-4 family residences. Reliable invests in U.S. Government and agency obligations, state and municipal obligations, Federal Home Loan Mortgage Corporation common stock and Federal Home Loan Bank of Pittsburgh capital stock. Reliable's principal sources of income are mortgage loans, investment securities and interest bearing deposits. Reliable does not have a trust department, and its business is not seasonal in nature. Reliable operates two ATMs which permit its customers to conduct routine banking transactions 24 hours a day, and these ATMs are located on the premises of its banking offices. All of the ATMs are part of the MAC Network, which consists of over 14,000 ATMs owned by numerous banks, savings and loan associations and credit unions located in 16 states, of which 14 are east of the Mississippi River. Reliable's MAC customers may use the HONOR Network, which has 9,800 ATMs located primarily in the southeastern quadrant of the United States. As a state chartered, federally insured savings association that is a member of the Federal Home Loan Bank System, Reliable is subject to supervision and regular examination by the Pennsylvania Department of Banking and the Office of Thrift Supervision. Various federal and state laws and regulations govern many aspects of its savings association business. See "Regulation and Supervision--Subsidiary Banks and Reliable." Reliable competes actively with commercial banks, savings banks and savings and loan associations in its area, many of which are larger than Reliable, as well as with major regional banking and financial institutions headquartered in Pittsburgh. The management of Reliable believes that it is generally competitive with all competing financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. The headquarters of Reliable is located at 428 Station Street, Bridgeville, Allegheny County, Pennsylvania. The one-story granite headquarters building has approximately 4,200 square feet of floor space and contains a full-service banking facility and the central administrative offices of Reliable. Of Reliable's banking offices, two branches are leased and the headquarters is owned in fee, free of all liens and encumbrances. Management believes all such facilities to be in good repair and well suited to their current uses. 47 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY 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 appearing elsewhere in this Proxy Statement/Prospectus. The results for the six month periods ended March 31, 1994 and 1993 are not necessarily indicative of the results to be expected for the entire year.
Six Months Ended March 31, Years Ended September 30, ---------------------- --------------------------------------------------------- 1994 1993 1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- --------- --------- --------- Interest income......... $ 5,108 $ 5,467 $ 10,865 $ 11,976 $ 12,413 $ 11,453 $ 10,639 Interest expense........ 2,092 2,310 4,500 6,147 7,912 7,817 7,112 ---------- ---------- ---------- ---------- --------- --------- --------- Net interest income.... 3,016 3,157 6,365 5,829 4,501 3,636 3,527 Provision for possible loan losses........... 100 100 250 200 155 67 0 ---------- ---------- ---------- ---------- --------- --------- --------- Net interest income after provision for possible loan losses.. 2,916 3,057 6,115 5,629 4,346 3,569 3,527 Gain (loss) on sales of investment securities. 234 483 1,133 261 0 (54) 0 Gain (loss) on sales of real estate owned..... 0 (5) 49 11 0 67 0 Non-interest income.... 189 145 317 191 162 141 106 Non-interest expense... 1,304 1,252 2,575 2,220 1,924 1,682 1,377 ---------- ---------- ---------- ---------- --------- --------- --------- Income before taxes and cumulative effect of change in tax accounting method.... 2,035 2,428 5,039 3,872 2,584 2,041 2,256 Applicable income taxes................. 818 952 1,884 1,529 872 995 953 ---------- ---------- ---------- ---------- --------- --------- --------- Net income before cumulative effect of change in tax accounting method.... 1,217 1,476 3,155 2,343 1,712 1,046 1,303 Cumulative effect of change in tax accounting method..... 365 0 0 0 0 0 0 ---------- ---------- ---------- ---------- --------- --------- --------- Net income............. $ 1,582 $ 1,476 $ 3,155 $ 2,343 $ 1,712 $ 1,046 $ 1,303 ========== ========== ========== ========== ========= ========= ========= Per Share Data Net income before cumulative effect of change in tax accounting method..... $ 0.86 $ 1.03 $ 2.21 $ 1.61 N/A N/A N/A Cumulative effect of change in tax accounting method..... 0.26 0 0 0 N/A N/A N/A ---------- ---------- ---------- ---------- --------- --------- --------- Net income............. $ 1.12 $ 1.03 $ 2.21 $ 1.61 N/A N/A N/A ========== ========== ========== ========== ========= ========= ========= Cash dividends declared.............. $ 0.80 $ 0.50 $ 1.15 $ 0.35 N/A N/A N/A Average shares outstanding........... 1,409,938 1,437,277 1,425,596 1,457,944 N/A N/A N/A At End of Period Total assets........... $ 150,401 $ 149,964 $ 146,783 $ 145,803 $ 135,505 $ 126,148 $ 115,026 Investment securities.. 37,474 36,391 31,640 8,913 3,165 4,025 5,353 Interest-bearing deposits.............. 16,910 17,932 20,587 33,763 18,201 6,993 10,736 Loans and leases, net of unearned income(1). 92,501 91,989 91,185 99,683 110,967 111,451 95,587 Allowance for possible loan losses........... 800 550 700 495 295 155 90 Deposits............... 116,817 117,142 114,619 114,099 119,431 111,649 101,666 Long-term debt......... 0 0 0 0 0 0 0 Total liabilities...... 120,025 119,789 116,979 116,226 121,432 113,787 103,711 Stockholders' equity(2)............. 30,376 30,175 29,804 29,577 14,073 12,361 11,315 Key Ratios Return on average assets................ 2.13% 2.00% 2.14% 1.61% 1.31% 0.87% 1.17% Return on average equity................ 10.63 10.09 10.70 9.16 12.95 8.83 12.22 Net loans to deposit ratio................. 78.49 78.05 78.94 86.93 92.66 99.68 93.93 Dividend payout ratio.. 71.42 48.54 52.03 43.47(3) N/A N/A N/A Average stockholders' equity as percentage of average assets..... 20.02 19.83 20.02 17.61 10.10 9.82 9.56
- -------- (1)Includes mortgage-backed securities. (2) Stockholders' equity consists of common stock, additional paid-in capital, treasury stock and retained earnings effective for periods ending subsequent to completion of the Conversion on March 30, 1992. (3)Dividend payout ratio annualized for comparative purposes. 48 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Liquidity and Sources of Capital During the fiscal year ended September 30, 1993, the total consolidated assets of Reliable Financial Corporation increased by only 0.67% to $146,783,000 from $145,803,000 for the fiscal year ended September 30, 1992. Changes in the composition of the balance sheet resulted primarily from loan repayments continuing to exceed new loans granted throughout the year which represents an additional source of liquidity for the Corporation. With net loans repaid by borrowers during fiscal 1993 totaling $14,631,000, these monies were reinvested among a variety of intermediate term investment securities including U.S. Government Treasury notes and agency obligations, tax-qualified municipal general obligation bonds and mortgage-backed securities. Together with cash and cash equivalents of approximately $21,616,000, mostly held in readily-liquid interest-bearing deposits in the FHLB of Pittsburgh, the Corporation maintains a liquidity ratio, as defined by federal regulations, of over 41% as of September 30, 1993. What this has achieved for Reliable over the course of the last twelve months and for the past two years in general is to significantly change the interest- rate sensitivity position, or "gap" of the Corporation. As of September 30, 1993, the Savings Bank's cumulative one-year maturity gap as a percentage of total assets was a positive 3.9% as compared to a positive 4.5% gap position at September 30, 1992. Translated a positive gap means that total interest-bearing assets maturing or repricing within one year exceed total interest-bearing liabilities maturing or repricing within the same period. For fiscal 1993, the overall ratio of average interest-earnings assets to average interest-costing liabilities for 1.29-to-1, which in management's opinion, is a safe and sound position and serves as a protective measure in a low-rate environment against when rates eventually turn less favorable and begin to trend upward. The overall strength and quality of the asset side of Reliable's balance sheet is evident through a review of the three major components. Cash and interest-bearing deposits in other institutions has provided the liquidity necessary to remain efficient and flexible in an everchanging economic environment. Investment securities, in addition to providing currently higher level yields; have, without sacrificing marketability, positioned the portfolio for growth in capital appreciation as the market value exceeds the carrying amount of the investment portfolio by over $5.1 million as of September 30, 1993. And finally, loans, making up over 61% of the assets composition, continue to represent the mainstay of Reliable's business. Broken down even further, 94% of the loans included in portfolio at fiscal year end 1993 were collateralized by one-to-four family residences. In the area of non-performing assets, Reliable has not been immune to the effects of the sluggish economy. As of September 30, 1993, the ratio of non-performing assets to total consolidated assets was 1.80% as compared to a ratio of 1.79% as of a year earlier. This increase is a direct result of management attempting to identify potential problem loans by taking a scrutinizing look at its loan portfolio. These regular evaluations are supported by the continued aggressive position taken with respect to providing for possible loan losses monthly, even if the actual loan loss experience would not alone indicate an addition. In view of the uncertain economic environment and growing regulatory pressure for higher allowance levels, the Corporation's established business plan for the Savings Bank includes the intention to add to the general valuation allowance at an annual rate of $200,000 through fiscal year end 1994. At September 30, 1993, Reliable had a total of $2,638,000 in loans that were past due 90 days or more considered non-performing loans that have been determined by management to be placed on non-accrual status. As of fiscal year end 1993, the Savings Bank's general allowance for loan losses was $700,000 which represented 0.78% of total loans and 26.54% of total non-performing loans, compared to the coverage as of September 30, 1992 of 0.48% and 18.91%, respectively. 49 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Despite the recent trend of increased delinquencies affecting the Savings Bank's loan portfolio, management does not expect to experience a material loss on any of the currently non-performing loans as, in the opinion of management, adequate allowances have been established as of September 30, 1993 and will continue to be evaluated for adequacy on at least a quarterly basis. However, the Savings Bank is prepared, if required, to take the necessary foreclosure steps in order to protect its interest and to minimize any unforeseen future losses. On the liability side of the balance sheet, overall deposits accounts showed a slight increase of 0.46% during fiscal year 1993. The majority of this movement was out of the area of long-term certificates of deposit as interest rates declined throughout the year. Offsetting balance increases were noticed in passbook savings accounts and NOW and money market checking accounts as funds liquidity appeared to be a customer concern in light of the falling rate environment. Although the Savings Bank has the ability to borrow over $18 million in advances from the FHLB of Pittsburgh to meet its current liquidity requirements if necessary, there continues to be no outstanding debt or borrowings as of September 30, 1993 and as of that date the amount of outstanding loan commitments and loans in process totaled $6,964,000. Consolidated stockholders' equity of the Corporation remained relatively constant between the fiscal years ended September 30, 1993 and 1992, increasing only by 0.77% to a level of $29,804,000. The level amount of equity resulted primarily from the declaration of over $1.6 million in quarterly cash dividends and the repurchase of approximately $1.4 million in treasury stock during the fiscal year. The ratio of average equity to average assets during fiscal year 1993 was 20.02% compared to 17.61% for fiscal 1992. Current net earnings represents a return on average equity for fiscal 1993 of 10.7% compared to prior year's return on average equity of 9.16%. The Savings Bank continues to be well capitalized as of September 30, 1993, with tangible and core capital levels of 18.19% and an adjusted risk-based capital level of 42.71%, each of which continues to be well in excess of the current regulatory capital requirements. Results of Operations Net Income Net income for the fiscal year ended September 30, 1993 was $3,155,000 compared to net income for fiscal years 1992 and 1991 of $2,343,000 and $1,712,000, respectively. This represents annual net earnings growth at a rate of 35% during fiscal 1993 and 37% for fiscal 1992. The operating results of Reliable are largely dependent upon the net interest income generated by the Savings Bank. The most significant factor contributing to this steady growth pattern has been the impact of the continued declining interest rate environment throughout the financial services industry. The effect can be noted in the Savings Bank's interest rate spread or the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities. The average interest rate spread for fiscal 1993 was 3.54% versus 3.05% and 2.75% for fiscal years 1992 and 1991, respectively. The Savings Bank has also benefited from its interest-rate sensitivity position during these years. Interest-rate sensitivity provides a measure as to the effect changes in rates will have on net interest income. During the fiscal years 1993, 1992 and 1991, the Savings Bank's cumulative one-year interest rate repricing "gap" was a positive 3.9%, 4.5% and a negative 11.6% of total assets, respectively. The favorable impact of the changing rate environment during these periods can be seen in Reliable's bottom line as the return on average assets has increased from 1.31% for fiscal 1991, to 1.61% during fiscal 1992, and to 2.14% for fiscal year end 1993. 50 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS It has, however, been Reliable's strategy to attempt to balance its interest- rate sensitivity position by achieving a more favorable match between the maturity and repricing of its interest-earning assets and its interest-bearing liabilities. It is apparent from the related discussion of Reliable's financial condition that continued success has been reached towards this goal. In the face of reduced loan demand, Reliable has increased its short and intermediate term liquidity positions; thereby, improving the interest rate sensitivity of its earning assets. At fiscal year end 1993, the Savings Bank had a positive gap of (9.8%) which has well positioned the Corporation for a period when interest rates may again be on the rise. Interest Income Interest income experienced an overall decrease of 9.3% for the fiscal year ended 1993 as compared to a decrease of 3.5% between the fiscal years ended 1992 and 1991. The current year decline is a result in large due to a 14.6% decrease in the amount of total loans outstanding caused primarily by an increased number of prepayments and the overall reduced loan demand experienced attributable to general economic uncertainty. An offsetting increase occurred as interest on investments increased by $438,000 or 36% as an additional $23 million was used to purchase investment securities during the fiscal year 1993. The net interest margin, a measure which reflects the net yield on interest- earning assets, has continued to reflect Reliable's overall strength and earnings capacity. The net interest margin for fiscal year 1993 was 4.45% compared to 4.12% and 3.54% for the respective fiscal years ended 1992 and 1991. Interest Expense Interest expense during fiscal 1993 declined by 27% or $1,647,000 from a total of just over $6.15 million in fiscal 1992 to the current year end level of $4.5 million. The major impact on the Savings Bank's interest expense paid on deposits resulted from the general decrease in market interest rates. The average cost of funds for the fiscal year 1993 was 4.05% compared to 5.41% for fiscal 1992, representing a 136 basis point decline for the current year. A comparison of interest expense between fiscal 1992 and fiscal 1991 reflected a 22% decrease resulting from a 4.5% decrease in outstanding deposit balances coupled with a significant decline in the average cost of funds. Provision for Loan Losses The provision for loan losses is based upon management's assessment of the inherent risk of loss in the loan portfolio. This evaluation process takes into consideration the growth and composition of the portfolio, historical loan loss experience and delinquency trends, overall credit risk exposure related to general economic conditions and the identification of problem loans based on the current ability of borrowers to repay and the adequacy of the underlying collateral securitizing the loans. The provision for loan losses during fiscal year 1993 increased $50,000 or 25% to $250,000 compared to $200,000 for fiscal 1992. For fiscal year ended September 30, 1991 the provision for loan losses was $155,000. Reliable will continually monitor its loan portfolio in an effort to maintain an adequate allowance for loan losses to absorb unforeseen future losses and in view of this effort management's plans include, at a minimum, an addition of $200,000 to the provision for loan losses during the upcoming fiscal year ending September 30, 1994. Non-Interest Income During the fiscal years ended September 30, 1993 and 1992, the Corporation recognized gains of $1,182,000 and $272,000, respectively, on the sales of marketable equity securities and real estate owned. The 51 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS gains on such sales were primarily attributable to the sale of 25,000 shares in 1993 and 10,000 shares in 1992 of Federal Home Loan Mortgage Corporation (FHLMC) common stock. Due to the increased operating overhead and tax cost burdens of being a publicly-traded company, it is management's intention to utilize the current benefit of the unrealized gain available within its equity investments to the extent determined appropriate in order to maintain the projected level of earnings and expected rate of return to our stockholders. Other non-interest income increased $126,000 or 66% during fiscal year 1993 and increased by $29,000 or 18% in fiscal 1992 when compared to respective prior fiscal years. Included in other non-interest income are fees generated out of normal operating activities, such as transaction account service fees and late payment charges. Non-Interest Expense For fiscal 1993, total non-interest expenses increased by $355,000 or 16% to $2.6 million up from the prior year's total $2.2 million. Fiscal 1992 reflected a 15.4% or $296,000 increase over fiscal year end 1991. In addition to the normal recurring increases in the general cost of operations: including compensation and employee benefits, occupancy expense, deposit insurance and data processing, the primary increase in overhead costs occurred in the area of outside service and professional fees. A further review of this area explains the increase as a result of the costs incurred by the Corporation to retain professional services and advice as Reliable continues to expand and is faced with the costs of keeping pace with the demands of the complex and regulated financial services industry. For the fiscal years ended September 30, 1993, 1992 and 1991, the Corporation continues to maintain relatively low operating expenses with ratios of net interest income to non-interest expenses of 2.47x, 2.63x and 2.34-to-1, respectively; and, respective percentages of non-interest expenses to average assets of 1.75%, 1.53% and 1.47% for the same periods. Provision for Income Taxes The Corporation incurred provisions for income taxes of $1,884,000, $1,529,000 and $872,000 during the fiscal years ended 1993, 1992 and 1991, respectively. The provision for Federal income taxes varied between the fiscal years due to the tax effects of changes in the Corporation's operating results and resultant levels of taxable income generated. Effective Federal tax rates for fiscal years 1993, 1992 and 1991 were 31.5%, 31.3% and 26.6%, respectively. In addition to the higher level of taxable income generated during fiscal years ended September 30, 1993 and 1992, the increase in the effective tax rate over fiscal 1991 was most significantly impacted by the limitations imposed on the deductibility of the tax bad debt calculation. Changes in the state statutory tax rates during the comparative fiscal years provides an additional explanation regarding the difference in effective tax rates between those years. The provision for the state income taxes assessed on the net earning of the Savings Bank was determined based on the statutory rates of 11.5%, 12.5% and 20% for the fiscal years ended 1993, 1992 and 1991, respectively. Additional state tax liabilities are incurred by the Corporation as a separate entity in both Delaware as the state of incorporation and Pennsylvania where business operations are conducted. 52 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statistical Profile Lending Activities Loan and Mortgage-Backed Securities Portfolio Composition--The following table sets forth information summarizing the composition of the Savings Bank's loan and mortgage-backed securities portfolio by type of loan.
September 30, ---------------------------------------------------- 1993 1992 1991 ---------------- ---------------- ---------------- Percent Percent Percent of of of Amount Total Amount Total Amount Total -------- ------- -------- ------- -------- ------- (Dollars in thousands) Real estate loans: Residential mortgage........ $78,782 87.54% $ 93,049 90.50% $104,706 91.05% Real estate construction... 5,765 6.41 5,450 5.30 5,483 4.77 Commercial real estate..... 1,838 2.04 456 0.44 422 0.37 Non-residential and land... 1,942 2.16 2,391 2.33 3,055 2.66 ------- ------ -------- ------ -------- ------ Total real estate loans..... 88,327 98.15 101,346 98.57 113,666 98.85 ======= ====== ======== ====== ======== ====== Other loans: Deposit accounts........... 1,047 1.16 1,021 0.99 1,052 0.91 Home improvement........... 54 .06 64 0.06 90 0.08 Consumer................... 571 .63 391 0.38 188 9.16 ------- ------ -------- ------ -------- ------ Total other loans.......... 1,672 1.85 1,476 1.43 1,330 1.15 ------- ------ -------- ------ -------- ------ Total loans................. 89,999 100.00% 102,822 100.00% 114,996 100.00% ======= ====== ======== ====== ======== ====== Less: Undisbursed portion of loans..................... 3,556 1,749 2,631 Unamortized loan fees...... 1,188 1,615 1,688 Allowance for loan losses.. 700 495 295 ------- -------- -------- 5,444 3,859 4,614 ------- -------- -------- Total loans, net............ $84,555 $ 98,963 $110,382 ======= ======== ======== Mortgage-backed securities.. $ 5,930 100.00% $ 224 100.00% $ 290 100.00% ======= ====== ======== ====== ======== ======
53 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table indicates the amount and percentage of fixed-rate and floating- or adjustable-rate loans at September 30, 1993 due after September 30, 1994.
September 30, 1993 --------------------------- Fixed Adjustable Total ------- ---------- ------- (In thousands) Residential mortgage (1)........................... $55,204 $13,366 $68,570 Real estate construction (2)....................... -0- -0- -0- Commercial real estate............................. 813 -0- 813 Non-residential and land........................... 1,193 -0- 1,193 Deposit accounts (3)............................... -0- -0- -0- Home improvement................................... 54 -0- 54 Consumer........................................... 199 -0- 199 ------- ------- ------- Total............................................ $57,463 $13,366 $70,829 ======= ======= ======= Percent of total................................. 81.13% 18.87% 100.00% ======= ======= =======
- -------- (1) Includes mortgage-backed securities secured by residential mortgages. (2) Real estate construction loans are generally extended for a period not to exceed twelve months. As of September 30, 1993, there were $5,765,000 real estate construction loans which were due prior to September 30, 1994. (3) Loans on deposit accounts are considered demand loans and are assumed to be due prior to September 30, 1994. The following table shows the maturity or period to repricing of the Savings Bank's loan and mortgage-backed securities portfolios at September 30, 1993. Loans that have adjustable rates are shown as being due in the period in which the interest rates are next subject to change. The table includes historical prepayment assumptions used to represent scheduled principal amortization. Prepayments and scheduled principal amortization on loans totaled $37,677,000, $31,715,000 and $16,948,000 for the years ended September 30, 1993, 1992 and 1991, respectively. Loans having no stated maturity and no schedule of repayments (including delinquent loans), and demand loans are reported as due in 1994.
September 30, 1993 ----------------------------------------------------- 1995- 1997- 1999- 2004- 2014- 1994 1996 1998 2003 2013 After Total ------- ------- ------- ------- ------ ------ ------- (In thousands) Residential mortgage..... $26,598 $23,068 $11,223 $12,131 $3,261 $2,501 $78,782 Real estate construction. 5,765 -0- -0- -0- -0- -0- 5,765 Commercial real estate... 1,025 37 776 -0- -0- -0- 1,838 Non-residential and land. 749 680 264 231 18 -0- 1,942 Deposit accounts......... 1,047 -0- -0- -0- -0- -0- 1,047 Home improvement......... -0- -0- 54 -0- -0- -0- 54 Consumer................. 372 199 -0- -0- -0- -0- 571 Mortgage-backed securities............... 2,910 -0- 1,899 1,098 23 -0- 5,930 ------- ------- ------- ------- ------ ------ ------- Total.................. $38,466 $23,984 $14,216 $13,460 $3,302 $2,501 $95,929 ======= ======= ======= ======= ====== ====== =======
54 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At September 30, 1993, 1992 and 1991, non-performing assets in the Savings Bank's portfolio were as follows:
September 30, ------------------------- 1993 1992 1991 ------- ------- ------- (Dollars in thousands) Non-accrual loans (1)............................... $ 2,638 $ 1,223 $ -0- Real estate owned (2)............................... -0- -0- 29 Accruing loans contractually past due 90 days and over............................................... -0- 1,394 1,273 ------- ------- ------- Total............................................. $ 2,638 $ 2,617 $ 1,302 ======= ======= ======= Percent of total assets........................... 1.80% 1.79% 0.96%
- -------- (1) Loans are placed in the non-accrual category when, in the opinion of management, the collection of interest due on the loan is no longer reasonably assured. Subsequent to September 30, 1992, management began placing all loans past due 90 days and over on non-accrual status. Approximately $182,000 of interest income on these loans was included in net income for the year and approximately $237,000 of interest income would have been paid if the loans had been current throughout the year. (2) The Savings Bank has customarily not held real estate owned for a period greater than one year. The real estate owned at September 30, 1991 was subsequently sold. The following table sets forth an analysis of the Savings Bank's allowance for loan losses at the dates indicated.
Years Ended September 30, ---------------------------- 1993 1992 1991 -------- -------- -------- (Dollars in thousands) Balance at beginning of year..................... $ 495 $ 295 $ 155 Loans charged-off................................ (45) -0- (15) Recoveries....................................... -0- -0- -0- -------- -------- -------- Net loans charged-off............................ (45) -0- (15) Balance before provision for possible loan losses.......................................... 450 295 140 Provision for possible loan losses............... 250 200 155 -------- -------- -------- Balance at end of year........................... $ 700 $ 495 $ 295 ======== ======== ======== Allowance for loan losses to total loans......... .78% .48% .26% ======== ======== ======== Allowance for loan losses to total non-performing assets.......................................... 26.54% 18.91% 22.66% ======== ======== ======== Net charge-offs to average loans outstanding during the year................................. .047% 0% .014% ======== ======== ========
55 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table shows the Savings Bank's total allowance for loan losses at the dates indicated and the allocation to the various loan categories:
September 30, ----------------------------------------------- 1993 1992 1991 --------------- --------------- --------------- Percent Percent Percent of of of Total Total Total Loans Loans Loans by by by Amount Category Amount Category Amount Category ------ -------- ------ -------- ------ -------- (Dollars in thousands) Residential mortgage............ $295 87.54% $207 90.50% $158 91.05% Real estate construction........ 41 6.41 63 5.30 69 4.77 Commercial real estate.......... 46 2.04 5 0.44 3 0.37 Non-residential and land........ 91 2.16 72 2.33 63 2.66 Deposit accounts................ -0- 1.16 -0- 0.99 -0- 0.91 Home improvement................ 1 0.06 -0- 0.06 1 0.08 Consumer........................ 4 0.63 3 0.38 1 0.16 Unallocated..................... 222 N/A 145 N/A -0- N/A ---- ------ ---- ------ ---- ------ $700 100.00% $495 100.00% $295 100.00% ==== ====== ==== ====== ==== ======
Investment Activities The carrying value and estimated market value of the Savings Bank's portfolio of investment securities for the reported periods is incorporated by reference to Note B on page 16 of the 1993 Annual Report to Stockholders. The table below presents the contractual maturities and weighted average yields of investment securities at September 30, 1993, excluding the FHLB stock:
Maturity Distribution --------------------------------------------------------------------- Within Over One Over Five Over One Year to Five Years to Ten Years Ten Years Total ------------ ------------- ------------ ------------ ------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------- ----- ------ ----- ------ ----- ------- ----- (Dollars in thousands) Book Value: U.S. Treasury notes..... $1,999 4.63% $ 6,986 4.16% $ -0- -- $-0- -- $ 8,985 4.26% U.S. Agency obligations. -0- -- 15,750 4.43% 1,500 6.26% -0- -- 17,250 4.59% State and municipal obligations............ 145 3.40% 2,459 4.18% 410 5.41% -0- -- 3,014 4.31% Corporate debt.......... -0- -- 499 4.88% -0- -- -0- -- 499 4.88% Marketable equity security............... -0- -- -0- -- 970 10.43% -0- -- 970 10.43% ------ ------- ------ ---- ------- Total Investment Securities............. $2,144 4.54% $25,694 4.34% $2,880 7.55% $-0- -- $30,718 4.66% ====== ======= ====== ==== =======
56 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sources of Funds The following table sets forth the distribution of the Savings Bank's deposit accounts at the dates indicated and the weighted average interest rates on each category of deposits presented. Management does not believe that the use of year-end balances instead of average balances produces any material difference in the information presented:
September 30, -------------------------------------------------------------------------------- 1993 1992 1991 -------------------------- -------------------------- -------------------------- Percent Weighted Percent Weighted Percent Weighted of Average of Average of Average Amount Total Rate Amount Total Rate Amount Total Rate -------- ------- -------- -------- ------- -------- -------- ------- -------- (Dollars in thousands) Passbook savings........ $ 31,249 27.26% 3.00% $ 30,499 26.73% 3.35% $ 24,287 20.34% 5.53% NOW accounts Interest bearing....... 6,296 5.49 2.47% 5,634 4.94 2.78% 4,964 4.16 3.39% Noninterest-bearing.... 4,156 3.63 0.00% 3,464 3.03 0.00% 2,635 2.20 0.00% Money market accounts... 14,772 12.89 2.99% 14,035 12.30 3.15% 12,090 10.12 5.25% Certificates of deposit. 58,146 50.73 5.15% 60,467 53.00 5.54% 75,455 63.18 7.04% -------- ------ -------- ------ -------- ------ Total................... $114,619 100.00% $114,099 100.00% $119,431 100.00% ======== ====== ======== ====== ======== ======
At September 30, 1993, the Savings Bank had certificates of deposit in amounts of $100,000 or more maturing as follows:
Amount Maturity Period (in thousands) ---------------- -------------- 3 months or less................... $ 939 Over 3 to 6 months................. 677 Over 6 to 12 months................ 200 Over 12 months..................... 1,219 ------ Total.............................. $3,035 ======
57 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Analysis of Net Interest Income The Savings Bank's earnings have historically depended primarily upon the Savings Bank's net interest income, which is the difference between interest income earned on its loans and investments ("interest-bearing assets") and interest paid on its deposits and any borrowed funds ("interest-bearing liabilities"). Net interest income is affected by (i) the difference between rates of interest earned on the Savings Bank's interest-earning assets and rates paid on its interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of its interest-earning assets and interest-bearing liabilities. ---------------- The following tables present an analysis of certain aspects of the Savings Bank's operations during the years ended September 30, 1993, 1992 and 1991. The first table presents the average balances of, and the interest and dividends earned or paid on, each major class of interest-earning assets and interest- bearing liabilities and the weighted average yields and rates for those categories for the periods indicated. No tax equivalent adjustments were made. Average balances were based on quarter-end balances, which management believes do not represent material differences from daily average balances. The yields and costs include fees which are considered adjustments to yields. 58 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years Ended September 30, --------------------------------------------------------------------------------- 1993 1992 1991 -------------------------- -------------------------- -------------------------- Interest Interest Interest Average and Yield/ Average and Yield/ Average and Yield/ Balance Dividends Rate Balance Dividends Rate Balance Dividends Rate -------- --------- ------ -------- --------- ------ -------- --------- ------ (Dollars in thousands) ASSETS: Interest-earning assets: Loans, net (1)......... $ 94,739 $9,012 9.51% $104,755 $10,537 10.06% $110,984 $11,250 10.14% Investment securities (2)................... 18,362 935 5.09 5,027 325 6.46 3,595 320 8.90 Interest-bearing deposits (3).......... 29,925 918 3.07 31,794 1,114 3.50 12,597 844 6.70 -------- ------ ---- -------- ------- ----- -------- ------- ----- Total interest-bearing assets.............. 143,026 10,865 7.59% 141,576 11,976 8.46% 127,176 12,414 9.76% ---- ----- ----- Non-interest earning assets................. 4,193 3,746 3,650 -------- -------- -------- Total assets.......... $147,219 $145,322 $130,826 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Savings and NOW accounts.............. $ 50,497 $1,458 2.89% $ 46,078 $ 1,891 4.10% $ 38,030 $ 1,976 5.20% Time deposit accounts.. 60,502 3,042 5.03 67,649 4,256 6.29 74,915 5,936 7.92 -------- ------ ---- -------- ------- ----- -------- ------- ----- Total interest-bearing liabilities......... 110,999 4,500 4.05% 113,727 6,147 5.41% 112,945 7,912 7.01% ---- ----- ----- Non-Interest-Bearing Liabilities............ 6,746 6,004 4,664 -------- -------- -------- Total liabilities..... 117,745 119,731 117,609 Stockholders' Equity.... $ 29,474 $ 25,591 $ 13,217 -------- -------- -------- Total liabilities and stockholders' equity.............. $147,219 $145,322 $130,826 ======== ======== ======== Net interest income/interest rate spread (4)............. $6,365 3.54% $ 5,829 3.05% $ 4,502 2.75% ====== ==== ======= ===== ======= ===== Net interest-earning assets/net interest margin (5)............. $ 32,027 4.45% $ 27,849 4.12% $ 14,231 3.54% ======== ==== ======== ===== ======== ===== Interest-bearing assets to interest-bearing liabilities (x times).............. 1.29x 1.24x 1.13x ======== ======== ========
- -------- (1) Includes mortgage-backed securities secured by residential mortgages. (2) Includes U.S. government and agency obligations, state and municipal obligations, FHLMC common stock and FHLB of Pittsburgh capital stock. (3) Includes interest-bearing deposits in the FHLB of Pittsburgh and certificates of deposit in other institutions. (4) Interest rate spread represents the difference between the average yield earned on interest-earning assets and the average rate paid on interest- bearing liabilities. (5) Net interest margin represents net interest income before the provision for loan losses divided by average interest-earning assets. 59 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Rate/Volume Analysis The relationship between the volume and rates of the Savings Bank's interest- earning assets and interest-bearing liabilities influences the Savings Bank's net interest income. The following table reflects the sensitivity of the Savings Bank's interest income and interest expense to changes in volume and in prevailing interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on effects attributable to: (1) changes in volume (change in volume multiplied by old rate); (2) changes in rate (change in rate multiplied by old volume); and (3) net change. Changes attributable to the combined impact of volume and rates have been allocated proportionately to changes due to volume and changes due to rate.
September 30, Increase (Decrease) ----------------------------------------------- 1993 vs. 1992 1992 vs. 1991 ----------------------- ---------------------- Due to Due to -------------- -------------- Volume Rate Net Volume Rate Net ------ ------ ------- ------ ------ ------ (In thousands) Interest Income: Loans, net (1).................. $(969) $ (556) $(1,525) $(625) $ (88) $ (713) Investment securities........... 692 (82) 610 15 (10) 5 Interest-bearing deposits....... (64) (132) (196) 820 (550) 270 ----- ------ ------- ----- ------ ------ Total interest income.......... (341) (770) (1,111) 210 (648) (438) ----- ------ ------- ----- ------ ------ Interest Expense: Savings and NOW accounts........ 168 (601) (433) 378 (463) (85) Time deposit accounts........... (421) (793) (1,214) (682) (998) (1,680) ----- ------ ------- ----- ------ ------ Total interest expense......... (253) (1,394) (1,647) (304) (1,461) (1,765) ----- ------ ------- ----- ------ ------ Net Interest Income.............. $ (88) $ 624 $ 536 $ 514 $ 813 $1,327 ===== ====== ======= ===== ====== ======
- -------- (1) Includes mortgage-backed securities secured by residential mortgages. 60 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Liquidity and Sources of Capital For the six months ended March 31, 1994, the total consolidated assets of Reliable Financial Corporation increased by $3.6 million from $146,783,000 to $150,401,000 or 2.46%. The Corporation maintains a strategy of balance sheet diversification and continues to hold a favorable mix of interest-earning assets consisting of interest-bearing deposits and investments representing 36% of assets and loans and mortgage-backed securities representing 61% of assets. During the six-month period ended March 31, 1994, net cash flows were negative $3.9 million versus negative cash flows of $2.2 million for the comparable period of fiscal 1993. The use of these funds during the six months ended March 31, 1994 was seen primarily in the area of investing activities as evidenced by a 16.2% increase in investment securities since the end of the preceding fiscal year. Total loans outstanding grew slightly during the same period showing growth of $1.9 million compared to a net reduction of $7.3 million for the six months ended March 31, 1993. The diversity and strength of the asset side of Reliable's balance sheet provides a solid basis for earnings potential as the ratio of average interest- earning assets to average interest-bearing liabilities has been maintained at a level of 1.29-to-1, the same ratio existing at the end of the fiscal year ended September 30, 1993. The Corporation retains as a source of liquidity cash and cash equivalents of $17.7 million which contributes to an overall liquidity ratio, as defined by federal regulations, of 41.5% as of March 31, 1994. As of March 31, 1994, the ratio of non-performing assets to total consolidated assets was 1.86% as compared to a ratio of 1.80% as of the end of the preceding fiscal year. Despite this slight increase, the Corporation considers this a relatively low level of non-performing assets and continues to monitor these assets on a regular basis. At March 31, 1994, Reliable had a total of $2,795,000 in non-performing loans that were past due 90 days or more and have been placed on non-accrual status. For the quarter ended March 31, 1994, a provision for possible loan losses of $50,000 was recorded which increased the allowance for possible loan losses to $800,000 at March 31, 1994. This level of allowance for possible loan losses represents 0.86% of total loans and 28.62% of total non-performing loans, compared to the coverage as of September 30, 1993 of 0.78% and 26.54%, respectively. On the liability side of the balance sheet, growth in the overall deposit account balances kept pace with asset growth by showing an increase of $2.2 million or 2% since the fiscal year ended September 30, 1993. The other significant increase in liabilities as of March 31, 1994 was the collection of $1.5 million in advances from borrowers for taxes and insurance. The Corporation continues to maintain no outstanding debt or borrowings as of March 31, 1994 and as of that date the total amount of outstanding investment and loan commitments and loans in process was $8,762,000. Consolidated stockholders' equity of the Corporation was $30,376,000 which represents a stated book value of $21.54 per share at March 31, 1994. Annualized return on average equity for the three- and six-month periods ended March 31, 1994 was 8.74% and 10.63%, respectively, compared to the return on average equity for the 1993 fiscal year of 10.70%. Reliable Savings Bank remains well capitalized at March 31, 1994 as tangible, core and risk-based capital levels continue to be well in excess of the current regulatory capital requirements. Results of Operations Net Income Net income for the three months ended March 31, 1994 was $651,000 or $0.46 per share, a decrease of 18% from the $791,000 and $0.56 per share earned during the second quarter of fiscal 1993. Six month year-to-date income for fiscal 1994 was $1,582,000 or $1.12 per share, including the cumulative effect of a change in an accounting principle totaling $365,000 or $0.26 per share. Six-month income before the cumulative effect adjustment was $1,217,000 or $0.86 per share, a decrease of 17.5% over the comparative six-month 61 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS results of operations of $1,476,000 and $1.03 per share for fiscal 1993. For the comparative three- and six-month periods ended March 31, 1994 and March 31, 1993 the annualized return on average assets was 1.75% and 2.13%, respectively, for fiscal 1994 compared to 2.14% and 2.00%, respectively, for fiscal 1993. The operating results of Reliable are largely dependent upon the net interest income generated by the Savings Bank. Net interest income represents the amount by which interest income on earning assets, including FHLMC stock available for sale, investment securities and loans, exceeds interest paid on interest- bearing liabilities, mainly deposits. Interest rate fluctuations, as well as changes in the amount and type of earning assets and interest-bearing liabilities combine to affect net interest income. In addition to contributing to growth in earnings for the Corporation in fiscal 1993, the low interest rate environment has also had its effect on the more recent decrease in interest earning yields. The narrowing of the rates can be seen in the Savings Bank's interest rate spread or the difference between the yield earned on interest- earning assets and the rate paid on interest-bearing liabilities. The average interest rate spread during the comparative three- and six-month periods ended March 31, 1994 and 1993 was 3.28% compared to 3.26% and 3.32% versus 3.48%, respectively. Net Interest Income Net interest income reflected a decrease of $141,000 or 4.5% for the six- month period ended March 31, 1994 over the six-month period ended March 31, 1993. Respective quarter to quarter figures did not vary. The net interest margin, a measure which reflects the net yield on interest-earning assets, however, continued to reflect Reliable's earnings ability. The net interest margin for the second quarter of fiscal year 1994 was 4.13% compared to 4.16% for the same quarter in the prior fiscal year. Six-month comparative periods reflect a net interest margin of 4.18% for fiscal 1994 versus 4.40% for fiscal 1993. During the six months ended March 31, 1994, interest income declined by $359,000 or 6.57% when compared to the same period ended one year earlier. This decrease can be attributed to continued repricing of the loan portfolio in a lower interest rate environment along with the origination of new loans and the purchase of investment securities at yields lower than the previously existing portfolio. The low interest rate environment also accelerated prepayments on loans and mortgage-backed securities, as residential mortgage borrowers refinanced their loans. The cost of funds also declined due to the maturing and repricing downward of deposits reflected by an offsetting 9.44% or $218,000 decrease in interest expense incurred between the comparative six-month periods. Provision for Possible Loan Losses The provision for possible loan losses is based upon management's assessment of the inherent risk of loss in the loan portfolio. This evaluation process takes into consideration the growth and composition of the portfolio, historical loan loss experience and delinquency trends, overall credit risk exposure related to general economic conditions and the identification of problem loans based on the current ability of borrowers to repay and the adequacy of the underlying collateral securing the loans. The provision for possible loan losses for the six months ended March 31, 1994 and 1993 was $100,000, respectively. As Reliable's management continues to monitor the loan portfolio the necessary measures will be taken in order to maintain an adequate allowance for possible loan losses and current plans include recording at least $200,000 in provision for possible loan losses during the fiscal year ending September 30, 1994. Non-Interest Income Non-interest income decreased $200,000 or 32% during the six-month period ended March 31, 1994 versus the same six-month period ended a year ago. For the six months ended March 31, 1994 compared to the six months ended March 31, 1993, the Corporation recognized net gains of $234,000 and $478,000, 62 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS respectively, on the sales of investment securities and real estate owned. The gains on such sales were primarily attributable to the sale of shares of Federal Home Loan Mortgage Corporation (FHLMC) stock. Offsetting the investment gains during fiscal 1993 were the non-operating costs incurred to hold and maintain the REO properties which were recognized and netted against any gains realized upon ultimate disposition. Other non-interest income increased by $44,000 or 30% during the six-month period ended March 31, 1994 versus the same six-month period one year ago and showed an increase of $26,000 or 34% for the comparative fiscal three-month periods. Included in non-interest income are fees generated out of normal operating activities, such as transaction account service fees and late payment charges. Service fee income based on the levels of customer activity is one area in which revenues may be generated by the Savings Bank that are largely unaffected by the prevailing economic conditions and interest rate environment. Non-Interest Expense Total non-interest expense increased by $12,000 or 1.87% for the quarter ended March 31, 1994 when compared to the prior fiscal year's second quarter. During the comparative six months ended March 31, 1994 and 1993, non-interest expense was $1,304,000 and $1,252,000, respectively, an increase of 4.15%. The major components of non-interest expense represent the normal recurring costs of operations including compensation and employee benefits, occupancy expense, deposit insurance, data processing and outside service and professional fees. The Corporation continues to focus on overall cost maintenance which translates into a relatively low overhead burden with ratios of net interest income to non-interest expense of 2.28 and 2.31-to-1 and percentages of non- interest expense to average assets of 1.76% and 1.75% for the fiscal quarters ended March 31, 1994 and 1993, respectively. The same ratios for the respective six-month periods ended on the same dates were 2.31 and 2.51-to-1 for net interest income to non-interest expense and percentages of 1.75% and 1.70% for non-interest expense to average assets. Provision for Income Taxes The Corporation incurred provisions for income taxes of $474,000 and $818,000 for the three- and six-month periods ended March 31, 1994, respectively. These figures compare to provisions for income taxes of $564,000 and $952,000 for the same respective periods ended March 31, 1993. The decreased level of provision for income taxes varied between the comparative fiscal periods primarily due to the tax effects of changes in the Corporation's operating results and the resultant levels of taxable income generated. Income before income taxes for the Corporation decreased by 17% and 16%, respectively, between the comparative three- and six-month fiscal periods ended March 31, 1994 and 1993. The provision for state income taxes assessed on the net earnings of the Savings Bank is determined based on a current statutory rate of 11.5%. Additional state tax liabilities are incurred by the Corporation as a separate entity in both Delaware as the state of incorporation and Pennsylvania where business operations are conducted. 63 MANAGEMENT OF RELIABLE Board of Directors The table below provides information concerning the Board of Directors of Reliable. Share ownership information contained in the table reflects beneficial ownership (see note (1) to the table) of Reliable Common Stock as of June 24, and is based upon information furnished by or on behalf of the persons referred to in the table.
Amount and Nature of Beneficial Percentage of Director Ownership Outstanding Name, Principal Occupation During of Reliable of Reliable Reliable Common the Past Five Years, Other Directorships Age Since Common Stock (1) Stock ---------------------------------------- --- ----------- ---------------- --------------- Term Ending in 1997: George W. Keith................................. 67 1976 19,213(2)(4) 1.36% President, KLH Engineering (environmental consulting firm) Eugene Povero................................... 66 1979 20,580(2)(3)(4) 1.46 Owner, Gene Povero Enterprises; President, McDonald Land Company, Inc. and McDonald Enterprise, Inc.; Partner, Povero and Brunner (all four entities are in the real estate leasing and development business) Term Ending in 1996: Peter Calabro................................... 71 1974 18,213(2)(4) 1.29 President, Calabro Tire Service, Inc. (sales and servicing of auto and truck tires) S.A. Russo...................................... 61 1986 18,606(2)(4) 1.31 President, Norwood Food Services, Inc. (industrial catering and food services) Term Ending in 1995: Stephen Grippi.................................. 69 1978 29,000(5) 2.06 President, Reliable Savings Bank All directors and executive officers of Reliable as a group (9 persons)......................... -- -- 114,394(1-6) 8.11
- -------- *Less than one percent. (1) Under regulations of the Securities and Exchange Commission, a person who has or shares voting or investment power with respect to a security is considered a beneficial owner of the security. Voting power is the power to vote or direct the voting of shares, and investment power is the power to dispose of or direct the disposition of shares. Unless otherwise indicated in the other footnotes below, each director has sole voting power and sole investment power with respect to the shares indicated opposite his name in the table, and each member of a group has sole voting power and sole investment power with respect to the number of the shares indicated for the group. (2) Includes the following shares held jointly with spouses and children: Mr. Keith, 17,017 shares; Mr. Povero, 15,298; Mr. Calabro, 10,733; Mr. Russo, 13,353; and all directors and executive officers as a group. (3) Includes 1,000 shares held by McDonald Land Company, Inc., of which Mr. Povero is President. 64 (4) Includes 1,098 shares owned by Mr. Keith's spouse, Lois H. Keith; 1,126 owned by Mr. Povero's spouse, Darlene Povero; 2,480 owned by Mr. Calabro's spouse, Elvera Calabro; and 2,203 owned by Mr. Russo's spouse, Carol K. Russo. (5) Does not include 2,000 restricted shares awarded to Mr. Grippi under the Reliable Savings Bank, PaSA Recognition and Retention Plan and Trust Agreement over which Mr. Grippi does not yet have voting or investment power. Each of the persons listed above has held the position described above or other executive positions with the same entity (or a subsidiary thereof) for at least the past five years. The Board and Its Committees During fiscal 1993 there were 24 meetings of the Board of Directors of Reliable. Each director attended at least 75% of the Board and committee meetings during the period he was a director and committee member. The Board of Directors of Reliable has established certain standing committees, three of which are discussed below: Audit Committee, Compensation Committee and Pension Committee. Reliable does not have a nominating committee. The Audit Committee is comprised of Messrs. Povero (Chairman), Calabro, Keith and Russo, all of whom are outside directors. The Audit Committee meets with Reliable's independent auditors to review and discuss the preparation, conduct and results of the annual audit and to review other matters related to Reliable's operations and internal control structure. Additional matters, such as regulatory compliance and tax matters, may also be addressed from time to time. The Audit Committee met five times in fiscal 1993. The Compensation Committee is comprised of Messrs. Calabro (Chairman), Keith, Povero and Russo. The Compensation Committee reviews employee performance and prepares recommendations for annual salary adjustments and bonuses. In addition, Board of Directors and committee fees are reviewed and recommended. The Compensation Committee met four times in fiscal 1993. The Pension Committee is comprised of Messrs. Russo (Chairman), Calabro, Keith and Povero. The Pension Committee administers the Reliable Savings Bank, PaSA Recognition and Retention Plan and Trust Agreement, the 401(k) Plan (defined below), the Incentive Stock Option Plan and the Non-Employee Directors' Plan and monitors participation and involvement therein. The Pension Committee met three times in fiscal 1993. The other standing committees of the Reliable Board are the Loan, Investment, Asset and Liability, Budget and Forward Planning Committees. Reliable's By-Laws describe in full the procedures to be followed by a shareholder in recommending nominees for director. Nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of capital stock of Reliable entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the existing management of Reliable, shall be made in writing and shall be delivered or mailed to the Secretary of Reliable, not less than 90 nor more than seven days prior to the anniversary date of the next preceding annual meeting of shareholders, provided such nomination shall be delivered to the Secretary of Reliable. Such notification shall contain the following information to the extent known to the notifying shareholder: (a) the name, age and business and home address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the number of shares of capital stock of Reliable beneficially owned by each proposed nominee; (d) a statement that each proposed nominee is willing to be nominated; (e) a representation that the notifying shareholder is a holder of record of capital stock of Reliable entitle to vote at such meeting and intends to appear in person or by proxy at such meeting to nominate the proposed nominees; (f) a description of all 65 arrangements or understandings between the shareholder and each nominee and any other person pursuant to which the nomination(s)) are to be made; and (g) such other information concerning each such nominee as required under the rules of the Securities and Exchange Commission. Nominations not made in accordance herewith may, in his or her discretion, be disregarded by the chairman of the meeting. Compensation of Directors Directors receive an annual fee of $20,000, and each director receives an annual fee of $4,000 for service on the standing committees of the Reliable Board. No director of Reliable who is an officer or employee of Reliable Savings Bank receives any compensation (in addition to his or her regular salary) for service on the Board or any of its committees. As additional compensation for serving as a director, on March 30, 1992 Reliable granted to each nonemployee director an option to purchase 5,500 shares of Reliable Common Stock at a price of $10 per share. The options have a term of 10 years and one day, and may terminate earlier upon the occurrence of certain events. Executive Officers The table below provides information concerning the present executive officers of Reliable.
Name Age Positions Held During the Past Five Years - ---- --- ----------------------------------------- Stephen Grippi............................. 69 President, Reliable Savings Bank Edward H. Eiter, Jr........................ 41 Vice President and Chief Operating Officer, Reliable Savings Bank Gregory B. Swango.......................... 34 Treasurer and Chief Financial Officer, Reliable Savings Bank; previously Audit Senior, Edwards Leap & Sauer (accounting firm) Jean L. David.............................. 66 Senior Vice President and Secretary, Reliable Savings Bank Charles E. Kindig, Jr...................... 38 Vice President and Chief Loan Officer, Reliable Savings Bank; previously Senior Examiner, Office of Thrift Supervision
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. Executive officers of Reliable serve at the pleasure of the Board of Directors of Reliable. Compensation of Executive Officers The following table sets forth certain information regarding compensation received by the Chief Executive Officer. No other executive officers of Reliable or Reliable Savings Bank received annual compensation, including bonus, in excess of $100,000 for the period indicated. 66 SUMMARY COMPENSATION TABLE Annual Compensation
Long-Term Compensation ------------------------------ Dollar Annual Value of No. of Securities Compensation Restricted Underlying Name and -------------- Stock Options/SARs All Principal Position Year(1) Salary Bonus Awards Granted Other(3) - ------------------- ------- ------- ------ ---------- ----------------- -------- Stephen Grippi.......... 1993 128,281 15,000 $ -- -- 11,909 President and Chief 1992 120,750 15,000 60,000(2) 12,000 6,221 Executive Officer 1991 104,445 15,000 -- -- 2,375
- -------- (1) Reliable's fiscal year ends September 30. (2) On March 30, 1992 the Pension Committee granted Mr. Grippi an award of 6,000 shares of Reliable Common Stock pursuant to the Reliable Savings Bank, PaSA Recognition and Retention Plan and Trust Agreement (the "Recognition and Retention Plan"). One third of this award vests on each of the first three anniversary dates of the award. (3) In accordance with the transitional provisions applicable to the revised rules on executive officer and director compensation disclosure adopted by the Securities and Exchange Commission, as informally interpreted by the Commission's Staff, amounts of All Other compensation are excluded for Reliable's 1991 fiscal year. Represents matching contributions by Reliable Savings Bank to Mr. Grippi's account in the Reliable Savings Bank 401(k) Profit Sharing Plan, an automobile provided by Reliable for Mr. Grippi's use and, for fiscal 1993, accrued dividends paid from the 2,000 shares in which Mr. Grippi is vested pursuant to the Recognition and Retention Plan. The following table sets forth the number of shares of Reliable Common Stock acquired on the exercise of stock options and the aggregate gains realized on the exercise during fiscal 1993 by Mr. Grippi. The table also sets forth the number of shares covered by exercisable an unexercisable options held by Mr. Grippi on September 30, 1993 and the aggregate gains that would have been realized had these options been exercised on September 30, 1993 even though these options were not exercised, and the unexercised options could not have been exercised, on September 30, 1993. AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
Dollar Number of Shares Value of Unexercised Shares Acquired Covered by Unexercised In-The-Money On Exercise Options on 9/30/93 Options on 9/30/93 During Fiscal Value ------------------------- ------------------------- Name and Principal Position 1993 Realized(1) Exercisable Unexercisable Exercisable Unexercisable - --------------------------- --------------- ----------- ----------- ------------- ----------- ------------- Stephen Grippi.......... 4,000 $46,000 0 8,000 0 $136,000 President and Chief Executive Officer
- -------- (1) Market value on the date of exercise of shares covered by options exercised, less option exercise price. Compensation Committee Interlocks and Insider Participation No member of the Compensation Committee has ever been an officer or employee of Reliable or Reliable Savings Bank or has a transaction or relationship required to be disclosed under Item 404 of Regulation S-K. During fiscal 1993, no executive officer served on a compensation committee (or other board committee performing equivalent functions) or Board of Directors of any entity related to the above named Committee members. 67 401(k) Profit Sharing Plan Reliable Savings Bank established in June of 1991 the Reliable Savings Bank 401(k) Profit Sharing Plan (the "401(k) Plan"). Under the 401(k) Plan, employees 21 or more years old with one year of service may make pre-tax contributions through salary deductions of up to 10% of their annual compensation. Reliable Savings Bank may match these contributions up to 5% of the employee's annual compensation. Reliable Savings Bank may also make additional contributions. Participants become vested in Reliable Savings Bank's contributions 20% per year after the first year of service. Benefits will normally be paid at age 65. However, participants aged 59 1/2 years may receive distributions of amounts 100% vested without terminating their participation in the 401(k) Plan. Distributions are made in lump-sum payments. The 401(k) Plan also permits participants access to their accounts, in accordance with uniform guidelines, for financial necessity or hardship. Participants may direct the investment of their accounts among five investment options. The Reliable Common Stock is not currently an investment option, and Reliable Savings Bank has no present plans to include it as an investment option. Interests of Nominees, Directors and Officers in Certain Transactions Reliable Savings Bank has entered into a three-year employment agreement with Mr. Grippi which expires December 31, 1994. In addition to Mr. Grippi's salary the agreement provides for reimbursement of reasonable business expenses and for participation in the employee benefit programs of Reliable Savings Bank. In the event Reliable Savings Bank terminates his employment without cause, Mr. Grippi will receive a severance payment equal to six months salary and benefits increased by one week for each year of his employment, not to exceed one year in the aggregate. He will continue to participate in all benefit programs for one year, and all his stock options not otherwise exercisable would become immediately exercisable. Reliable Savings Bank has extended credit to directors and officers of Reliable Savings Bank and Reliable, to members of their families and to corporations or organizations in which such persons have a beneficial interest or with which such persons are associated as officers, partners, directors or trustees. In all cases these transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. As of December 31, 1993 total loans to such directors, executive officers, principal stockholders and their related interests whose loan balances exceeded $60,000 during fiscal 1993 were $668,261.50. 68 INFORMATION CONCERNING UNITED The United Merger FCFC and United have entered into the United Plan of Reorganization, which provides for the United Merger. Although it is contemplated that the United Merger and the Reliable Merger will be consummated at the same time if all required regulatory approvals have been received and all conditions precedent have been satisfied, the United Merger and the Reliable Merger are separate and independent transactions. The information presented in this Proxy Statement/Prospectus concerning United is intended only to provide the holders of Reliable Common Stock an understanding of United and the United Merger. The holders of Reliable Common Stock have no rights to approve or reject the consummation of the United Merger. The consummation of the Reliable Merger is not a condition precedent to the United Merger, and the consummation of the United Merger is not a condition precedent to the Reliable Merger. Business and Properties of United United was organized as a Pennsylvania business corporation on July 24, 1981 at the direction of the Board of Directors of Unitas Bank for the purpose of acquiring Unitas Bank and creating a bank holding company. On January 4, 1982, Unitas Bank became a wholly-owned subsidiary of United and the shareholders of Unitas Bank became the shareholders of United. Unitas Bank and Unitas Mortgage are United's only active subsidiaries and United functions primarily as the holder of all of the outstanding stock of these two subsidiaries. As used herein, "United" refers collectively to United and its two subsidiaries. United is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and United currently employs 110 employees (full-time equivalents). Through Unitas Bank, United traces its origins to John Bare & Co., a private bank established in Huntingdon, Pennsylvania on October 17, 1866. On May 15, 1894 the bank was organized as a national banking association under the name The Union National Bank of Huntingdon. Unitas Bank adopted its present name on October 1, 1983. Since January 1, 1989, Unitas Bank has established three new branches--one inside a supermarket in Gettysburg, Pennsylvania on April 1, 1991; another inside a supermarket in State College, Pennsylvania on March 23, 1992; and a free-standing branch in Guilford Township (just outside Chambersburg), Pennsylvania on March 20, 1993. Unitas Bank presently conducts its business through 12 community banking offices in 11 communities in the counties of Adams (1 office), Bedford (1), Centre (2), Franklin (2) and Huntingdon (6). Unitas Bank engages in a full-service commercial banking business within the vicinity of its service area. It offers various loan services, including secured and unsecured commercial and consumer loans, construction and mortgage loans, lease financing, all types of deposit services, including checking services and interest bearing demand, savings and other time deposit accounts, and trust and personal financial services. Trust services include investment custodianship, investment management, estate administration, executorships, trusteeships, guardian of property, employee benefits and corporate trusts. Unitas Mortgage engages in the origination of mortgages for resale in the secondary mortgage market from three community offices located in Adams, Centre and Cumberland Counties. United's business is not seasonal in nature. United operates six ATMs which permit its customers to conduct routine banking transactions 24 hours a day, and these ATMs are located on the premises of its banking offices. All of the ATMs are part of the MAC Network, which consists of over 14,000 ATMs owned by numerous banks, savings and loan associations and credit unions located in 16 states, of which 14 are east of the Mississippi River. United's MAC customers may use the HONOR Network, which has 9,800 ATMs located primarily in the southeastern quadrant of the United States. The ATMs operated by United are also part of the national Plus Network which is comprised of more than 170,000 ATMs located in the United States, Canada and 45 other countries and territories, and which services over 161 million cards. Such networks allow United's customers to withdraw cash and, in certain cases, conduct other banking transactions using ATMs of all participating financial institutions. 69 As a nationally chartered, federally insured commercial bank that is a member of the Federal Reserve System, United is subject to supervision and regular examination by the Office of the Comptroller of the Currency ("OCC"). Various federal and state laws and regulations govern many aspects of its banking business. See "Regulation and Supervision." United competes actively with other commercial banks and savings and loan associations in its area, many of which are larger than United, as well as with major regional banking and financial institutions headquartered in Harrisburg, Altoona, State College, Johnstown and Pittsburgh. The management of United believes that it is generally competitive with all competing financial institutions in its service area with respect to interest rates paid on savings and other time deposits, service charges on deposit accounts and interest rates charged on loans. The headquarters of United is located at 15 South Main Street, Chambersburg, Franklin County, Pennsylvania. The two-story brick veneer headquarters building has approximately 9,200 square feet of floor space and contains a full-service banking facility and the central administrative offices of United. Of United's banking offices, the headquarters and three branches are leased and the remaining facilities are owned in fee, free of all liens and encumbrances. Management believes all such facilities to be in good repair and well suited to their current uses. 70 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES 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 appearing elsewhere in this Proxy Statement/Prospectus. The results for the three month periods ended March 31, 1994 and 1993 are not necessarily indicative of the results to be expected for the entire year.
Three Months Ended March 31, Years Ended December 31, ------------------ ------------------------------------------------ 1994 1993 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- -------- -------- Interest Income Interest and fees on loans................. $ 2,640 $ 2,704 $ 10,946 $ 10,822 $ 10,625 $ 10,485 $ 9,971 Interest and dividends on investment securities............ 281 429 1,601 1,414 1,330 1,224 1,248 Interest on money market investments.... 13 38 70 216 342 735 1,053 -------- -------- -------- -------- -------- -------- -------- Total interest income 2,934 3,171 12,617 12,452 12,297 12,444 12,272 -------- -------- -------- -------- -------- -------- -------- Interest Expense Interest on deposits... 955 1,257 4,651 5,653 7,004 7,601 7,808 Interest on short-term borrowings............ 36 36 143 30 1 7 21 Interest on long-term debt.................. 0 0 0 0 0 0 0 -------- -------- -------- -------- -------- -------- -------- Total interest expense 991 1,293 4,794 5,683 7,005 7,608 7,829 -------- -------- -------- -------- -------- -------- -------- Net interest income.... 1,943 1,878 7,823 6,769 5,292 4,836 4,443 Provision for possible loan losses........... 99 75 473 325 300 300 420 -------- -------- -------- -------- -------- -------- -------- Net interest income after provision for possible loan losses.. 1,844 1,803 7,350 6,444 4,992 4,536 4,023 Other operating income. 178 361 876 528 517 439 402 Other operating expenses.............. 1,406 1,266 5,548 4,913 4,260 3,716 3,794 -------- -------- -------- -------- -------- -------- -------- Income before taxes.... 616 898 2,678 2,059 1,249 1,259 631 Applicable income taxes................. 198 286 858 641 346 350 110 -------- -------- -------- -------- -------- -------- -------- Net income........... $ 418 $ 612 $ 1,820 $ 1,418 $ 903 $ 909 $ 521 ======== ======== ======== ======== ======== ======== ======== Per Share Data Net income............. $ .54 $ .80 $ 2.37 $ 1.84 $ 1.17 $ 1.18 $ .68 Cash dividends declared.............. $ .13 $ .12 $ .47 $ .43 $ .39 $ .39 $ .39 Average shares outstanding (a)....... 769,147 769,147 769,147 769,147 769,147 769,147 769,147 At End of Period Total assets........... $145,522 $145,117 $147,603 $143,261 $128,644 $124,974 $121,098 Investment Securities.. 21,302 29,082 20,041 25,426 18,567 20,270 23,532 Loans and leases, net of unearned income.... 114,759 107,035 117,287 101,719 97,385 96,632 90,292 Reserve for possible loan losses........... 1,257 1,129 1,189 1,061 910 802 652 Deposits............... 128,003 128,864 129,319 127,862 117,437 114,344 110,372 Long-term debt......... 0 0 0 0 0 0 0 Shareholders' equity... 12,521 11,352 12,282 10,831 9,748 9,149 8,541 Key Ratios Return on average assets................ 1.14% 1.41% 1.22% 1.05% 0.72% 0.75% 0.42% Return on average equity................ 13.48% 18.37% 15.36% 13.62% 9.60% 10.26% 6.22% Net loans to deposit ratio................. 89.65% 83.06% 90.70% 79.55% 82.93% 84.51% 81.81% Dividend payout ratio.. 23.92% 14.86% 20.00% 23.34% 33.33% 33.11% 57.58% Average shareholders' equity as percentage of average assets..... 9.32% 8.87% 9.05% 8.75% 8.49% 8.05% 7.55%
- -------- (a) Average number of shares outstanding has been adjusted to reflect 10% stock dividends declared on November 13, 1991, November 18, 1992 and November 17, 1993. 71 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Profitability--Interest rates continued to fall during 1993, affording the banking industry another window of opportunity to enhance net interest margins and, likewise, profitability. UNB's net income for fiscal year ended December 31, 1993 reached a record $1.8 million, comparing vigorously with net income of $1.4 million in 1992 and $903 thousand in 1991. Return on assets for the three years ended December 31, 1993 equalled 1.22 percent, 1.05 percent, and .72 percent, respectively. Return on shareholders' equity equalled 15.4 percent, a healthy increase over 13.6 percent in 1992 and 9.6 percent in 1991. Net interest income grew $1 million in 1993, representing the underlying strength of the earning power of the Corporation. The following analysis of average balances and interest rates illustrates the components of net interest margin. While interest rates continued to fall, UNB managed the net interest margin conservatively and achieved a net increase of 23 basis points. The three year trend in declining interest rates and achievable yields is evident in each category of funding sources and earning assets. The overall decline of 78 basis points on earning assets from 1992 to 1993 was more than offset by a 101 basis point decline in break even cost of carrying earning assets. The resultant net interest margin equalled 5.67 percent in 1993, as compared with 5.44 percent in 1992 and 4.62 percent in 1991. AVERAGE BALANCES AND INTEREST RATES--Tax Equivalent Basis (In Thousands)
1993 1992 1991 ------------------------- ------------------------- ------------------------- Average Interest Yield/ Average Interest Yield/ Average Interest Yield/ Balance REV/EXP Rate Balance REV/EXP Rate Balance REV/EXP Rate -------- -------- ------ -------- -------- ------ -------- -------- ------ EARNING ASSETS Investment Securities... $ 25,545 $ 1,619 6.34% $ 19,233 $ 1,580 8.22% $ 16,355 $ 1,519 9.29% Loans, Net of Reserve... 111,451 11,016 9.88 103,115 10,822 10.50 96,570 10,625 11.00 Funds Sold.............. 2,033 60 2.95 3,923 145 3.70 3,111 163 5.24 Short-Term Investments.. 459 10 2.18 1,344 71 5.28 2,653 179 6.75 -------- ------- -------- ------- -------- ------- Total Earning Assets.... $139,488 $12,705 9.11% $127,615 $12,618 9.89% $118,689 $12,486 10.52% ======== ======== ======== SOURCE OF FUNDS Interest-Bearing Demand. $ 38,653 $ 1,199 3.10% $ 36,583 $ 1,462 4.00% $ 24,770 $ 1,400 5.65% Savings Deposits........ 31,495 1,173 3.72 17,329 790 4.56 10,269 616 6.00 Time Deposits........... 52,256 2,279 4.36 60,408 3,401 5.63 70,609 4,988 7.06 Short-Term Borrowings... 3,928 143 3.64 647 30 4.64 13 1 7.69 -------- ------- -------- ------- -------- ------- Total Interest-Bearing Sources................ $126,332 $ 4,794 3.79% $114,967 $ 5,683 4.94% $105,661 $ 7,005 6.63% Demand Deposits......... 8,465 8,166 8,055 Cash and Due from Banks. (3,731) (3,720) (3,614) Other Sources, Net...... 8,422 8,202 8,587 -------- ------- -------- ------- -------- ------- Total Sources of Funds.. $139,488 $ 4,794 3.44% $127,615 $ 5,683 4.45% $118,689 $ 7,005 5.90% ======== ------- ======== ------- -------- ------- Net Interest Revenue.... $ 7,911 $ 6,935 $ 5,481 ======= ======= ======= Net Interest Revenue to Earning Assets......... 5.67% 5.44% 4.62%
For the purposes of this presentation, nonaccrual loans are accounted for in Loans, Net of Reserve. Interest revenue on Investment Securities and Loans is calculated on a tax equivalency basis at a rate of 34 percent. 72 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION During 1993, the banking industry felt the pressure on net interest income as more assets repriced at the low interest rate levels. Influenced by declining earning asset yields, the industry continued to lower interest rates paid on deposits. UNB's competitive market was not immune to these pressures and responded accordingly by lowering depository rates. Attraction of new deposits became highly competitive as investors sought out higher yielding instruments such as mutual funds, stocks, and bonds. Fortunately, UNB was negatively gapped at December 31, 1992, whereby $106 million in liabilities were scheduled to mature or reprice during fiscal 1993, and only $46 million in assets were scheduled to mature or reprice. Repricing of more liabilities than assets was the greatest contributor to the increase in net interest income in 1993. Growth in earning assets also contributed significantly to the change in net interest income, as can be analyzed by review of the following summary of the changes in interest earned and paid resulting from changes in volume and rates.
1993 Compared to 1992(1) 1992 Compared to 1991(1) Increase (Decrease) Due to: Increase (Decrease) Due to: ------------------------------ ------------------------------ Volume Rate Net Volume Rate Net ------------------- --------- ------------------- --------- (In Thousands of Dollars) Interest earned on: Investment Securities. $ 400 $ (361) $ 39 $ 237 $ (176) $ 61 Loans, Net of Reserve. 824 (630) 194 687 (490) 197 Funds Sold............ (56) (29) (85) 30 (48) (18) Short-Term Investments.......... (19) (42) (61) (192) 84 (108) -------- --------- --------- ------- --------- --------- Total interest-earning assets............... $ 1,149 $ (1,062) $ 87 $ 762 $ (630) $ 132 ======== ========= ========= ======= ========= ========= Interest paid on: Demand deposits....... $ 64 $ (327) $ (263) $ 473 $ (411) $ 62 Savings deposits...... 528 (145) 383 322 (149) 173 Time deposits......... (356) (766) (1,122) (472) (1,115) (1,587) Short-Term borrowings. 119 (6) 113 30 -- 30 -------- --------- --------- ------- --------- --------- Total interest-bearing liabilities.......... $ 356 $ (1,245) $ (889) $ 353 $ (1,675) $ (1,322) ======== ========= ========= ======= ========= ========= Net interest income..... $ 793 $ 183 $ 976 $ 409 $ 1,045 $ 1,454 ======== ========= ========= ======= ========= =========
- -------- (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Noninterest income equalled $876 thousand in 1993 as compared with $528 thousand in 1992 and $517 thousand in 1991. The large increase in noninterest income was accomplished through sales of mortgage loans and investment securities. During the first quarter of 1993, Management elected to sell $4.7 million in fixed-rate, long-term real estate loans in strategy to reduce the volume of long-term assets funded by short-term liabilities. The sale of this block of mortgages produced $238 thousand in gross income, or $157 thousand net of federal income taxes. During the fourth quarter of 1993, Management elected to sell $2.2 million in investment securities as UNB repositioned the portfolio for mark-to-market accounting to be adopted during the first quarter of 1994 pursuant to FASB Statement No. 115, as discussed in Note 1 of the financial statements. The gain on sale of investment securities totalled $62 thousand gross income, or $41 thousand net of federal income tax. Noninterest expenses equalled $5.5 million in 1993, as compared with $4.9 million in 1992 and $4.3 million in 1991. Increased noninterest expenditures represent the cost of new branch offices and an increase in salaries and employee benefits, primarily the rising cost of health care. During 1993, UNB expanded the 73 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION supermarket retail segment of the bank by relocation of the existing Huntingdon Plaza Office into a new Bi-Lo Superstore within the same plaza center. This location offers full-service banking as well as drive-up facilities. In the first quarter of 1993, UNB opened a traditional branch on Lincoln Way East in Chambersburg. This location complements the downtown headquarters location. As with many businesses nationwide, UNB has felt the increasing burden of the cost to provide adequate health care coverage for its employees. Health care costs totalled $333 thousand in 1993 as compared with $170 thousand in 1992 and $144 thousand in 1991. UNB is continually seeking avenues to manage this cost over the long run. FDIC insurance costs escalated significantly from 1990 to 1991, when the banking industry was experiencing significant losses and the FDIC assessment fund needed to be replenished. In subsequent years, FDIC insurance costs have grown commensurate with depository growth. Costs of FDIC insurance are now determined by the capitalization level of the institution and deposit base. At present, the capitalization level of the bank commands the least costly premium charge. Management evaluates the adequacy of the loan loss reserve on a quarterly basis. As part of this analysis, Management determines the appropriate loan loss provisional level. In 1993, UNB provided $473 thousand for loan losses, an increase over $325 thousand in 1992 and $300 thousand in 1991. In consideration of the exceptional loan growth that UNB has experienced over the past two years, and a fourth quarter increase in nonaccrual loans, Management elected to make an additional $173 thousand provision to the reserve account and allocate $27 thousand for possible other real estate deficiencies. These additional provisions place UNB in a strengthened position to absorb potential future losses. Federal Income Taxes--The federal income tax provision for book purposes was $858 thousand in 1993, $641 thousand in 1992, and $346 thousand in 1991. Federal tax provisions absorbed 32 percent of pretax profits in 1993, 31 percent in 1992, and 28 percent in 1991. UNB incurred Alternative Minimum Tax (AMT) of $485 thousand in 1993, deferring $373 thousand to future tax liability; this AMT position resulted primarily from timing differences incurred by leasing activities. The Corporation adopted FASB Statement No. 109, "Accounting for Income Taxes," in the first quarter of 1993. UNB adopted the Statement of a prospective basis, without restating any prior years and has determined that the effect of its implementation on financial position and profitability was not material for 1993 or 1992. Impact of Inflation and Changing Prices--The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at a faster pace than asset growth in order to maintain an appropriate equity-to-assets ratio. An important effect of this has been the reduction of the proportion of earnings paid out as dividends. Another significant effect of inflation is on other expenses, which tend to rise during periods of general inflation. Management of UNB believes that the most significant impact on financial performance is the ability to react to interest rate swings in a timely and prudent manner and to monitor noninterest expenditures. The Asset/Liability function closely monitors economic indicators and anticipated interest rate swings. Through such monitoring, Management is able to react on a timely basis in adjusting strategy to minimize exposure to earnings and asset quality. Management's strategy in this regard is to maintain an essentially neutral position between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations. 74 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION Financial Condition--UNB functions as a financial intermediary and, as such, trends in its sources and uses of funds should be examined when reviewing financial condition. The table below depicts the major funding sources and funding uses: Sources and Uses of Funds Trends
1993 1992 1991 -------------------------- ---------------------------- -------- Increase/ Increase/ Average (Decrease) % Average (Decrease) % Average Balance Amount Change Balance Amount Change Balance -------- ---------- ------ -------- ---------- -------- -------- (in thousands) Funding Sources Demand deposits: Noninterest-bearing... $ 8,465 $ 299 3.66% $ 8,166 $ 111 1.38% $ 8,055 Interest-bearing...... 38,653 2,070 5.66 36,583 11,813 47.69 24,770 Savings deposits....... 31,495 14,166 81.75 17,329 7,060 68.75 10,269 Time deposits.......... 52,256 (8,152) (13.49) 60,408 (10,201) (14.45) 70,609 Federal funds purchased & other short-term borrowings............ 3,928 3,281 507.11 647 634 4,876.92 13 Other.................. 13,614 1,895 16.17 11,719 757 6.91 10,962 -------- ------- -------- -------- -------- Total Sources....... $148,411 $13,559 10.05% $134,852 $ 10,174 8.16% $124,678 ======== ======= ======== ======== ======== Funding Uses Loans.................. $111,451 $ 8,336 8.08% $103,115 $ 6,545 6.78% $ 96,570 Taxable investment securities............ 25,047 6,264 33.35 18,783 2,884 18.14 15,899 Tax exempt investment securities............ 498 48 10.67 450 (6) (1.32) 456 Federal funds sold & securities purchased u/a resell............ 2,033 (1,890) (48.18) 3,923 812 26.10 3,111 Deposits with banks at interest.............. 375 3 0.81 372 (1,321) (78.03) 1,693 Money market investments........... 84 (888) (91.36) 972 12 1.25 960 Other.................. 8,923 1,686 23.30 7,237 1,248 20.84 5,989 -------- ------- -------- -------- -------- Total Uses.......... $148,411 $13,559 10.05% $134,852 $ 10,174 8.16% $124,678 ======== ======= ======== ======== ========
Deposits--UNB's primary funding source is the deposit base. Total deposits equalled $129 million at December 31, 1993, reflecting a slight gain over $128 million in total deposits at year end 1992. Depository growth in the prior year totalled $10 million, and was achieved through special promotions of core-type depository products. Growth in deposits leveled off in 1993, when investors sought other avenues of investment in an effort to obtain higher returns. UNB experienced growth in investors savings and checking accounts; however, maturing certificates of deposit were difficult to retain in the highly competitive interest rate environment. Certificates of deposit under $100 thousand declined $1.7 million, with the primary reason from investors repeatedly being to achieve higher rates in the nonbanking sector of the financial industry. 75 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION Maturities of time certificates of deposit and other time deposits of $100,000 or more at December 31, 1993, are summarized as follows:
Time Certificates Other Time of Deposit Deposits Total ----------------- ---------- ------ (In Thousands) 3 months or less....................... $1,115 $ 0 $1,115 Over 3 through 6 months................ 3,400 0 3,400 Over 6 through 12 months............... 1,454 107 1,561 Over 12 months......................... 765 338 1,103 ------ ---- ------ Total Deposits $100,000 or more...... $6,734 $445 $7,179 ====== ==== ======
Future growth in deposits is dependent upon UNB's ability to attract and retain funding in an environment where the investor is seeking higher rates and willing to venture out of the insured comfort of the banking system. UNB anticipates several promotional deposit products will be offered during 1994 to assist in retaining maturing certificates as well as attracting new depositors. Short-Term Borrowings--UNB's deposit base is complemented by another source of funds--repurchase agreements. Such instruments are simply business cash management accounts for which securities are pledged. UNB offers this type of account to business clients at their request, but does not actively seek new accounts due to the uninsured nature and required pledging. At December 31, 1993, cash management (repo) accounts totalled $4.7 million, reflecting a gain of $1.5 million over prior year. Outstanding volumes in these accounts can fluctuate significantly from day to day. The following table shows the distribution of UNB's short-term borrowings and the weighted average interest rates thereon. Also, provided pertaining to borrowings, are the maximum amounts, average amounts, and weighted average interest rates for the last three years.
Securities Sold Under Other Short-Term Agreements to Purchase Borrowings ---------------------- ---------------- (In Thousands) Balance at December 31 1993............................. $4,687 $ 0 1992............................. 3,198 0 1991............................. 0 0 Weighted average interest rate at year-end: 1993............................. 3.50% N/A 1992............................. 3.75 N/A 1991............................. N/A N/A Maximum amount outstanding at any month's end: 1993............................. $6,481 $3,000 1992............................. 5,772 0 1991............................. 1,175 0 Average amount outstanding during the year: 1993............................. $3,714 $ 302 1992............................. 647 0 1991............................. 9 4 Weighted average interest rate during the year: 1993............................. 3.59% 3.17% 1992............................. 4.64 0.00 1991............................. 7.29 5.58
Loans--UNB's primary use of funds has historically been meeting the credit needs of our communities through retail lending. The year 1993 proved to be a challenging one, as loan demand was very strong in our 76 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION markets during a time period when investors were looking to other financial intermediaries to invest their funds. Funded by growth in savings accounts, retained earnings, and cash management accounts, the loan portfolio grew $10.2 million in 1993. During the first quarter of the year, $4.7 million in mortgage loans were sold to a secondary market investor. UNB replaced these long-term assets with short-term, more liquid and diversified loans. In addition, normal runoff of approximately $4 million per month was rewritten, bringing total lending volume to approximately $63 million for the year. UNB's growth in 1993 was spread among consumer, leasing, and commercial categories. Retail consumer loans and lease financing, combined, grew $8.3 million, or 17.4 percent in 1993, comparing similarly to $7.3 million, or 18.1 percent in 1992. The tables below illustrate the mix of the loan portfolio and the maturity and repricing frequency: Loan Portfolio
1993 1992 1991 1990 1989 -------- -------- ------- ------- ------- Commercial........................... $ 24,881 $ 18,854 $18,998 $18,998 $17,718 Real Estate Comm'l & Other..................... 15,675 14,872 12,476 10,234 10,845 Residential........................ 21,518 20,493 25,313 27,094 26,444 Construction....................... 357 816 1,095 535 282 Held for Resale.................... 0 5,507 0 0 0 Consumer............................. 32,119 28,852 27,720 27,513 24,909 Leases............................... 23,926 18,893 12,693 11,709 10,746 -------- -------- ------- ------- ------- Total Loans & Mortgage Loans Held for Resale.............................. $118,476 $108,287 $98,295 $96,083 $90,944 ======== ======== ======= ======= =======
Loan Maturity and Less Than After One But Within After Five Repricing Frequency One Year Five Years Years Total - ------------------- --------- -------------------- ---------- -------- Fixed Interest Rate.......... $ 3,768 $53,365 $21,508 $ 78,641 Variable Interest Rate....... 34,888 9,223 536 44,647 ------- ------- ------- -------- Total...................... $38,656 $62,588 $22,044 $123,288 ======= ======= ======= ========
Growth in the loan portfolio in 1994 will be dependent upon the bank's ability to attract and retain deposit accounts. Our communities continue to generate strong loan demand into the first quarter of 1994, and Management anticipates this to continue throughout the year. The disparity between deposit growth and loan demand resulted in a loan to deposit ratio of 90 percent at year-end 1993. On a quarterly basis, Management evaluates the adequacy of the allowance for loan losses with respect to past loan loss experience, current economic conditions, growth and composition of the loan portfolio, credit analyses, and the status of problem and potential problem loans. Included in this quarterly review, is determination of specific allocations for identified loans, as well as general allocations for each category type. 77 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION The following table shows the allocation by category of the allowance for loan losses for each of the past five years:
December 31, 1993 December 31, 1992 December 31, 1991 December 31, 1990 -------------------- -------------------- -------------------- -------------------- Percent Percent Percent Percent of loans of loans of loans of loans in each in each in each in each Balance at End category category category category of Period to gross to gross to gross to gross Applicable To Amount loans Amount loans Amount loans Amount loans - -------------- ---------- --------- ---------- --------- --------- --------- --------- --------- Domestic Loans: Real Estate Loans......... $ 51 32% $ 100 39% $ 75 40% $ 50 39% Commercial, financial and agricultural............. 331 21 375 17 350 19 350 21 Installment (including lease receivables)....... 583 47 325 44 275 41 225 40 Not allocated.............. 224 N/A 261 N/A 210 N/A 177 N/A ---------- ---------- --------- --------- Total................... $ 1,189 100% $ 1,061 100% $ 910 100% $ 802 100% ========== ========== ========= ========= December 31, 1989 ----------------------- Percent of loans in each Balance at End category of Period to gross Applicable To Amount loans - -------------- ---------- ------------ Domestic Loans: Real Estate Loans......... $ 50 42% Commercial, financial and agricultural............. 325 19 Installment (including lease receivables)....... 175 39 Not allocated.............. 102 N/A ---------- Total................... $ 652 100% ==========
The relationship of the allowance and net charge-offs to loan volume is depicted historically in the table below:
1993 1992 1991 1990 1989 ------ ------ ----- ----- ----- Allowance for Loan Losses as percent of Average Loans............................ 1.06% 0.98% 0.92% 0.81% 0.74% Net Loan Charge-Offs as percent of Average Loans.................................... 0.31% 0.17% 0.20% 0.16% 0.45% Provision for Loan Losses as percent of Average Loans............................ 0.43% 0.32% 0.31% 0.31% 0.45% Nonaccrual Loans (000's).................. $1,515 $1,092 $ 392 $ 299 $ 575 Restructured Loans........................ 227 0 0 0 0 Accruing Loans past due 90 days or more... 345 242 418 93 103 ------ ------ ----- ----- ----- Total................................... $2,087 $1,334 $ 810 $ 392 $ 678 ====== ====== ===== ===== ===== Nonaccrual Loans as a percent of Average Loans.................................... 1.36% 1.05% 0.41% 0.31% 0.63%
The allowance for loan losses increased as a percent of average loans from .98 percent in 1992 to 1.06 percent in 1993. Included in the analysis for the adequacy of the allowance was the increase in nonaccrual loans from $1.1 million at December 31, 1992 to $1.5 million at December 31, 1993. No interest income was recorded on such loans during 1993 or 1992; however, interest income which would have been recorded under original terms equalled $74 thousand in 1993 and $44 thousand in 1992. At December 31, 1993, all nonaccrual loans were secured. The increase in nonaccruals, coupled with the loan growth over the past two years, was a determining factor for Management to increase the provision for loan losses to .43 percent of average loans as compared with .32 percent provisioned in 1992. At December 31, 1993, UNB had $3.3 million in loans for which payments presently are current, but the borrowers are experiencing financial difficulties. Those loans are subject to ongoing management attention, and their classification is reviewed on a quarterly basis. The allowance for loan losses is charged when Management determines that the prospects of recovery of the principal of a loan or lease have significantly diminished. Subsequent recoveries, if any, are credited to the allowance. During 1993, $369 thousand in gross charge-offs were made, and $24 thousand in recoveries occurred. Net loan charge-offs equalled .31 percent of average loans, comparing higher than .17 percent in 1992. The following table shows the charge-offs and recoveries by loan category for the past five years: 78 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION SUMMARY OF LOAN LOSS EXPERIENCE
1993 1992 1991 1990 1989 ------ ------ ---- ---- ---- Allowance for Loan Losses Balance January 1........ $1,061 $ 910 $802 $652 $643 Charge-Offs: Commercial....................................... 43 44 26 70 275 Real Estate...................................... 137 30 56 0 17 Installment...................................... 163 66 40 53 90 Lease Financing.................................. 26 70 82 58 62 ------ ------ ---- ---- ---- Total Charge-Offs.............................. $ 369 $ 210 $204 $181 $444 Recoveries: Commercial....................................... 4 11 0 2 0 Real Estate...................................... 0 0 0 4 0 Installment...................................... 13 9 5 10 14 Lease Financing.................................. 7 16 7 15 19 ------ ------ ---- ---- ---- Total Recoveries............................... $ 24 $ 36 $ 12 $ 31 $ 33 ------ ------ ---- ---- ---- Net Charge-Offs.................................... $ 345 $ 174 $192 $150 $411 ------ ------ ---- ---- ---- Provision for Loan Losses.......................... $ 473 $ 325 $300 $300 $420 ------ ------ ---- ---- ---- Allowance for Loan Losses Balance December 31...... $1,189 $1,061 $910 $802 $652 ====== ====== ==== ==== ====
The Corporation will be required to adopt FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan," in the first quarter of fiscal year ending December 31, 1995. UNB has determined that the effect of such implementation will not be material to the financial position and results of operations. Investments--As of December 31, 1993, the book values of investment securities was $20 million, reflecting a decrease of $3.7 million from the prior year. This decrease was a result of UNB's aggressive loan growth, which absorbed all new depository funds as well as some of the funds generated by investment sales, calls, and maturities. The mix within the portfolio remains consistent with last year's mix, reinforcing Management's commitment to keep the portfolio in high quality and liquid, with the majority of investments made in Treasuries or Government Agencies. The following table sets forth the carrying amount of the investment portfolio in each of the past five years:
1993 1992 1991 1990 1989 ------- ------- ------- ------- ------- U.S. Treasury Securities............... $ 3,150 $ 2,124 $ 1,259 $ 755 $ 105 Other U.S. Gov't Securities*........... 15,052 18,895 9,168 5,959 5,080 State and Municipal.................... 200 550 550 450 620 All Other Securities................... 1,606 2,171 5,490 8,608 7,731 ------- ------- ------- ------- ------- Total Investments.................... $20,008 $23,740 $16,467 $15,772 $13,536 ======= ======= ======= ======= =======
- -------- * Other U.S. Gov't Securities includes all holdings of mortgage-backed securities issued by FNMA and FHLMC. In preparing for implementation of FASB STATEMENT No. 115 in the first quarter of 1994, Management updated Investment and Asset/Liability Policies to incorporate mark-to-market accounting issues. Concurrently, Management reviewed the investment portfolio and made the decision to sell $2.2 million in securities in order to reposition the portfolio for future needs. Management's continuous review of the Corporation's ability to hold securities to maturity will insure compliance with financial accounting standards as well as liquidity to fund the Bank's needs. Future changes in Held to Maturity and Available for Sale mix will be achieved through the classification of new securities at the time of purchase; transfers out of Held to Maturity would be rare. 79 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION However, the Revenue Reconciliation Act of 1993 (S)475 requires classification of securities for tax purposes; Management has deemed all securities to be Not Held for Sale. This necessitates that some securities have a dual classification: 1) Available for Sale under the definition of FASB 115 and 2) Not Held for Sale under the definition of (S)475. The following table sets forth the contractual maturities of investment securities at December 31, 1993 and their respective weighted average tax equivalent yields.
After 1 Year, After 5 Years, After Within 1 Year Within 5 Years Within 10 Years Ten Years -------------- --------------- ---------------- ------------ Amount Yield Amount Yield Amount Yield Amount Yield ------- ------ -------- ------ -------- ------- ------ ----- U.S. Treasury........... $ 500 5.45% $ 1,100 4.39% $ 1,550 4.81% -- -- Gov't Agency............ -- -- 11,096 5.50 3,920 6.71 $ 36 9.50% State & Municipal....... 100 9.55 100 10.98 -- -- -- -- Other Securities........ 250 8.62 550 7.32 -- -- 806 7.58 ------ ------ -------- ------ -------- ------ ---- ---- Total Investments....... $850 6.86% $12,846 5.55% $5,470 6.17% $842 7.66% ====== ====== ======== ====== ======== ====== ==== ====
Liquidity and Interest Rate Sensitivity--As with any business, the need to insure financial stability is foremost in management's decisions. This includes contingency financing to satisfy any foreseen or unforeseen demand, as well as, counteracting any adverse effect interest rate movements may cause. With this directive, UNB's Management strives to maintain the most cost-effective funding while preserving the earning power of its asset base. Core deposits for 1993 averaged $126 million, giving UNB a strong springboard for loan growth. This growth was further funded by the runoff of called and matured securities. Additional growth or an unexpected reduction in deposits can be financed by various other means including federal fund lines, repurchase agreements, Federal Home Loan Bank, and Federal Reserve Bank borrowings. These instruments created a borrowing potential of approximately $21 million at December 31, 1993. UNB can attract, but does not actively seek, brokered deposits. As of December 31, 1993, UNB had seven brokered certificates of deposit totalling $693 thousand, which were issued in 1991 during an advertised promotion of normal bank certificates of deposit. Each brokered certificate was less than $100 thousand, and no such deposits were issued in 1992 or 1993. Liquidity analyses are presented every month to the Asset and Liability Management Committee (ALCO) with a 30 and 90 day measurability. As of December 31, 1993, UNB's 30 day ratio of available funds to net needs was 1.31 percent and the 90 day ratio was 1.19 percent. These compared with 2.01 percent and 1.80 percent, respectively, at December 31, 1992. With the strong loan demand and the downward trend of the ratios, Management has elected to modify reporting criteria and monitor liquidity on a weekly basis to provide prudent guidance for future liquidity needs. Earning power for the bank is mainly attained through the net interest margin or the difference between the cost of funds and earning asset yields. This can be controlled by volume, rate, and repricing frequency; usually a blend is used to obtain maximum earnings with minimal risk. Though risk is inherent in a volatile rate environment, assumptions can be made and forecasts run to assist management in making prudent decisions to reduce risk. UNB's ALCO has the responsibility of monitoring and adjusting volume and rate mix to ensure the Corporation's continued profitability and adequate capitalization. The ALCO has many tools which it can utilize to track, predict, and simulate trends and changes to volumes and rates. At its monthly meetings, the ALCO reviews the gaps, or the spread between asset and liability pricing at 30 days, 90 days, and one year. Management has maintained a negative gap (more liabilities repricing than assets in a given period of time) thus taking full advantage of the downward rate movement. Exemplifying this strategy is the one year gap which was $(33,393) as of December 31, 1992 and $(60,535) at year-end 1993. 80 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION Balance sheet gaps (volume) cannot solely be used to control interest rate sensitivity. Interest rates themselves must be monitored and adjusted to maintain an acceptable return on assets. Management's ability to forecast and simulate rate movements allows changes to be made quickly and advantageously. With the economists predicting a slight upward movement in rates for 1994, Management is prepared to monitor these effects on earnings and to implement changes in the balance sheet and rates to insure UNB's continued success. Interest Sensitivity Gap Analysis December 31, 1993
After 1 After 5 0-3 3-12 But Within But Within After Months Months 5 Years 10 Years 10 Years Assets: -------- -------- ---------- ---------- -------- Investment Securities....... $ 4,864 $ 5,263 $ 9,085 $ 204 $ 592 Loans: Real Estate............... 1,862 2,673 7,215 9,785 16,015 Commercial................ 18,204 3,624 950 44 2,059 Installment............... 3,762 8,010 13,213 6,032 1,102 Leases.................... 129 785 23,012 0 0 Other Interest-Bearing...... 1,633 -------- -------- -------- ------- ------- Total Earning Assets.... $ 30,454 $ 20,355 $ 53,475 $16,065 $19,768 ======== ======== ======== ======= ======= Liabilities: Deposits: NOW & MMDA................ $ 39,551 Savings................... 33,763 Time + 100M............... 1,115 4,960 1,103 All Other Time............ 10,050 17,218 12,606 150 27 Repurchase Agreements..... 4,687 0 0 0 0 Other Noninterest-Bearing. 0 0 0 0 0 -------- -------- -------- ------- ------- Total Interest-Bearing Liabilities............ $ 89,166 $ 22,178 $ 13,709 $ 150 $ 27 ======== ======== ======== ======= ======= Sensitivity Gap........... (58,712) (1,823) 39,766 15,915 19,741 Cumulative Gap............ (58,712) (60,535) (20,769) (4,854) 14,887 Gap Ratio................. 0.34 0.92 3.90 107.10 732.15 Cumulative Gap Ratio...... 0.34 0.46 0.83 0.96 1.12
Table conservatively based upon calls in Investment Portfolio. Capital Resources--UNB's equity capital grew $1.5 million in 1993, representing internal capital generation of 13.4 percent.Over the past five years, equity capital grew at an average rate of 8.2 percent, with all growth funded internally. Regulation of UNB falls under the joint responsibility of the Federal Reserve Bank of Philadelphia for the Corporation, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation for the bank, and the Pennsylvania Department of Banking for both.Such regulatory authorities monitor capital growth, sufficiency, and leverage position. UNB's regulatory capital ratios for the past three years are as follows:
1993 1992 1991 ----- ----- ----- Capital Leverage........................................ 8.26% 7.52% 7.58% Tier I Capital/Risk Weighted Assets..................... 10.72 10.42 10.10 Tier 1 and Tier 2 Capital/Risk Weighted Assets.......... 11.76 11.45 11.04
At December 31, 1993, all UNB capital ratios exceeded minimum required levels. Regulatory agencies are currently in the process of revising equity capital guidelines to include recognition of unrealized gains and losses on investment securities to be included in equity capital on the Corporation's statement of condition beginning in the first quarter of 1994. It is anticipated that initial adoption of mark-to-market accounting will not materially affect the Corporation's capital adequacy ratios. However, Management does concur with banking industry concerns regarding the volatility of the capital base of the banking industry as a whole, exposed by major swings in interest rates and/or stock price fluctuations. UNB closely monitors the quality of the investment portfolio and will act prudently to protect the capital adequacy of the Corporation. 81 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations for the three month period ended March 31, 1994 compared to March 31, 1993: Net income for the three month period ended March 31, 1994 totalled $418 thousand, representing a 1.14 percent annualized return on average assets. Net profits for the comparable period last year equalled $612 thousand, or 1.41 percent return on assets; however, prior year profitability included $157 thousand net gain on the sale of mortgage loans. Excluding this prior period gain, profitability levels have declined from 1.23 percent return on assets to 1.14 percent. This differential is directly related to increased noninterest expenditures related to expanded branch facilities and overall increased salary and benefit costs. Reduction in interest rates paid on deposits afforded UNB a 3.4 percent increase in net interest income over the prior year period. The average rate paid on deposits during the first quarter of 1994 equalled 2.99 percent, as compared with 3.88 percent paid in the first quarter of 1993. The gross earning asset base declined $2.6 million, or 1.9 percent as compared with prior year. These two factors combined to result in an increase in the annualized net interest margin from 5.50 percent in 1993 to 5.66 percent in 1994; thus, an indication of continued strength in UNB's basic earning power. Noninterest expenditures increased $140 thousand, or 11 percent over the comparable period last year. During 1993, UNB opened a new branch facility in the Chambersburg area to complement the downtown Headquarters Office, and relocated the Huntingdon Plaza Office into a supermarket branch location. Staffing and facilities costs to accommodate such expansion is included in the current quarter expenditures; however, growth potential and related profitability to be gained by these strategic locations are yet to be fully realized. Financial Condition: The banking industry continues to be stagnant in deposit growth due to unattractive interest rates for the investor. UNB's deposit base declined $1.3 million during the three month period ended March 31, 1994, and business cash management accounts (repurchase agreements) also declined $1.3 million. During the first quarter of 1994, UNB curtailed lending volume by $2.5 million due to the lack of growth in the deposit base. UNB experienced strong loan growth of 9.4 percent in 1993 and 10.2 percent in 1992. Deposit growth kept pace with loan growth in 1992 and through the first nine months of 1993; however, during the fourth quarter of 1993, public funds deposits declined and investors sought other avenues of investment in an effort to obtain higher returns. This trend has continued into 1994, as UNB offered two special promotion certificates of deposit to retain existing deposits and attract new accounts, but deposits continued to move out to nonbanking entities offering higher rates of return to investors. Equity capital increased $239 thousand during the first quarter of 1994, affording UNB enhanced capital protection on a smaller volume of assets. The primary capital to average assets ratio increased from 8.87 percent one year ago to 9.32 percent currently. All three measures of regulatory capital adequacy reflect improvement over December 31, 1993 ratios, as follows:
March 31, 1994 December 31, 1993 -------------- ----------------- Capital Leverage........................... 8.46% 8.26% Tier 1 Capital to Risk Weighted Assets..... 11.12 10.72 Tier 1 and Tier 2 Capital to Risk Weighted Assets.................................... 12.24 11.76
Equity capital at March 31, 1994 included a charge of $80 thousand for net unrealized losses in investment securities categorized as available-for-sale in the adoption of FASB No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Asset quality remains good, as evidenced by a low net loan charge off level of .03 percent of average loans. The allowance for loan losses has been augmented through provisions from earnings to increase the reserve level from 1.05 percent of total loans last year to 1.06 percent at March 31, 1994. Nonaccrual loans as a percent of average loans have declined from 1.36 percent at December 31, 1993 to 1.23 percent at March 31, 1994. UNB aggressively works the delinquent accounts to maintain past due loans below 2 percent of total loans. At March 31, 1994, past due accounts equalled 1.24 percent of average total loans. 82 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash flows from operations were $771 thousand for the three month period ended March 31, 1994 as compared with cash generation of $850 thousand in the comparable period of 1993. Net cash provided by investing activities equalled $914 thousand in 1994, as compared with cash used in investing activities of $3.6 million in 1993. Proceeds from sales and maturities of investment securities and reduction in loan volume created cash generation in 1994, contrasting strong loan growth and less than half the proceeds collected by maturing securities in 1993. Decreases in deposits and short term borrowings resulted in cash being used in financing activities of $2.8 million in 1994, also contrasting cash provided by such activities of $1.0 million in 1993. UNB is optimistic that as interest rates inch upward, investors will return to insured deposits for investment. On March 25, 1994, UNB signed a definitive agreement to merge the Corporation into FCFC. Total assets of the combined entity will exceed $2.0 billion, affording our bank subsidiary, Unitas National Bank, and active nonbank subsidiary, Unitas Mortgage Corporation, excellent long term growth and profitability potential. We are confident that this partnership will open significant opportunities for these subsidiaries as they become independent affiliates of FCFC. Management of UNB anticipates acquisition costs to UNB in excess of $200 thousand during 1994; however, Management is not aware of forseeable future events which would otherwise materially alter the profitability or safety and soundness of UNB. We expect certain cost savings in noninterest expenditures subsequent to the merger. 83 REGULATION AND SUPERVISION FCFC FCFC is a bank holding company registered as such with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). As a bank holding company, FCFC 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 FCFC and its subsidiaries. The Bank Holding Company Act and Regulation Y of the Federal Reserve Board require every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire direct or indirect ownership or control of more than 5% of the outstanding voting shares or substantially all of the assets of a bank or merge or consolidate with another bank holding company. The Federal Reserve Board may not approve acquisitions by FCFC of such percentage of voting shares or substantially all the assets of any bank located in any state other than Pennsylvania unless the laws of such state specifically authorize such an acquisition. The Bank Holding Company Act generally prohibits a bank holding company from engaging in a nonbanking business or acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any nonbanking corporation, such as Reliable, subject to certain exceptions, the principal one of which is applicable where the business activity in question is determined by the Federal Reserve Board to be so closely related to banking or to managing or controlling banks as 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 such as FCFC. The Federal Reserve Board has issued risk-based capital adequacy guidelines which provide for a standard designed principally as a measure of credit risk. These guidelines require that: (1) at least 50% of a banking organization's total capital ("Total Capital") be common and certain other "core" equity capital ("Tier 1 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) the minimum leverage capital ratio, Tier 1 Capital to total assets, be 3% for banking organizations that do not anticipate significant growth and have well-diversified risk (including no undue interest rate risk exposure), excellent asset quality, high liquidity and good earnings. The minimum leverage capital ratio for other banking organizations is generally expected to be 4-5%, depending on their particular condition and growth plans. The table below presents FCFC's historical and pro forma capital position relative to its minimum capital requirements:
Historical Pro Forma(1) At March 31, 1994 At March 31, 1994 ------------------- ------------------- Percentage Percentage Amount of Assets Amount of Assets -------- ---------- -------- ---------- (Dollars in Thousands) Tier 1 Capital.......................... $170,426 15.96% $213,304 16.98% Risk-Based Requirement.................. 42,723 4.00 50,242 4.00 Total Capital........................... 184,207 17.25 229,142 18.24 Risk-Based Requirement.................. 85,445 8.00 18,331 8.00 Leverage Capital........................ 170,426 8.77 213,304 9.50 Minimum Leverage Requirement............ 58,360 3.00 67,333 3.00
84 - -------- (1) Assuming that FCFC, United and Reliable had been combined as of March 31, 1994, and that pooling of interests accounting had been used to record the business combinations. If FCFC and Reliable only were combined, the pro forma Tier I Capital ratio would be 17.68%, the pro forma Total Capital ratio would be 18.96% and the pro forma Leverage ratio would be 9.58%. Reliable Reliable is presently a unitary savings and loan holding company. Its only subsidiary, Reliable Savings Bank, is a Qualified Thrift Lender ("QTL") because more than 65% of its portfolio assets (as defined in the law) are invested in residential mortgages, and certain mortgage backed securities and housing related assets such as Federal Home Loan Bank stock and stock issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. As a unitary savings and loan holding company, Reliable and any subsidiary it might create are not restricted to the statutorily prescribed list of permissible activities found in the Savings and Loan Holding Company Act and in certain regulations of the predecessor of the OTS, and the Savings and Loan Holding Company Act imposes no limits on their direct or indirect non- savings institutions operations. Its stock may be acquired by a bank holding company such as FCFC, a savings and loan holding company or any ordinary corporation. If Reliable were to acquire a second savings association and operate it as a separate subsidiary, it would become a multiple savings and loan holding company and its activities would be confined to a statutorily prescribed list of activities regarded as closely related to the savings association business. If Reliable Savings Bank were to lose its QTL status, thereafter Reliable would be regulated and supervised by the OTS as a bank holding company, as described above for FCFC, with each savings institution subsidiary being treated as a bank for this purpose. Upon consummation of the Reliable Merger, FCFC will be not only a bank holding company subject to regulation and supervision by the Federal Reserve Board under the Bank Holding Company Act as described above, but also a savings and loan holding company subject to regulation and supervision by the OTS under the Savings and Loan Holding Company Act, and by the Pennsylvania Department of Banking under the Pennsylvania Savings Association Code of 1967, as amended. While this dual regulation and supervision will increase FCFC's cost of compliance with federal and state banking laws and regulations, it is not expected to have a significant adverse effect on its operations or financial condition. Subsidiary Banks and Reliable Savings Bank The Subsidiary Banks, other than Deposit, PBTC and Central are subject to the supervision of and are regularly examined by the Comptroller of the Currency. In addition, because such banks are members of the Federal Reserve System, they are also subject to examination by that System. Deposit, PBTC and Peoples are Pennsylvania-chartered banks and are not members of the Federal Reserve System. They are subject to the supervision of and regularly examined by the Pennsylvania Department of Banking and the FDIC and are subject to certain regulations of the Federal Reserve Board. Because Central is a Pennsylvania- chartered bank and a member of the Federal Reserve System, it is subject to the supervision of and is regularly examined by the Pennsylvania Department of Banking and the Federal Reserve System. Reliable Savings Bank is a Pennsylvania-chartered savings association and is subject to the supervision of and is regularly examined by the Pennsylvania Department of Banking and the OTS. All the Subsidiary Banks are members of the FDIC and Reliable Savings Bank is a member of the Savings Association Insurance Fund of the FDIC and, as such, are subject to examination by the FDIC. The areas of operation of the Subsidiary Banks and Reliable Savings Bank which are 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 and truth-in-savings disclosure, permissible types of loans and investments, trust operations, mergers and acquisitions, issuance of securities, 85 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 or national bank or a savings association located in Pennsylvania may establish branches anywhere in the state. In addition, the Comptroller, the FDIC, the Federal Reserve Board and the OTS have issued to national banks, state nonmember banks, state member banks and savings associations, respectively, capital adequacy and risk-based capital guidelines similar to those adopted by the Federal Reserve Board for bank holding companies as described above. The Subsidiary Banks and Reliable Savings Bank are in compliance with all such guidelines. Reciprocal Interstate Banking As stated above, under the Bank Holding Company Act 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) (referred to herein as the "Reciprocal Interstate Banking Law") 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 May 31, 1994 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 reciprocal interstate law is applicable to savings associations and savings and loan holding companies. It is difficult to determine the precise effects that reciprocal interstate banking will have on FCFC, Reliable and the Subsidiary Banks, but it is likely that the number of potential buyers for Pennsylvania banks and bank holding companies will increase. The reciprocal interstate laws also permit Pennsylvania bank holding companies and Pennsylvania savings and loan holding companies that desire to expand outside Pennsylvania to acquire banks, savings associations, bank holding companies and savings and loan holding companies located in jurisdictions with which Pennsylvania has reciprocity. EFFECTS OF GOVERNMENTAL POLICIES The business and earnings of FCFC and Reliable 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 banks and savings institutions from the Federal Reserve System and changes in reserve requirements on 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 FCFC, Reliable or the Subsidiary Banks. 86 COMPARISON OF FCFC COMMON STOCK AND RELIABLE COMMON STOCK General Upon consummation of the Merger, the stockholders of Reliable, a Delaware corporation, will become shareholders of FCFC, a Pennsylvania corporation. Differences between the Delaware General Corporation Law (the "DGCL") and the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), as well as differences between Reliable's certificate of incorporation (the "Reliable Certificate") and by-laws (the "Reliable By-Laws"), on the one hand, and FCFC's articles of incorporation (the "FCFC Articles") and by-laws (the "FCFC By- Laws") on the other, will result in changes in the rights of the Reliable shareholders when they become shareholders of FCFC. Set forth below is a description of certain material provisions which affect the rights of holders of FCFC Common Stock and Reliable Common Stock, based on the BCL, the DGCL and the respective charter documents and By-Laws of FCFC and Reliable as in effect on the date hereof. This description does not purport to be a complete statement of the rights of holders of Reliable Common Stock and FCFC Common Stock, and is qualified in its entirety by reference to the BCL, the DGCL and the Reliable Certificate, the Reliable By-Laws, the FCFC Articles and the FCFC By-Laws. Voting Rights General. Holders of Reliable Common Stock and holders of FCFC Common Stock are each entitled to one vote for each share held on all matters submitted to a shareholder vote. Except where a greater vote is required by law or by the FCFC Articles or By-Laws, or the Reliable Certificate or By-Laws (see "Voting Rights--Mergers, Consolidations, Etc.", "Voting Rights--Charter Amendments" and "Voting Rights--By-Law Amendments" below), any matter submitted to a vote of the shareholders at a duly organized meeting of the shareholders may be passed by the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon. Election of Directors. Nominees for the Board of Directors of FCFC must receive the votes of a majority of the shares voted in order to be elected whereas nominees for Reliable's Board are elected by a plurality of the votes cast. The FCFC and Reliable By-Laws provide that their respective Boards of Directors shall be divided into three classes, with one class to be elected at each annual meeting of shareholders and each class to serve for a term of three years. The FCFC and Reliable By-Laws provide that vacancies on the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled by a majority vote of the remaining members of the Board, and that each person so appointed will be a director until the expiration of the term of office of the class of directors to which he was appointed, except that each person elected to fill a vacancy on the Reliable Board resulting from an increase in the number of directors shall serve only until the next annual meeting of the shareholders. Mergers, Consolidations, Etc. The FCFC Articles provide that no merger, consolidation or liquidation or dissolution of FCFC nor any action that would result in the sale or other disposition of all or substantially all of the assets of FCFC shall be valid unless first approved by the affirmative vote of the holders of at least 75% of the outstanding shares of FCFC Common Stock; provided, however, that in a merger or consolidation, no vote of the shareholders is required if the outstanding FCFC Common Stock is increased by less than 100% as a result of the merger or consolidation. The Reliable Certificate provides that certain business combinations (including mergers, sales of assets, and sales or issuances of securities) with any interested shareholder (any person who, directly or indirectly, owns or controls more than 15% of the voting power of the Reliable Common Stock), plans of liquidation or dissolution proposed by any interested shareholder, any loans, guarantees or pledges by Reliable for the benefit of any interested shareholder, and any recapitalization or securities reclassification or other transaction which would increase the proportionate interest in Reliable of any interested shareholder, must be approved by the Reliable Board and by the affirmative vote of the holders of at least two-thirds of the voting power of the then outstanding shares of Reliable Common Stock who are not interested shareholders. Such 87 supermajority approval is not required, however, if the transaction is approved by a majority of directors unaffiliated with the interested shareholder or meets minimum price requirements as to the consideration paid by the interested shareholder. The Reliable Certificate contains two further restrictions regarding ownership and acquisition of Reliable Common Stock. Reliable may not acquire Common Stock from any person who owns 5% or more of the outstanding Common Stock (or any affiliate of such person) unless (i) the acquisition is approved by the Reliable Board and a majority of the Reliable shareholders (other than the proposed seller) or (ii) the Common Stock to be acquired has been owned by the proposed seller for at least two years. In addition, no person may acquire or offer to acquire beneficial ownership of more than 10% of the Common Stock; any shares in excess of 10% owned by any person shall not be counted as shares entitled to vote, and such person shall not be able to vote such shares. Charter Amendments. Under the BCL, amendments to the FCFC Articles may be proposed only by its Board of Directors. Generally, amendments must be approved by the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon and, if any class or series of capital stock is entitled to vote as a class, the affirmative vote of a majority of the votes cast in each such class vote. However, under the FCFC Articles, the approval of the holders of at least 75% of the outstanding shares of FCFC Common Stock is required to amend the provisions of the FCFC Articles related to the approval of mergers or similar transactions. Generally, to amend a corporation's certificate of incorporation, the DGCL requires approval first by the Board of Directors and then by the holders of a majority of the outstanding shares entitled to vote thereon and a majority of the outstanding shares of each class entitled to vote thereon as a class. However, the Reliable Certificate provides that the affirmative vote of the holders of at least two-thirds of the outstanding shares of capital stock of Reliable entitled to vote generally in the election of directors is required to amend or rescind the provisions of the Reliable Certificate related to (i) the rights of holders of Reliable Common Stock, (ii) business combinations, (iii) the Board of Directors, (iv) the prohibition of shareholder action taken without a meeting, (v) the method for amending the Reliable By-Laws and (vi) indemnification of directors and officers. By-Law Amendments. The FCFC By-Laws may be amended by the affirmative vote of the holders of 80% of the shares of FCFC Common Stock. The FCFC By-Laws may also be amended by the affirmative vote of a majority of the FCFC Board of Directors at any regular or special meeting of the Board subject to the power of the FCFC shareholders to change such action by the affirmative vote of the holders of 80% of the outstanding FCFC Common Stock. The Reliable Certificate authorizes the Reliable Board to make, alter or repeal the Reliable By-Laws, subject to the power of the Reliable shareholders to change such action. In addition, the affirmative vote of the holders of two- thirds of all votes entitled to be cast in the election of directors is required to alter or repeal provisions in the Reliable By-Laws relating to (i) the number, term, nomination and removal of directors and (ii) the calling of special meetings of the shareholders. Procedures to Bring Business Before a Meeting Both the FCFC and Reliable By-Laws limit the right to call special meetings to the Board of Directors. The Reliable By-Laws provide that in order for a stockholder to bring business (other than the election of directors) properly before an annual shareholders' meeting, that shareholder must give written notice thereof to the Secretary of Reliable not less than 120 days prior to the anniversary of the date of the annual shareholders' meeting in the preceding year. Any such notice must contain certain specified information concerning the shareholder and the business to be brought before the annual meeting of shareholders in order to be valid. A similar notice provision applies to any attempt by a Reliable shareholder or an FCFC shareholder to nominate any person as a director and certain disclosures concerning any potential nominee is also required. 88 Liabilities and Indemnification of Directors and Officers The FCFC By-Laws provide that FCFC shall indemnify any director, officer and/or employee or any former director, officer and/or employee who was or is a party to, or is threatened to be made a party to, or is called as a witness in connection with, any threatened, pending or completed action, suit or proceeding by reason of the fact that such person is or was a director, officer and/or employee of FCFC, or is or was serving at the request of FCFC as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. In the case of an action or suit by or in the right of FCFC, no indemnification shall be made in respect of a claim, issue or matter as to which such person shall have been adjudged to be liable for misconduct in the performance of his duty to FCFC. Except as may be otherwise ordered by a court, there shall be a presumption that any officer, director and/or employee is entitled to indemnification in the foregoing circumstances unless either a majority of the directors not involved in the proceedings or, if there are less than three such directors, then the holders of one-third of the outstanding shares of FCFC, determine that the person is not entitled to such presumption. In the event of any such determination, a written opinion as to whether or not the parties involved are entitled to indemnification shall be requested from independent counsel. Also as permitted by the BCL, the FCFC By-Laws provide that except as may be specifically provided by law, a director of FCFC will not be personally liable for monetary damages with respect to any action taken, or any failure to act, unless such director has breached or failed to perform the duties of his office under Pennsylvania law relating to standard of care and justifiable reliance and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Any amendment or repeal of this provision which has the effect of increasing director liability will operate prospectively only and will not affect any action taken, or any failure to act, prior to the adoption of such amendment. The Reliable Certificate contains a provision eliminating the liability of directors of Reliable for monetary damages except for liability (i) for any breach of the director's duty of loyalty to Reliable or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL (which relates to the unlawful payment of dividends or an unlawful stock purchase or redemption) or (iv) for any transaction from which a director derived an improper personal benefit. Any repeal or modification of this provision by the Reliable shareholders will not adversely affect any right or protection of a director of Reliable existing thereunder at the time of such repeal or modification. The Reliable Certificate provides that Reliable will indemnify any director, officer, employee or agent to the fullest extent now permitted by law (a) at the time of the act or omission to be indemnified against or (b) at the time of such indemnification, whichever may be broader and more inclusive. Expenses incurred by a director or officer in defending or investigating a threatened or pending action, suit or proceeding may be paid by Reliable in advance of the final disposition of that action, suit or proceeding, upon receipt of an undertaking by or on behalf of that director or officer to repay that amount if it is ultimately determined that he is not entitled to be indemnified by Reliable. Qualifications for Directors The FCFC By-Laws require that directors who have never served as such before December 31, 1988 and who are elected after such date must maintain direct, indirect or beneficial ownership of at least 2,500 shares of FCFC Common Stock. In addition, directors of FCFC elected after December 31, 1988 who have never served as directors before such date are not eligible for reelection when age 72 or over. The Reliable By-Laws prohibit the appointment, election or reelection of a director who is more than 75 years of age. Each member of the Reliable Board must resign at the annual meeting of the shareholders immediately following his 75th birthday. 89 "Anti-Takeover" Provisions In addition to certain provisions of their respective charter documents and By-Laws which may be considered to be "anti-takeover" in nature, both FCFC and Reliable are subject to certain statutory provisions that may discourage takeovers or tender offers. The BCL. The BCL includes provisions that, among other things, (i) strip voting rights from "control shares", (ii) require disgorgement of short-term profits upon disposition of stock by certain controlling persons and (iii) permit directors to oppose a tender offer or other offer for securities of FCFC on the basis of factors other than economic benefit to shareholders. The BCL also requires approval of certain extraordinary corporate transactions by a majority vote of all outstanding shares other than those held by "interested shareholders" (generally, a beneficial owner of more than 20% of the outstanding stock entitled to elect directors). Such transactions include mergers, consolidations, share exchanges or sale of assets with interested shareholders, or corporate divisions, voluntary dissolutions and reclassifications of corporate securities in which interested shareholders receive treatment different from other shareholders. However, no such shareholder approval will be required for certain transactions, including a transaction (i) that has been approved by a majority vote of the board of directors, excluding directors who were either nominated for election by the interested shareholder and first elected as director within two years of the date of the vote on the proposed transaction or who are directors or officers of, or who have a material equity interest in the interested shareholder or (ii) in which the consideration to be received by the shareholders for shares of any class of which shares are owned by the interested shareholder is not less than the highest amount paid by the interested shareholder in acquiring shares of the same class. The BCL prohibits a corporation from engaging, except in certain instances, in any business combination with any interested shareholder of the corporation other than (i) a business combination approved by the board of directors of the corporation prior to the date such shareholder becomes an interested shareholder, (ii) by the affirmative vote of all of the holders of the outstanding common stock of the corporation, (iii) if the consideration payable to shareholders of the corporation in the business combination complies with certain fair price conditions specified by Pennsylvania law, by holders of a majority of the voting shares (excluding the shares held by the interested shareholder or any associate or affiliate thereof) at a meeting called for such purpose, no earlier than three months after the interested shareholder becomes the beneficial owner of at least 80% of the corporation's voting shares, or (iv) if the interested shareholder waits at least five years after its share acquisition date and (a) obtains a majority of the votes of the shareholders entitled to vote (excluding the shares held by the interested shareholder or any associate or affiliate thereof) or (b) the business combination complies with certain fair price conditions specified by Pennsylvania law and is approved by the shareholders. The DGCL. Section 203 of the DGCL provides that any person who acquires or controls, directly or indirectly, 15% or more of a corporation's voting stock (thereby becoming an "interested stockholder") may not engage in a "business combination" with that corporation for a period of three years following the date that person became an interested stockholder, unless (i) the board of directors of that corporation approved, prior to such date, either the business combination or the transaction that resulted in that person's becoming an interested stockholder, (ii) upon consummation of the transaction that resulted in that person's becoming an interested stockholder, that person owns at least 85% of that corporation's voting stock outstanding at the time the transaction commenced (excluding for purposes of determining the number of shares outstanding shares owned by persons who are directors and also officers of that corporation and shares owned by employee stock plans in which participants do not have the right to determine confidentially whether shares will be tendered in a tender or exchange offer) or (iii) the business combination is approved by the board of directors and authorized by the affirmative vote (at an annual or special meeting and not by written consent) of the holders of at least 66-2/3% of the outstanding shares of voting stock not owned by the interested stockholder. 90 A "business combination" is defined broadly by the DGCL to include (i) mergers or consolidations of a corporation with an interested stockholder, (ii) sales or other dispositions of 10% or more of the assets of a corporation with or to an interested stockholder, (iii) certain transactions resulting in the issuance or transfer to an interested stockholder of any stock of a corporation or its subsidiaries, (iv) certain transactions which would result in increasing the proportionate share of the stock of a corporation or its subsidiaries owned by an interested stockholder and (v) receipt by an interested stockholder of the benefit (except proportionately as a stockholder) of any loans, advances, guarantees, pledges or other financial benefits from, by or to a corporation or any of its majority-owned subsidiaries. Dividend Reinvestment Plan FCFC currently maintains a dividend reinvestment plan in order to provide its shareholders with a simple and convenient method of investing cash dividends and voluntary contributions of up to $10,000 per quarter in additional shares of FCFC Common Stock. The price per share is equal to 95% of the then current fair market value of FCFC Common Stock. The dividend reinvestment plan relates only to dividends paid on (and further investment in) FCFC Common Stock. Following the sale of any dividend reinvestment plan shares by an FCFC shareholder, such shareholder is not eligible to purchase additional shares pursuant to the plan for a period of six months. No such dividend reinvestment plan is maintained by Reliable. Reliable shareholders who receive shares of FCFC Common Stock in exchange for their shares of Reliable Common Stock will be eligible to participate in the FCFC dividend reinvestment plan on the Effective Date of the Merger. Miscellaneous There are no sinking fund provisions, conversion rights or redemption provisions applicable to Reliable Common Stock or FCFC Common Stock, and holders of fully paid shares of Reliable Common Stock or FCFC Common Stock are under no liability for further calls or assessments. Holders of Reliable Common Stock and FCFC Common Stock are entitled to dividends when, as and if declared by their respective Boards of Directors out of funds legally available therefor. Neither the holders of Reliable Common Stock nor the holders of FCFC Common Stock have preemptive rights to subscribe for additional shares of Reliable Common Stock or FCFC Common Stock, as the case may be, which may be issued from time to time. On liquidation, dissolution or winding up, whether voluntary or involuntary, the holders of Reliable Common Stock and FCFC Common Stock are entitled to share ratably in the assets of Reliable or FCFC, as the case may be, after all liabilities of such corporation have been satisfied. Preferred Stock FCFC's authorized capital includes a class of 3,000,000 shares of preferred stock, par value $1 per share ("FCFC Preferred Stock"). As yet, no shares of FCFC Preferred Stock have been issued. Such FCFC Preferred Stock may be issued in one or more series by resolution of the Board of Directors from time to time without further authorization by shareholders. Each series will have such dividend rate and date from which dividends accumulate, and such general voting, dividend, redemption, liquidation, conversion and sinking fund rights, if any, as the Board of Directors of FCFC may determine. All shares of any one series of FCFC Preferred Stock will have identical rights. Each series of FCFC Preferred Stock will be entitled to receive, when and as declared by the Board of Directors of FCFC, and before any dividends (other than dividends payable in stock of junior shares) are paid on any series or class ranking junior to the shares of such series, dividends at the rate fixed by the FCFC Board of Directors for such series. Under Pennsylvania law, no dividend may be paid on FCFC Common Stock which would reduce the remaining net assets of FCFC below the amount to which holders of any series of FCFC Preferred Stock, if issued, would be entitled in a voluntary liquidation. The Reliable Certificate contains a similar provision authorizing the issuance of up to 1,000,000 shares of preferred stock by resolution of the Board of Directors. No such shares have yet been issued. 91 The issuance of preferred stock by FCFC or Reliable could potentially be used to discourage attempts by others to obtain control of FCFC or Reliable, as the case may be, through merger, tender offer or otherwise by making such attempts more difficult to achieve or more costly. RELATIONSHIPS WITH INDEPENDENT PUBLIC ACCOUNTANTS FCFC The independent auditors for FCFC and its subsidiaries are selected annually by the FCFC Board of Directors. The independent auditors to audit the financial statements of FCFC for 1994 has not yet been appointed. Jarrett * Stokes & Co. has served as the independent auditor for FCFC or NBOC for each year since 1978. Representatives of Jarrett * Stokes & Co. are expected to be present at the Special Meeting. Reliable At present, the financial statements of Reliable are audited annually by Edwards Leap & Sauer, independent certified public accountants. It is anticipated that if the Merger is consummated, the financial statements of Reliable will, in the future, be audited by FCFC's independent auditors. Representatives of Edwards Leap & Sauer are expected to be present at the Special Meeting and to be available to respond to appropriate questions. LEGAL OPINIONS The validity of the shares of FCFC Common Stock to be issued in the Merger will be passed upon for FCFC by Tomb and Tomb, Attorneys-at-Law, Indiana, Pennsylvania. David R. Tomb, Jr., a partner of the firm of Tomb and Tomb, is Vice President, Secretary and Treasurer and a Director of FCFC. Information concerning the beneficial ownership of FCFC Common Stock by Mr. Tomb is set forth under "Management of FCFC--Board of Directors." During 1993, Tomb and Tomb performed legal services for FCFC and its subsidiaries and the fees paid for such services in 1993 were $65,000. Reed Smith Shaw & McClay, special counsel to FCFC and Reliable in connection with the proposed Merger, will be rendering an opinion with respect to certain tax matters in connection with the proposed Merger. See "Plan of Reorganization--Conditions to the Merger." EXPERTS The audited consolidated financial statements of FCFC appearing on pages F-2 through F-14 of this Proxy Statement/ Prospectus have been examined by Jarrett * Stokes & Co., independent certified public accountants, whose report thereon is included herein on page F-2. Such financial statements have been included herein in reliance upon such report, given upon the authority of such firm as experts in auditing and accounting. The consolidated financial statements of United at December 31, 1993 and 1992, and for each of the three years ended December 31, 1993 appearing on pages F-22 through F-34 of this Proxy Statement/Prospectus have been audited by Ernst & Young, independent auditors, as set forth in their report appearing on page F-22, and are included herein in reliance upon such report, given upon the authority of such firm as experts in accounting and auditing. The audited consolidated financial statements of Reliable appearing on pages F-41 through F-58 of this Proxy Statement/Prospectus have been examined by Edwards Leap & Sauer, independent certified public accountants, whose report thereon is included herein on page F-41. Such financial statements have been included herein in reliance upon such report, given upon the authority of such firm as experts in auditing and accounting. 92 SHAREHOLDER PROPOSALS Proposals of FCFC shareholders intended to be presented at FCFC's 1995 Annual Meeting of Shareholders must be received by the Secretary of FCFC not later than November 29, 1994 in order to be considered for inclusion in FCFC's proxy statement for such meeting. If the Plan of Reorganization is approved and the Merger becomes effective before the date for Reliable's 1995 Annual Meeting, Reliable will have been merged into FCFC, and no 1995 Annual Meeting of Shareholders of Reliable will be held. In that event, holders of FCFC Common Stock issued in the Merger will be entitled to vote at FCFC's 1995 Annual Meeting of Shareholders. 93 INDEX TO FINANCIAL STATEMENTS FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES: Audited Financial Statements: Auditor's Report......................................................... F-2 Balance Sheets........................................................... F-3 Statements of Income..................................................... F-4 Statements of Cash Flows................................................. F-5 Statements of Changes in Shareholders' Equity............................ F-6 Notes to Financial Statements............................................ F-6 Unaudited Interim Financial Statements: Balance Sheets........................................................... F-15 Statements of Income..................................................... F-16 Statements of Changes in Shareholders' Equity............................ F-17 Statements of Cash Flows................................................. F-18 Notes to Financial Statements............................................ F-19 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES: Audited Financial Statements: Report of Independent Auditors........................................... F-22 Balance Sheet............................................................ F-23 Statement of Income...................................................... F-24 Statement of Changes in Shareholders' Equity............................. F-25 Statement of Cash Flows.................................................. F-26 Notes to Financial Statements............................................ F-27 Unaudited Interim Financial Statements: Balance Sheet............................................................ F-35 Statement of Income...................................................... F-36 Statement of Changes in Shareholders' Equity............................. F-37 Statement of Cash Flows.................................................. F-38 Notes to Financial Statements............................................ F-39 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY: Audited Financial Statements: Independent Auditors' Report............................................. F-41 Balance Sheets........................................................... F-42 Statements of Income..................................................... F-43 Statements of Changes in Stockholders' Equity............................ F-44 Statements of Cash Flows................................................. F-45 Notes to Financial Statements............................................ F-46 Unaudited Interim Financial Statements: Balance Sheets........................................................... F-59 Statements of Income..................................................... F-60 Statements of Changes in Stockholders' Equity............................ F-61 Statements of Cash Flows................................................. F-62 Notes to Financial Statements............................................ F-63
F-1 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- AUDITOR'S REPORT Report of Jarrett . Stokes & Co. Independent Certified Public Accountants Board of Directors and Shareholders of First Commonwealth Financial Corporation Indiana, Pennsylvania We have audited the accompanying consolidated balance sheets of First Commonwealth Financial Corporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 First Commonwealth Financial Corporation and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in NOTE 1 to the consolidated financial statements, the Corporation changed its method of accounting for income taxes and investments. JARRETT . STOKES & CO. Indiana, Pennsylvania March 2, 1994 - -------------------------------------------------------------------------------- F-2 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (Dollar Amounts in Thousands)
December 31, ------------------------------ 1993 1992 ------------------------------ Assets Cash and due from banks on demand $ 51,044 $ 63,337 Interest-bearing deposits with banks 2,569 18,196 Federal funds sold -0- 30,555 Securities available for sale 465,224 -0- Investment securities, market value $383,943 in 1993 and $674,066 in 1992 381,811 664,046 Loans 1,037,675 994,768 Unearned income (31,499) (30,241) Reserve for possible loan losses (14,544) (14,267) ------------------------------ Net loans 991,632 950,260 ------------------------------ Property and equipment 21,911 21,107 Other real estate owned 4,929 4,044 Other assets 36,149 36,003 ------------------------------ Total assets $1,955,269 $1,787,548 ============================== Liabilities Deposits (All Domestic): Noninterest-bearing $ 167,306 $ 167,486 Interest-bearing 1,408,318 1,377,337 ------------------------------ Total deposits 1,575,624 1,544,823 ------------------------------ Short-term borrowings 171,497 52,676 Other liabilities 14,332 11,516 Long-term debt 7,363 8,130 ------------------------------ Total liabilities 1,768,816 1,617,145 ------------------------------ Shareholders' Equity Preferred stock, $1 par value per share, 3,000,000 shares authorized and unissued -0- -0- Common stock, $5 par value per share, 25,000,000 shares authorized, 9,321,012 issued and outstanding 46,605 46,605 Additional paid-in capital 35,296 35,455 Retained earnings 107,417 93,256 Unrealized gain on securities available for sale 1,584 -0- ------------------------------ 190,902 175,316 Deferred compensation (4,449) (4,913) ------------------------------ Total shareholders' equity 186,453 170,403 ------------------------------ Total liabilities and shareholders' equity $1,955,269 $1,787,548 ==============================
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-3 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (Dollar Amounts in Thousands, except per share data)
Years Ended December 31, ------------------------------------------- 1993 1992 1991 ------------------------------------------- INTEREST INCOME Interest and fees on loans $ 86,121 $ 84,612 $ 81,357 Interest and dividends on investments: Taxable interest 41,323 39,922 34,494 Interest exempt from Federal income taxes 2,955 4,118 4,184 Dividends 628 271 166 Interest on Federal funds sold 208 650 1,610 Interest on bank deposits 483 1,844 3,990 ------------------------------------------- Total interest income 131,718 131,417 125,801 ------------------------------------------- INTEREST EXPENSE Interest on deposits 54,041 59,906 65,484 Interest on short-term borrowings 3,496 1,723 1,569 Interest on long-term debt 456 454 456 ------------------------------------------- Total interest expense 57,993 62,083 67,509 ------------------------------------------- NET INTEREST INCOME 73,725 69,334 58,292 Provision for possible loan losses 2,197 3,219 4,946 ------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 71,528 66,115 53,346 ------------------------------------------- OTHER INCOME Net securities gains 2,333 679 677 Trust income 2,194 1,967 1,303 Service charges on deposit accounts 4,720 4,400 3,397 Other income 2,878 2,328 2,152 ------------------------------------------- Total other income 12,125 9,374 7,529 ------------------------------------------- OTHER EXPENSES Salaries and employee benefits 25,397 22,968 20,154 Net occupancy expense 3,595 3,235 2,796 Furniture and equipment expense 3,710 3,246 2,762 FDIC expense 3,521 3,222 2,474 Settlement of lender liability claim -0- 1,400 -0- Other operating expenses 15,021 13,754 11,680 ------------------------------------------- Total other expenses 51,244 47,825 39,866 ------------------------------------------- INCOME BEFORE TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 32,409 27,664 21,009 Applicable income taxes 9,719 7,076 5,025 ------------------------------------------- NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD 22,690 20,588 15,984 Cumulative effect of change in accounting method 500 -0- -0- ------------------------------------------- NET INCOME $ 23,190 $ 20,588 $ 15,984 =========================================== Average Shares Outstanding 18,642,024 18,107,266 17,024,494 PER SHARE DATA: NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD $ 1.22 $ 1.14 $ 0.94 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD $ 0.02 $ 0.00 $ 0.00 NET INCOME $ 1.24 $ 1.14 $ 0.94
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-4 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar Amounts in Thousands)
Years Ended December 31, --------------------------------------- 1993 1992 1991 --------------------------------------- Operating Activities Net income $ 23,190 $ 20,588 $ 15,984 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 2,197 3,219 4,946 Depreciation and amortization 4,701 3,547 2,954 Net gains on sales of assets (2,617) (273) (904) Changes net of acquisition: Decrease (increase) in interest receivable 145 2,712 (209) Increase in interest payable (896) (2,336) (3) Increase (decrease) in income taxes payable 308 (567) 354 Provision for deferred taxes (1,189) (406) (478) Other - net (719) (2,363) (663) --------------------------------------- Net cash provided by operating activities 25,120 24,121 21,981 --------------------------------------- Investing Activities Proceeds from investment securities transactions: Sales 95,658 16,840 65,362 Maturities and redemptions 329,606 170,301 119,994 Proceeds from sales of loans and other assets 14,661 17,866 245 Acquisition of affiliate -0- (3,950) -0- Changes net of acquisition: Net decrease in time deposits with banks 15,627 39,945 3,583 Purchases of investment securities (603,637) (263,036) (301,778) Net increase in loans (57,044) (22,614) (42,239) Purchases of premises and equipment (3,425) (3,728) (1,936) --------------------------------------- Net cash used by investing activities (208,554) (48,376) (156,769) --------------------------------------- Financing Activities Proceeds from issuance of long-term debt 202 2,500 -0- Repayments of long-term debt (505) (179) -0- Tax benefit of ESOP dividend 84 119 97 Discount on dividend reinvestment plan purchases (159) (124) (80) Dividends paid (8,571) (6,860) (5,899) Dividends paid by subsidiary prior to merger (169) (285) (263) Changes net of acquisition: Net increase in deposits 30,883 65,441 130,020 Net increase (decrease) in Federal funds purchased 45,955 (10,550) 3,150 Net increase (decrease) in other short-term borrowings 72,866 15,482 (11,112) --------------------------------------- Net cash provided by financing activities 140,586 65,544 115,913 --------------------------------------- Net increase (decrease) in cash and cash equivalents (42,848) 41,289 (18,875) Cash and cash equivalents acquired with acquisition -0- 6,300 -0- Cash and cash equivalents at January 1 93,892 46,303 65,178 --------------------------------------- Cash and cash equivalents at December 31 $ 51,044 $ 93,892 $ 46,303 =======================================
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- F-5 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollar Amounts in Thousands)
Unrealized Gain (Loss) Additional on Securities Total Common Paid-in Retained Available Deferred Shareholders' Stock Capital Earnings For Sale Compensation Equity ------------------------------------------------------------------------------------- Balance at December 31, 1990 $ 42,561 $ 22,719 $ 71,918 $ (1,615) $ (4,821) $ 130,762 Net income -0- -0- 15,984 -0- -0- 15,984 Cash dividends declared -0- -0- (5,899) -0- -0- (5,899) Cash dividends declared by subsidiary prior to merger -0- -0- (263) -0- -0- (263) Decrease in unrealized loss on marketable equity securities -0- -0- -0- 1,197 -0- 1,197 Tax benefit on ESOP dividends -0- -0- 97 -0- -0- 97 Increase in deferred compensation -0- -0- -0- -0- (806) (806) Discount on dividend reinvestment plan purchases -0- (80) -0- -0- -0- (80) --------------------------------------------------------------------------------------- Balance at December 31, 1991 42,561 22,639 81,837 (418) (5,627) 140,992 Net income -0- -0- 20,588 -0- -0- 20,588 Cash dividends declared -0- -0- (9,003) -0- -0- (9,003) Cash dividends declared by subsidiary prior to merger -0- -0- (285) -0- -0- (285) Decrease in unrealized loss on marketable equity securities -0- -0- -0- 418 -0- 418 Tax benefit on ESOP dividends -0- -0- 119 -0- -0- 119 Decrease in deferred compensation -0- -0- -0- -0- 714 714 Discount on dividend reinvestment plan purchases -0- (124) -0- -0- -0- (124) Acquisition of subsidiary 4,044 12,940 -0- -0- -0- 16,984 ------------------------------------------------------------------------------------- Balance at December 31, 1992 46,605 35,455 93,256 -0- (4,913) 170,403 Net income -0- -0- 23,190 -0- -0- 23,190 Cash dividends declared -0- -0- (8,944) -0- -0- (8,944) Cash dividends declared by subsidiary prior to merger -0- -0- (169) -0- -0- (169) Increase in unrealized gain on securities available for sale, net of tax effect -0- -0- -0- 1,584 -0- 1,584 Tax benefit on ESOP dividends -0- -0- 84 -0- -0- 84 Decrease in deferred compensation -0- -0- -0- -0- 464 464 Discount on dividend reinvestment plan purchases -0- (159) -0- -0- -0- (159) ------------------------------------------------------------------------------------- Balance at December 31, 1993 $ 46,605 $ 35,296 $107,417 $ 1,584 $ (4,449) $ 186,453 =====================================================================================
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1993, 1992 and 1991 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 (the "Corporation") and its subsidiaries contained in this report. Such policies conform to generally accepted accounting principles and to general practice within the banking industry. The Corporation and its subsidiaries are on the accrual basis of accounting except for certain trust related revenues which are recorded on a cash basis. Recording income from such activities on a cash basis does not materially affect net income. Certain items of the consolidated statements for the years ended December 31, 1992 and 1991 have been reclassified to conform with the December 31, 1993 presentation. - -------------------------------------------------------------------------------- F-6 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--Statement of Accounting Policies (Continued) 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. Securities In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 ("FAS No. 115"), Accounting for Certain Investments in Debt and Equity Securities. This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows: (a) securities held-to-maturity, (b) trading securities and (c) securities available-for-sale. 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 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. The Corporation adopted FAS No. 115 effective December 31, 1993 and classified securities as either held-to-maturity or available-for-sale. The Corporation does not engage in trading activities (see NOTES 4 and 5). Prior to the implementation of FAS No. 115, investment securities consisted of debt and equity securities. Debt securities were stated at cost adjusted for amortization of premium and accretion of discount. These securities were principally purchased with the intent of holding them until maturity. Marketable equity securities were carried at the lower of aggregate cost or market value. Net gain or loss on the sale of investment securities was determined by using the specific identification method. Loans Loans are carried at the principal amount outstanding. Unearned income on installment loans is taken into income on a declining basis which results in an approximately level rate of return over the life of the loan. Interest is accrued as earned on nondiscounted loans. When a loan becomes past due and doubt exists as to the ultimate collection of principal and interest, the accrual of income is discontinued and is only recognized at the time payment is received. Renegotiated loans are those loans on which concessions in terms have been granted because of a borrower's financial difficulty. Interest is generally accrued on such loans in accordance with the new terms. 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 market at the time of acquisition. Expenses related to holding the property, net of rental income, are generally charged against earnings in the current period. Other real estate also includes properties that have in substance been foreclosed. In-substance foreclosed properties are those properties where the borrower has little or no remaining equity in the property considering its fair market value; where repayment can only be expected to come from the operation or sale of the property; and where the borrower has effectively abandoned control of the property or it is doubtful that the borrower will be able to rebuild equity in the property. In-substance foreclosed properties included in other real estate owned were $111 and $1,514 at December 31, 1993 and 1992, respectively. Reserve for Possible Loan Losses The reserve for possible loan 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 reserve based on historical patterns of loan charge-offs and recoveries, the relationship of the reserve to outstanding loans, industry experience, current economic trends and other factors relevant to the collectibility of loans currently in the portfolio. 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. Income Taxes In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 ("FAS No. 109"), Accounting for Income Taxes (see NOTE 14). Under the asset and liability method utilized by FAS No. 109, 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. Effective January 1, 1993, the Corporation adopted FAS No. 109 and has reported the cumulative effect of that change in method of accounting for income taxes in the 1993 consolidated statement of income. 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. - -------------------------------------------------------------------------------- F-7 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands, except per share data) NOTE 1--Statement of Accounting Policies (Continued) Supplemental Disclosures Cash paid during the year for:
1993 1992 1991 ------- ------- ------- Interest $59,119 $64,546 $67,518 Income taxes $ 9,245 $ 8,175 $ 5,187
Noncash Investing and Financing Activities The Corporation borrowed $250 in 1993 and $1,520 in 1991 and concurrently loaned these amounts to the First Commonwealth Financial Corporation Employee Stock Ownership Plan Trust ("ESOP") on identical terms. The loan has been recorded as long-term debt on the Corporation's books and the offset was recorded as a reduction in common shareholders' equity. Loan payments in the amount of $714 were made by the ESOP in each of the three years ending in 1993, thereby reducing the outstanding amount related to deferred compensation to $4,449 at December 31, 1993. Earnings Per Common Share Earnings per share have been calculated on the weighted average number of common shares outstanding during each year, restated to reflect pooling of interests. Additionally, average number of shares has been restated to reflect the two-for- one stock split effected in the form of a 100% stock dividend declared on January 18, 1994 (see NOTE 22). Fair Values of Financial Instruments The financial statements include various estimated fair values at December 31, 1993, 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 investment securities 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 Reserve Bank stock and 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. 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. NOTE 2--Business Combination Effective December 31, 1993 the Corporation acquired all of the outstanding common shares of Peoples Bank of Western Pennsylvania, a state-chartered bank headquartered in New Castle, Pennsylvania. Each of the 375,000 outstanding shares of common stock were exchanged for two shares of the Corporation's common stock. 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. Effective April 30, 1992, the Corporation acquired all of the outstanding common shares of Central Bank ("Central"), a state-chartered bank headquartered in Hollidaysburg, Pennsylvania, for 808,765 shares of the Corporation's common stock and $3,950 in cash. The acquisition was accounted for as a purchase transaction, whereby the identifiable tangible and intangible assets and liabilities of Central have been recorded at their fair values at the acquisition date. Goodwill of $4,858 and core deposit - -------------------------------------------------------------------------------- F-8 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) NOTE 2--Business Combination (continued) intangibles of $2,873 acquired in the transaction are being amortized on a straight-line basis over respective periods of fifteen and ten years. Under the purchase method of accounting, the results of operations of Central from the date of acquisition were included in the 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 $3,355 during 1993 and $3,971 during 1992. NOTE 4--Investment Securities Below is an analysis of the book values and approximate fair values of debt securities at December 31:
1993 1992 ------------------------------------------------------------------------------------------------- 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 $ -0- $ -0- $ -0- $ -0- $ 62,958 $ 1,562 $ (16) $ 64,504 Obligations of U.S. Government Corporations and Agencies: Mortgage Backed Securities 207,349 923 (805) 207,467 380,749 6,143 (612) 386,280 Other 85,570 425 (121) 85,874 89,362 1,170 (126) 90,406 Obligations of States and Political Subdivisions 73,366 1,646 (349) 74,663 72,642 1,639 (209) 74,072 Debt Securities Issued By Foreign Governments 745 4 -0- 749 350 -0- (2) 348 Corporate Securities 10,722 442 (73) 11,091 21,768 285 (152) 21,901 Other Mortgage Backed Securities 4,059 40 -0- 4,099 22,522 221 (92) 22,651 ------------------------------------------------------------------------------------------------ Total Debt Securities $381,811 $3,480 $(1,348) $383,943 $650,351 $11,020 $(1,209) $660,162 ================================================================================================
Mortgage backed securities include mortgage backed obligations of the 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 5 to 34 years and have an anticipated average life to maturity ranging from less than one year to 10 years. The amortized cost and estimated market value of debt securities at December 31, 1993, 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.
Estimated Amortized Market Cost Value -------------------- Due within 1 year $ 20,174 $ 20,326 Due after 1 but within 5 years 111,271 112,482 Due after 5 but within 10 years 30,439 30,662 Due after 10 years 8,519 8,907 ------------------- 170,403 172,377 Mortgage backed securities 211,408 211,566 ------------------- Total debt securities $381,811 $383,943 ===================
Proceeds from the sales of investment securities were $16,840 and $65,362 in 1992 and 1991, respectively. Gross gains of $803 and $1,456 were recognized during 1992 and 1991, respectively, while gross losses of $124 and $779 were recognized in the corresponding periods. Marketable equity securities included in investment securities at December 31, 1992 with a cost basis of $6,219 had gross unrealized gains of $331 and gross unrealized losses of $122. The Corporation also held nonmarketable equity securities in the amount of $7,476 at December 31, 1992, primarily Federal Home Loan Bank stock and Federal Reserve Bank stock. At December 31, 1993 equity securities have been classified as securities available for sale. Investment securities with a book value of $249,160 and $181,787 were pledged at December 31, 1993 and 1992, respectively, to secure public deposits and for other purposes required or permitted by law. - -------------------------------------------------------------------------------- F-9 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) NOTE 5--Securities Available For Sale Below is an analysis of the amortized cost and approximate fair values of securities available for sale at December 31, 1993:
Gross Gross Approx. Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------- U.S. Treasury Securities $103,253 $ 862 $ (125) $103,990 Obligations of U.S. Government Corporations and Agencies: Mortgage Backed Securities 285,854 2,507 (978) 287,383 Other 49,726 323 (133) 49,916 Obligations of States and Political Subdivisions 97 -0- -0- 97 Corporate Securities 4,688 50 -0- 4,738 Other Mortgage Backed Securities 6,327 25 (9) 6,343 ------------------------------------------- Total Debt Securities 449,945 3,767 (1,245) 452,467 Equity Securities 12,841 -0- (84) 12,757 ------------------------------------------- Total Securities Available for Sale $462,786 $3,767 $(1,329) $465,224 ===========================================
Mortgage backed securities include mortgage backed obligations of the 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 5 to 34 years and have an anticipated average life to maturity ranging from less than one year to 10 years. The amortized cost and estimated market value of debt securities at December 31, 1993, 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.
Estimated Amortized Fair Cost Value -------------------- Due within 1 year $ 4,960 $ 5,083 Due after 1 but within 5 years 141,804 142,652 Due after 5 but within 10 years 8,815 8,804 Due after 10 years 2,185 2,202 ------------------- 157,764 158,741 Mortgage backed securities 292,181 293,726 ------------------- Total debt securities $449,945 $452,467 ===================
Proceeds from the sales of investment securities during 1993 were $95,658. Gross gains of $2,350 and gross losses of $17 were realized on those sales. NOTE 6--Loans (all domestic) Loans at year end were divided among these general categories:
December 31, ---------------------- 1993 1992 ---------------------- Commercial, financial, agricultural and other $ 153,039 $196,979 Real estate loans: Construction and land development 9,718 11,676 1-4 Family dwellings 412,799 373,174 Other real estate loans 220,804 188,226 Loans to individuals for household, family and other personal expenditures 239,904 220,085 Leases, net of unearned income 1,411 4,628 --------------------- Subtotal 1,037,675 994,768 Unearned income (31,499) (30,241) --------------------- Total loans and leases $1,006,176 $964,527 =====================
Management's estimate of the fair value of loans was $1,035,850 and $991,491 at December 31, 1993 and 1992, respectively. Most of the Corporation's business activity was with customers located within Pennsylvania. The portfolio is well diversified, and as of December 31, 1993, there were no significant concentrations of credit. NOTE 7--Reserve for Possible Loan Losses Description of changes:
1993 1992 1991 ------------------------ Reserve balance at January 1 $14,267 $ 9,426 $8,323 Additions: Recoveries of previously charged off loans 1,564 1,115 825 Provision charged to operating expense 2,197 3,219 4,946 From acquisition -0- 4,501 -0- Deductions: Loans charged off 3,484 3,994 4,668 ------------------------ Reserve balance at December 31 $14,544 $14,267 $9,426 ========================
For Federal tax purposes, the reserve for possible loan losses was $1,911 in 1993 and $2,222 in 1992. 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. The Corporation does not issue any other instruments with significant off-balance-sheet 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 - -------------------------------------------------------------------------------- F-10 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) NOTE 8--Financial Instruments with Off-Balance-Sheet Risk (continued) 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, 1993 and 1992.
1993 1992 ------------------ Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $182,013 $153,319 Standby letters of credit $ 17,900 $ 11,858 Commercial letters of credit $ 65 $ 10
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 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, and income-producing commercial properties. 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:
1993 1992 ---------------- Land $ 3,615 $ 2,977 Buildings and improvements 22,200 21,084 Leasehold improvements 3,312 3,254 Furniture and equipment 20,377 19,221 ---------------- Subtotal 49,504 46,536 Less accumulated depreciation and amortization 27,593 25,429 ---------------- Total premises and equipment $21,911 $21,107 ================
Depreciation and amortization related to premises and equipment was $3,008 in 1993, $2,637 and $1,901, in 1992 and 1991, respectively. NOTE 10--Interest-Bearing Deposits Components of interest-bearing deposits at December 31 were as follows:
1993 1992 ---------------------- N.O.W. and Super N.O.W. accounts $ 169,897 $ 168,130 Savings and MMDA accounts 426,640 411,380 Time deposits 811,781 797,827 ---------------------- Total interest-bearing deposits $1,408,318 $1,377,337 ======================
Included in time deposits at December 31 were certificates of deposit in denominations of $100 or more maturing as follows:
1993 1992 ----------------- 3 months or less $19,734 $ 25,289 3 to 6 months 12,543 15,906 6 to 12 months 16,542 11,140 Over 12 months 47,006 49,731 ----------------- Total $95,825 $102,066 =================
Interest expense related to $100 or greater certificates of deposit amounted to $5,426 in 1993, $7,389 in 1992, and $7,566 in 1991. Management's estimated fair value of deposits was $1,590,502 and $1,565,065 at December 31, 1993 and 1992, respectively. NOTE 11--Short-term Borrowings Short-term borrowings at December 31 were as follows:
1993 1992 ------------------------------------------------------ Ending Average Average Ending Average Average Balance Balance Rate Balance Balance Rate ------------------------------------------------------ Federal funds purchased $ 46,155 $22,782 3.10% $ -0- $ 2,505 6.75% Borrowings from FHLB 62,276 22,673 3.32 -0- -0- -0- Securities sold under agreements to repurchase 43,498 41,714 4.28 34,272 25,595 4.69 Treasury, tax and loan note option 19,568 8,756 2.91 18,404 10,359 3.41 ------------------------------------------------------ Total $171,497 $95,925 3.64 $52,676 $38,459 4.48 ====================================================== Maximum total at any month-end $171,497 $67,056 ======================================================
Interest expense on short-term borrowings for the years ended December 31 is detailed below:
1993 1992 1991 ----------------------- Federal funds purchased $ 705 $ 169 $ 58 Borrowings from FHLB 753 -0- -0- Securities sold under agreements to repurchase 1,783 1,201 1,089 Treasury, tax and loan note option 255 353 422 ---------------------- Total interest on short-term borrowings $3,496 $1,723 $1,569 ======================
- -------------------------------------------------------------------------------- F-11 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) NOTE 12--Long-Term Debt Long-term debt at December 31, 1993 follows:
Amount Rate ------ ------ Bank subordinated notes due September, 1997 $ 716 8.38% ESOP loan due September, 1997 2,678 80% of Prime Bank loan due December, 1997 2,000 Prime ESOP loan due March, 2001 1,770 Prime Mortgage note due October, 2003 199 6.26% ------ Total long-term debt $7,363 ======
All subordinated notes are unsecured and equally subordinated in right of payment to depositors and other creditors. The notes are redeemable at 102% of principal until maturity, at the bank's option. The subordinated notes do not provide for sinking fund obligations. Scheduled loan payments and subordinated note maturities are summarized below:
1994 1995 1996 1997 1998 Thereafter ------------------------------------------------- Loan payments $1,419 $1,483 $1,484 $1,307 $272 $682 Note maturities -0- -0- -0- 716 -0- -0- ------------------------------------------------- Total $1,419 $1,483 $1,484 $2,023 $272 $682 =================================================
Management estimated the fair value of long-term debt at December 31, 1993 to be $7,433 and $8,207 at December 31, 1992. NOTE 13--Common Share Commitments At December 31, 1993 the Corporation had 25,000,000 common shares authorized and 18,642,024 shares outstanding after reflecting the two-for-one stock split effected in the form of a 100% stock dividend (see NOTE 22). 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. NOTE 14--Federal Income Taxes As discussed in Note 1, effective January 1, 1993 the Corporation adopted FAS No. 109. As permitted under FAS No. 109, prior years' financial statements have not been restated. The adoption of this statement resulted in a cumulative benefit of $500 in 1993. This benefit was primarily due to lower tax rates in the year that FAS No. 109 was adopted than tax rates were in the years of purchase business combinations. The income tax provision consists of:
1993 1992 1991 ------------------------- Current tax provision for income before securities transactions $ 9,591 $7,229 $5,273 Securities transactions 817 231 230 ------------------------- Total current tax provision 10,408 7,460 5,503 ------------------------- Deferred tax provision (credit) on: Loan loss provision (327) (72) (404) Bond discount (53) (130) (62) Leasing income (432) (236) (44) Purchase accounting valuations (209) -0- -0- Depreciation (15) 110 31 Loan origination fees and costs 185 47 172 Other 162 (103) (171) ------------------------- Total deferred tax benefit (689) (384) (478) ------------------------- Total tax provision $ 9,719 $7,076 $5,025 =========================
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 January 1, 1993 and December 31, 1993 were as follows:
December 31 January 1 ------------------------ Reserve for possible loan losses $ 4,422 $ 4,095 Accumulated accretion of bond discount (278) (331) Lease financing deduction (149) (581) Purchase accounting valuations, other than excess purchase price (2,191) (2,400) Accumulated depreciation (348) (363) Unrealized gain on securities available for sale (851) -0- Loan origination fees and costs (192) (7) Other - net 325 487 ------------------------ Deferred tax asset balance $ 738 $ 900 ========================
Management does not feel a need to establish a valuation allowance against the deferred tax asset because of the Corporation's ability to recover previously paid taxes through carrybacks. 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:
1993 1992 1991 ----------------------------------------------- % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income ----------------------------------------------- Tax at statutory rate $11,343 35.0 $9,406 34.0 $7,143 34.0 Increase (decrease) resulting from: Effect of nontaxable interest (1,979) (6.1) (2,406) (8.7) (2,346) (11.2) Other 355 1.1 76 0.3 228 1.1 ----------------------------------------------- Total tax provision $ 9,719 30.0 $7,076 25.6 $5,025 23.9 ===============================================
NOTE 15--Retirement Plans All employees with at least one year of service are eligible to participate in the employee stock ownership plan. 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. These contributions are used to purchase the Corporation's common shares. Contributions to the plan were $622 in 1993, $680 in 1992 and $518 in 1991. 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 60% of the employee's contribution. The 401(k) plan expense was $1,158 in 1993, $984 in 1992, $875 in 1991. Statement of Financial Accounting Standards No. 106 ("FAS No. 106"), Employers' Accounting for Postretirement Benefits Other than Pensions established standards for accounting for postretirement benefits, primarily health care benefits. FAS No. 106 was effective for all fiscal years - -------------------------------------------------------------------------------- F-12 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) NOTE 15--Retirement Plans (continued) beginning after December 15, 1992. Since the Corporation generally does not offer these benefits, the impact on net income is not considered material. Employees of Central were covered by a noncontributory defined benefit plan, which covered substantially all of its employees. The plan was fully funded, and no contributions were made during the past three years. The net periodic cost was $16 during 1992. The plan was terminated during 1993 and Central employees were included in the Corporation's employee stock ownership plan and 401(k) plan. The plan termination resulted in a gain of $186 thousand recorded during 1993. NOTE 16--Deferred Compensation 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 $4,449 at December 31, 1993. The loans have been recorded as long-term debt on the Corporation's consolidated balance sheets. A like amount of deferred compensation was recorded as a reduction of common shareholders' equity. Deferred compensation, included as a component of shareholders' equity, represents the Corporation's prepayment of future compensation expense. As the Corporation makes annual contributions to the ESOP, these contributions, plus dividends accumulated on the Corporation's common stock held by the ESOP, will be used to repay the loan to the Corporation. As the loan is repaid, common stock is allocated to the ESOP participants and deferred compensation is reduced by the amount of the principal payment on the loan. Interest on this loan was $245 in 1993 and $286 in 1992 and $382 in 1991. Dividends on common shares held in the ESOP used for debt service were $417 in 1993, $351 in 1992 and $289 in 1991. NOTE 17--Commitments and Contingent Liabilities During 1990, a subsidiary bank was named as a defendant in a forgery claim where the bank allegedly allowed checks bearing forged endorsements to be negotiated. Management feels that its maximum exposure is not significant and that it has adequate defenses for the claim. This action is being vigorously defended and, in the opinion of management, should be resolved in the bank's favor. 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 financial position of the Corporation and its subsidiaries. The Corporation leases various premises and assorted equipment under noncancelable agreements. Total future minimum rental commitments at December 31, 1993 were as follows:
1994 1995 1996 1997 1998 Thereafter Total ----------------------------------------------- Premises $451 $352 $255 $212 $148 $805 $2,223 Equipment 171 36 17 1 -0- -0- 225 ----------------------------------------------- Total $622 $388 $272 $213 $148 $805 $2,448 ===============================================
Under the terms of various lease agreements, increases in utilities and taxes may be passed on to the lessee. Such adjustments are not reflected in the above table. Additionally, various lease renewal options are available and are not included in the minimum lease commitments until such options are exercised. Total lease expense amounted to $1,034 in 1993, $1,326 in 1992 and $1,248 in 1991. NOTE 18--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 during 1993. 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 1993. Balances December 31, 1992 $34,840 Advances 7,599 Repayments (17,307) Other 102 ------- Balances December 31, 1993 $25,234 =======
Three loans to two directors, or their related interests were placed on a nonaccrual status during 1992 due to cash flow deficiencies. The original loans were made on substantially the same terms as those prevailing at the time for comparable transactions. One loan to a director has been in compliance with the terms of the loan and has been removed from a nonaccrual status. The original amount of this loan was $616 and the balance at December 31, 1993 was $500. The remaining two loans to one director remained on a nonaccrual status during 1993. The original balances of these loans were $1,969 and the recorded balance of these loans at December 31, 1993 was reduced to $987. In the opinion of management, adequate amounts have been provided in the reserve for possible loan losses for these loans. NOTE 19--Dividend Restrictions The amount of funds available to the parent from its subsidiary banks is limited by restrictions imposed on all national banks by the Comptroller of the Currency and on all state chartered banks by the Pennsylvania Department of Banking. During 1993, dividends from subsidiary banks were restricted not to exceed $44,908. These restrictions have not had, and are not expected to have, a significant impact on the Corporation's ability to meet its cash obligations. NOTE 20--Jointly-Owned Company Investment in Commonwealth Trust Credit Life Insurance Company ("Commonwealth Trust"), a jointly-owned credit life reinsurance company in which the Corporation has a 50% interest in the voting common stock, is carried at cost, adjusted for the Corporation's proportionate share of the - -------------------------------------------------------------------------------- F-13 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar Amounts in Thousands) earnings. Dividends, if any, reduce the basis of the investment. Commonwealth Trust has been in operation since June of 1989. The Corporation's net investment in Commonwealth Trust at December 31, 1993 was $1,162 and income from its investment was $221 during 1993. NOTE 21--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) Balance Sheets - --------------
December 31, --------------------- 1993 1992 --------------------- Assets Cash $ 2,571 $ 2,625 Investment in subsidiaries 187,054 171,568 Investment in jointly-owned company 1,162 941 Premises and equipment 1,181 890 Dividends receivable from subsidiaries 3,679 3,095 Receivable from subsidiaries 440 842 Other assets 279 397 ------------------- Total assets $196,366 $180,358 =================== Liabilities and Shareholders' Equity Accrued expenses and other liabilities $ 947 $ 399 Dividends payable 2,517 2,143 Loans payable 6,449 7,413 Shareholders' equity, exclusive of deferred compensation 190,902 175,316 Deferred compensation (4,449) (4,913) ------------------- Total liabilities and shareholders' equity $196,366 $180,358 ===================
Statements of Income
Years Ended December 31, --------------------------- 1993 1992 1991 --------------------------- Dividends from subsidiaries $13,490 $11,082 $11,085 Operating expenses (5,598) (4,893) (4,378) --------------------------- Income before taxes and equity in undistributed earnings of subsidiaries 7,892 6,189 6,707 Applicable income tax benefits 1,782 1,433 1,250 --------------------------- Income before equity in undistributed earnings of subsidiaries 9,674 7,622 7,957 Equity in undistributed earnings of subsidiaries 13,516 12,966 8,027 --------------------------- Net income $23,190 $20,588 $15,984 ===========================
Statements of Cash Flows
Years Ended December 31, ------------------------------ 1993 1992 1991 ------------------------------ Operating Activities Net income $ 23,190 $ 20,588 $15,984 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,190 865 723 Decrease (increase) in prepaid income taxes (262) (298) 911 Undistributed equity in subsidiaries (13,516) (12,966) (8,027) Other - net (11) (165) (618) ------------------------------ Net cash provided by operating activities 10,591 8,024 8,973 ------------------------------ Investing Activities Purchases of premises and equipment (499) (106) (300) Acquisition and additional investment in subsidiary (1,000) (3,950) -0- ------------------------------ Net cash used by investing activities (1,499) (4,056) (300) ------------------------------ Financing Activities Proceeds from issuance of long-term debt -0- 2,500 -0- Repayment of long-term debt (500) -0- -0- Tax benefit of ESOP dividend 84 119 97 Discount on dividend reinvestment plan purchases (159) (124) (80) Cash dividends paid (8,571) (6,860) (5,899) ------------------------------ Net cash used by financing activities (9,146) (4,365) (5,882) ------------------------------ Net increase (decrease) in cash (54) (397) 2,791 Cash at beginning of year 2,625 3,022 231 ------------------------------ Cash at end of year $ 2,571 $ 2,625 $ 3,022 ==============================
Supplemental schedule of noncash investing and financing activities The Corporation borrowed $250 in 1993 and $1,520 in 1991 and concurrently loaned these amounts to the ESOP on identical terms. The loans were recorded as long- term debt and the offset was recorded as a reduction of the common shareholders' equity. Loan payments in the amount of $714 were made during each of the three years ended 1993 thereby reducing the outstanding amount related to deferred compensation to $4,449 at December 31, 1993. NOTE 22--Subsequent Event On January 18, 1994, the Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend in the amount of 9,321,012 shares payable on February 10, 1994. Accordingly, the average number of shares and all per share amounts have been restated to reflect the stock split on a retroactive basis. F-14 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands)
March 31, December 31, 1994 1993 ----------- ------------ ASSETS Cash and due from banks.................. $ 50,976 $ 51,044 Interest-bearing bank deposits........... 595 2,569 Federal funds sold....................... 1,430 0 Securities available for sale............ 462,195 465,224 Investment securities (Market Value $367,603 in 1994 and $383,943 in 1993)...................... 373,567 381,811 Loans (all domestic)..................... 1,062,440 1,037,675 Less unearned income................... 30,712 31,499 Less reserve for possible loan losses 14,886 14,544 ---------- ---------- Net loans........................... 1,016,842 991,632 Property and equipment................... 22,189 21,911 Other real estate owned.................. 2,758 4,929 Other assets............................. 42,081 36,149 ---------- ---------- TOTAL ASSETS........................ $1,972,633 $1,955,269 ========== ========== LIABILITIES Deposits (all domestic): Noninterest-bearing.................... $ 167,170 $ 167,306 Interest-bearing....................... 1,423,545 1,408,318 ---------- ---------- Total deposits...................... 1,590,715 1,575,624 Short-term borrowings.................... 174,471 171,497 Other liabilities........................ 16,448 14,332 Long-term debt........................... 7,911 7,363 ---------- ---------- Total liabilities................... 1,789,545 1,768,816 ---------- ---------- SHAREHOLDERS' EQUITY Preferred stock, $1 par value per share, 3,000,000 shares authorized and unissued........................... -0- -0- Common stock $5 par value per share, 25,000,000 shares authorized and 18,642,024 and 9,321,012 shares issued and outstanding in 1994 and 1993, respectively..................... 93,210 46,605 Additional paid-in capital............... -0- 35,296 Retained earnings........................ 98,579 107,417 Unrealized gain (loss) on securities available for sale..................... (3,701) 1,584 ---------- ---------- 188,088 190,902 Deferred compensation.................... (5,000) (4,449) ---------- ---------- Total shareholders' equity............. 183,088 186,453 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $1,972,633 $1,955,269 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-15 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands except per share data)
For the 3 Months Ended March 31, ---------------- 1994 1993 ---- ---- Interest Income Interest and fees on loans............... $21,021 $21,695 Interest and dividends on investments: Taxable interest....................... 10,214 10,057 Interest exempt from federal income taxes.......................... 871 810 Dividends.............................. 226 151 Interest on federal funds sold........... 8 103 Interest on bank deposits................ 20 199 ------- ------- Total Interest Income................. 32,360 33,015 Interest Expense Interest on deposits..................... 12,759 13,794 Interest on short-term borrowings........ 1,522 663 Interest on long-term debt............... 106 115 ------- ------- Total Interest Expense................ 14,387 14,572 ------- ------- Net interest income........................ 17,973 18,443 Provision for possible loan losses....... 539 593 ------- ------- Net interest income after provision for possible loan losses................. 17,434 17,850 Other Income Securities gains......................... 213 657 Trust income............................. 630 603 Service charges on deposits.............. 1,146 1,184 Other income............................. 830 542 ------- ------- Total Other Income.................... 2,819 2,986 Other Expenses Salaries and employee benefits........... 6,649 6,322 Net occupancy expense.................... 971 936 Furniture and equipment expense.......... 865 784 FDIC expense............................. 889 884 Other operating expenses................. 3,558 3,711 ------- ------- Total Other Expenses.................. 12,932 12,637 ------- ------- Income before taxes and cumulative effect of change in accounting method................................... 7,321 8,199 Applicable income taxes.................. 2,191 2,360 ------- ------- Income before cumulative effect of change in accounting method.............. 5,130 5,839 Cumulative effect of change in method of accounting for income taxes........... -0- 500 ------- ------- Net Income................................. $ 5,130 $ 6,339 ======= ======= Average Shares Outstanding................. 18,642,024 18,642,024 Per Share Data: Net income before effect of change in accounting method..................... $0.28 $0.32 Cumulative effect of change in method of accounting for income taxes.................................... $0.00 $0.02 Net income................................. $0.28 $0.34 Cash dividends per share................... $0.14 $0.125
The accompanying notes are an integral part of these consolidated financial statements. F-16 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands)
Unrealized Gain (loss) Additional on Securities Total Common Paid-in Retained Available Deferred Shareholders' Stock Capital Earnings For Sale Compensation Equity ------- ----------- --------- -------------- ------------- -------------- Balance at December 31, 1992......... $46,605 $35,455 $93,256 $ -0- $(4,913) $170,403 Net income......................... -0- -0- 6,339 -0- -0- 6,339 Cash dividends declared............ -0- -0- (2,143) -0- -0- (2,143) Cash dividends declared by subsidiary prior to merger....... -0- -0- (56) -0- -0- (56) Decrease in deferred compensation -0- -0- -0- -0- 179 179 Discount on dividend reinvestment plan purchases................... -0- (40) -0- -0- -0- (40) ------- ------- -------- ---- -------- --------- Balance at March 31, 1993............ $46,605 $35,415 $97,396 $ -0- $(4,734) $174,682 ======= ======= ======== ====== ======== ========= Balance at December 31, 1993......... $46,605 $35,296 $107,417 $ 1,584 $(4,449) $186,453 Net income......................... -0- -0- 5,130 -0- -0- 5,130 Cash dividends declared............ -0- -0- (2,610) -0- -0- (2,610) Transfer to reflect 2-for-1 stock split effected in the form of a 100% stock dividend......................... 46,605 (35,258) (11,347) -0- -0- -0- Change in unrealized gain (loss) on securities available for sale, net of tax effect.................... -0- -0- -0- (5,285) -0- (5,285) Increase in deferred compensation -0- -0- -0- -0- (551) (551) Discount on dividend reinvestment plan purchases................... -0- (38) (11) -0- -0- (49) ------- -------- ------- ------- ------- -------- Balance at March 31, 1994............ $93,210 $ -0- $98,579 $(3,701) $(5,000) $183,088 ======= ======== ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-17 FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
For the 3 Months Ended March 31, ----------------- 1994 1993 ---- ---- Operating Activities Net income......................................... $ 5,130 $ 6,339 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses.............. 539 593 Depreciation and amortization................... 1,239 1,081 Net gains on sales of assets.................... (277) (670) Increase in interest receivable................. (1,125) (913) Decrease in interest payable.................... (126) (169) Increase in income taxes payable................ 1,907 2,473 Provision for deferred taxes.................... 478 (594) Other(net)...................................... (442) (2,281) -------- ------- Net cash provided by operating activities..... 7,323 5,859 -------- ------- Investing Activities Proceeds from investment securities transactions: Sales........................................... 43,329 39,402 Maturities and redemptions...................... 57,181 70,151 Proceeds from sales of loans and other assets...... 3,306 3,089 Net decrease in time deposits with banks........... 1,974 2,378 Purchases of investment securities................. (97,368) (176,707) Net increase in loans.............................. (28,286) (28,039) Purchase of premises and equipment................. (1,624) (806) ------- ------- Net cash used by investing activities............ (21,488) (90,532) ------- ------- Financing Activities Repayments of long-term debt....................... (3) (2) Discount on dividend reinvestment plan purchases... (49) (40) Dividends paid..................................... (2,516) (2,143) Dividends paid by subsidiary prior to merger....... -0- (56) Net increase (decrease) in deposits................ 15,121 (8,068) Net increase in federal funds purchased............ 7,837 21,410 Net increase (decrease) in other short-term borrowings....................................... (4,863) 20,491 ------- ------- Net cash provided by financing activities..... 15,527 31,592 ------- ------- Net increase (decrease) in cash and cash equivalents............................ 1,362 (53,081) Cash and cash equivalents at January 1............... 51,044 93,892 ------- ------- Cash and cash equivalents at March 31................ $52,406 $40,811 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-18 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1994 (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 March 31, 1994 and the results of operations for the three month periods ended March 31, 1994 and 1993, and statements of cash flows and changes in shareholders' equity for the three month periods ended March 31, 1994 and 1993. The results of the three months ended March 31, 1994 and 1993 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 Reserve For Possible Loan Losses (in thousands) - ------ --------------------------------
1994 1993 ---- ---- Reserve balance January 1.. $14,544 $14,267 Additions: Provision charged to operating expenses.... 539 593 Recoveries of previously charged off loans................. 405 454 Deductions: Loans charged off...... 602 912 ------- ------- Reserve balance March 31... $14,886 $14,402 ======= =======
NOTE 3 Cash Flow Disclosures (dollar amounts in thousands) - ------ --------------------- Cash paid during the first three months of the year for interest and income taxes were as follows:
1994 1993 ---- ----- Interest $14,513 $14,811 Income Taxes $ -0- $ -0-
During 1994 the Corporation borrowed $730 and concurrently loaned this amount to the ESOP Trust on identical terms. ESOP loan payments of $179 were made by the ESOP Trust during the respective 1994 and 1993 periods, thereby resulting in outstanding amounts related to deferred compensation of $5,000 at March 31, 1994 and $4,734 at March 31, 1993. F-19 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 1994 (Unaudited) NOTE 4 Change of Accounting Method - ------ --------------------------- The Corporation adopted Statement of Financial Accounting Standards No. 109 ("FAS No. 109"), "Accounting for Income Taxes", effective January 1, 1993. FAS No. 109 is an asset and liability approach for financial accounting and reporting for income taxes. The effect of adopting FAS No. 109 resulted in a cumulative benefit of $500 thousand in the first quarter of 1993. NOTE 5 Proposed Business Combination - ------ ----------------------------- On March 25, 1994, the Corporation entered into a definitive agreement to merge United National Bancorporation and its subsidiaries ("United") into the Corporation. Under the terms of the Agreement and Plan of Reorganization, the holders of shares of United common stock will receive two shares of the Corporation's common stock for each share of United common stock. The transaction is expected to be accounted for as a pooling of interests. United was organized as a Pennsylvania business corporation established in 1982 for the purposes of operating as a bank holding company. United is headquartered in Chambersburg, Pennsylvania with two active Subsidiaries. Unitas National Bank, a national banking association, headquartered in Chambersburg, Pennsylvania and Unitas Mortgage Corporation, having its principal place of business in Carlisle, Pennsylvania, and is engaged in the origination of mortgages for the secondary market. Total assets of United were $146 million serviced through twelve community offices. The proposed transaction requires the approval of the shareholders of United and approval of the appropriate regulatory agencies. On April 21, 1994 the Corporation entered into a definitive agreement to merge Reliable Financial Corporation ("Reliable") into the Corporation. Under the terms of the Agreement and Plan of Reorganization, the holders of shares of Reliable common stock will receive 1.6 shares of the Corporation's common stock for each share of Reliable common stock. The transaction is expected to be accounted for as a pooling of interests. Reliable is a holding company which was established in 1991 for the purpose of owning 100% of the outstanding common stock of Reliable Savings Bank, PaSA. Reliable Savings Bank, PaSA is a Pennsylvania-chartered savings association, headquartered in Bridgeville, Pennsylvania with total assets of $150 million serviced through three community offices. Reliable shares are traded on the NASDQ National Market System under the symbol "RESB". The proposed transaction requires the approval of the shareholders of Reliable and approval of the appropriate regulatory agencies. F-20 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) March 31, 1994 (Unaudited) NOTE 6 Earnings per Common Share - ------ ------------------------- Earnings per share have been calculated on the weighted average number of common shares outstanding during each period, restated to reflect pooling of interests. Additionally, average number of shares has been restated to reflect the two-for- one stock split effected in the form of a 100% stock distribution on the Corporation's common stock declared on January 18, 1994. F-21 [LETTERHEAD OF ERNST & YOUNG APPEARS HERE] Report of Independent Auditors The Board of Directors and Shareholders United National Bancorporation We have audited the accompanying consolidated balance sheets of United National Bancorporation and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. 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. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United National Bancorporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1993 the Corporation changed its method of accounting for income taxes. /s/ Ernst & Young January 14, 1994 F-22 CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
December 31 1993 1992 -------- -------- (In Thousands) Assets Cash and due from banks $ 3,758 $ 6,030 Federal funds sold 1,600 -- -------- -------- Cash and Cash Equivalents 5,358 6,030 Interest-bearing deposits in banks 33 1,686 Investment securities (Market value 1993 -- $20,363; 1992 -- $24,161) 20,008 23,740 Mortgage loans held for sale (Market value 1992 -- $5,809) -- 5,507 Loans: Real estate 37,550 36,181 Installment and consumer 38,446 38,318 Commercial, financial, and agricultural 24,881 18,854 Lease financing 28,113 18,893 -------- -------- 128,990 112,246 Less: Allowance for loan losses (1,189) (1,061) Unearned income (10,514) (9,466) -------- -------- Net Loans 117,287 101,719 Premises and equipment, net of accumulated depreciation (1993 -- $2,566; 1992 -- $2,317) 2,570 2,201 Accrued interest receivable 630 729 Other assets 1,717 1,649 -------- -------- TOTAL ASSETS $147,603 $143,261 ======== ======== Liabilities Deposits: Noninterest-bearing $ 8,776 $ 9,188 Interest-bearing 120,543 118,674 -------- -------- Total Deposits 129,319 127,862 Securities sold under agreements to repurchase 4,687 3,198 Net deferred tax liabilities 934 561 Other liabilities 381 809 -------- -------- Total Liabilities 135,321 132,430 Shareholders' Equity Preferred Stock -- $10.00 par value: Authorized and unissued 5,000,000 shares -- -- Common Stock -- $2.50 par value: Authorized 10,000,000 shares; issued and outstanding shares -- 769,147 in 1993 and 699,407 in 1992 1,923 1,748 Surplus 4,115 2,476 Retained earnings 6,244 6,607 -------- -------- Total Shareholders' Equity 12,282 10,831 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $147,603 $143,261 ======== ========
See accompanying notes. 4 F-23 CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------
Year Ended December 31 1993 1992 1991 ------- ------- ------- (In Thousands, except per share data) Interest income: Loans, including fees $10,946 $10,822 $10,625 Investment securities: Taxable 1,573 1,382 1,297 Tax-exempt 28 32 33 Other 70 216 342 ------- ------- ------- Total Interest Income 12,617 12,452 12,297 Interest expense: Deposits 4,651 5,653 7,004 Short-term borrowings 143 30 1 ------- ------- ------- Total Interest Expense 4,794 5,683 7,005 ------- ------- ------- Net Interest Income 7,823 6,769 5,292 Provision for loan losses 473 325 300 ------- ------- ------- Net Interest Income After Provision for Loan Losses 7,350 6,444 4,992 Other income: Gain on sale of mortgages 238 -- -- Trust department 138 138 157 Investment securities gains 62 15 34 Service fees and other 438 375 326 ------- ------- ------- 876 528 517 ------- ------- ------- Other expenses: Salaries and employee benefits 2,854 2,377 2,108 Occupancy expense 718 637 567 Special services 293 259 271 Taxes, other than income 57 107 98 FDIC insurance 293 268 238 Other 1,333 1,265 978 ------- ------- ------- 5,548 4,913 4,260 ------- ------- ------- Income Before Income Taxes 2,678 2,059 1,249 Income Taxes 858 641 346 ------- ------- ------- NET INCOME $ 1,820 $ 1,418 $ 903 ======= ======= ======= Per share data: Net income $2.37 $1.84 $1.17 Cash dividends .47 .43 .39
See accompanying notes. 5 F-24 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
Common Retained Stock Surplus Earnings Total ------- ------- -------- ------- (In Thousands) Balance at January 1, 1991 $1,446 $ 846 $ 6,857 $ 9,149 Net income 903 903 Cash dividends (301) (301) 10% common stock dividend -- 57,637 shares at fair market value 144 664 (811) (3) ------ ------ ------- ------- Balance at December 31, 1991 1,590 1,510 6,648 9,748 Net income 1,418 1,418 Cash dividends (331) (331) 10% common stock dividend -- 63,375 shares at fair market value 158 966 (1,128) (4) ------ ------ ------- ------- Balance at December 31, 1992 1,748 2,476 6,607 10,831 Net income 1,820 1,820 Cash dividends (364) (364) 10% common stock dividend -- 69,740 shares at fair market value 175 1,639 (1,819) (5) ------ ------ ------- ------- Balance at December 31, 1993 $1,923 $4,115 $ 6,244 $12,282 ====== ====== ======= =======
See accompanying notes. 6 F-25 CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Year Ended December 31 1993 1992 1991 -------- -------- ------- (In Thousands) Operating Activities Net income $ 1,820 $ 1,418 $ 903 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 473 325 300 Provision for depreciation and amortization 249 221 198 Amortization of investment security premiums and accretion of discounts, net 94 16 4 Deferred income taxes 373 180 19 Realized investment security gains (62) (15) (34) Gain on sale of mortgages (238) -- -- (Increase) decrease in other assets 31 (1,006) 238 Decrease in other liabilities (433) (273) (42) -------- -------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,307 866 1,586 Investing Activities Net increase in loans (16,041) (10,166) (1,068) Proceeds from sale of mortgages 5,745 -- -- Purchase of premises and equipment, net (618) (837) (494) Proceeds from sales of investment securities 2,555 2,016 2,183 Proceeds from maturities of investment securities 11,471 5,556 4,375 Purchase of investment securities (10,326) (14,846) (7,210) Net decrease in short-term investments 1,653 414 2,398 -------- -------- ------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,561) (17,863) 184 Financing Activities Net increase in deposits 1,457 10,425 3,093 Net increase in short-term borrowings 1,489 3,198 -- Cash dividends (364) (331) (301) -------- -------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,582 13,292 2,792 -------- -------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (672) (3,705) 4,562 Cash and cash equivalents at beginning of year 6,030 9,735 5,173 -------- -------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,358 $ 6,030 $ 9,735 ======== ======== =======
See accompanying notes. 7 F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993 1. Significant Accounting Policies Principles of Consolidation United National Bancorporation (the Corporation) and its subsidiaries (Unitas National Bank [the Bank], Unitas Real Estate Corp., Unitas Commercial Leasing Corp., Unitas Financial Corp., Unitas Life Insurance Co., Unitas Mortgage Corp., and Unitas Services Corp.) provide financial services. The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. Investments in subsidiaries are carried at the parent company's equity in the underlying net assets. Mortgage Loans Held for Sale The Bank identified a pool of conventional fixed-rate mortgages at December 31, 1992 which it was holding for sale. Mortgage loans held for sale are carried at the aggregate of lower of cost or market value. No loans were held for sale at December 31, 1993. Investment and Mortgage-Backed Securities Investment securities are stated at cost adjusted for amortization of premiums and accretion of discounts. Security gains and losses are determined using the specific identification method. In classifying debt securities acquired and held in the investment portfolio, management continually evaluates the Corporation's ability to hold the securities to maturity as well as its intent to hold the securities for the foreseeable future. Management's evaluation of the Corporation's ability to hold securities to maturity is based on an evaluation of its ability to satisfy liabilities in the normal course of business and meet regulatory and legal requirements such as minimum capital requirements. Additionally, management continually evaluates the probability of events that might occur which may cause the Corporation to sell debt securities. Currently, management is not aware of such probable events; thus all debt securities are classified as investment securities at December 31, 1993. Revenue Recognition Interest on loans is recognized based upon the principal amount outstanding. The accrual of interest income is discontinued when circumstances indicate that collection is questionable. When interest accruals are discontinued, interest credited to income in the current year is reversed. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest. Allowance for Loan Losses The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the portfolio. Management's determination of the adequacy of the allowance is based on the risk characteristics of the portfolio, past loan loss experience, local economic conditions, and such other relevant factors which, in management's judgment, deserve recognition. The allowance is increased by provisions for loan losses charged to operations. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are charged to operations over the estimated useful lives of the assets, computed by the straight-line method. Lease Financing The Corporation provides equipment (principally automobiles) financing through lease arrangements. Direct financing leases are stated at the aggregate of lease payments receivable plus estimated residual values (1993 -- $10,340,000; 1992 -- $5,891,000). Unearned income on direct financing leases is amortized over the lease term resulting in an approximate level rate of return. 8 F-27 - -------------------------------------------------------------------------------- 1. Significant Accounting Policies (continued) Per Share Data Net income and dividends per share have been restated to reflect a 10 percent stock dividend to shareholders of record December 9, 1993, payable January 18, 1994. The effect of common stock equivalents is not significant for any period presented. Cash Flow Information For purposes of the statements of cash flows, the Corporation considers cash and due from banks and federal funds sold as cash and cash equivalents. Generally, federal funds are purchased and sold for one-day periods. Cash paid during the years ended December 31, 1993, 1992, and 1991 for interest was $4,883,000, $5,961,000, and $5,314,000, respectively. Cash paid for income taxes was $585,000 in 1993, $544,000 in 1992, and $288,000 in 1991. Accounting Change -- Income Taxes The Corporation adopted FASB Statement No. 109, "Accounting for Income Taxes," in the first quarter of its fiscal year ended December 31, 1993. The Corporation adopted the Statement on a prospective basis without restating any prior years and has determined that the effect of its implementation on the Corporation's financial position and results of operations was not material for 1993 or 1992. In accordance with FASB Statement No. 109, the liability method is used in accounting for income taxes. Deferred income taxes are provided for differences between the tax basis of an asset or liability and its reported amount in the financial statements at the statutory tax rates that will be in effect when the differences are expected to reverse. Recently Issued FASB Statement The Corporation is required to adopt FASB Statement No. 115, "Accounting for Certain Investment in Debt and Equity Securities," in the first quarter of its fiscal year ending December 31, 1994 and will be required to adopt FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan," in the first quarter of its fiscal year ending December 31, 1995. The Corporation has determined that the effect of its implementation of these FASB Statements on the Corporation's financial position and results of operations will not be material. 2. Restrictions on Cash and Due from Banks The Bank is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 1993 was approximately $1,130,000. 3. Investment Securities The amortized cost and estimated market value of investment securities were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- (In Thousands) December 31, 1993: U.S.Treasury securities and obligations of U.S. government corporations and agencies $ 17,006 $ 281 $ (17) $ 17,270 Obligations of states and political subdivisions 200 3 -- 203 Corporate securities 800 29 -- 829 Foreign securities 250 19 -- 269 Mortgage-backed securities 1,195 40 -- 1,235 --------- ---------- ---------- --------- Total debt securities 19,451 372 (17) 19,806 Equity securities 557 -- -- 557 --------- ---------- ---------- --------- Total $ 20,008 $ 372 $ (17) $ 20,363 ========= ========== ========== =========
9 F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED - -------------------------------------------------------------------------------- 3. Investment Securities (continued)
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- (In Thousands) December 31, 1992: U.S.Treasury securities and obligations of U.S. government corporations and agencies $ 18,822 $ 329 $ (80) $ 19,071 Obligations of states and political subdivisions 550 22 -- 572 Corporate securities 1,316 48 (4) 1,360 Foreign securities 249 22 -- 271 Mortgage-backed securities 2,244 84 -- 2,328 --------- ---------- ---------- --------- Total debt securities 23,181 505 (84) 23,602 Equity securities 559 -- -- 559 --------- ---------- ---------- --------- Total $ 23,740 $ 505 $ (84) $ 24,161 ========= ========== ========== =========
At December 31, 1993 and 1992, investment securities with a carrying value of $14,649,000 and $9,830,000, respectively, were pledged as collateral to secure public deposits and for other purposes. The amortized cost and estimated market value of debt securities at December 31, 1993, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Amortized Market Cost Value --------- --------- (In Thousands) Due in one year or less $ 850 $ 863 Due after one year through five years 12,068 12,249 Due after five years through ten years 5,338 5,459 Due after ten years -- -- ------- ------- 18,256 18,571 Mortgage-backed securities 1,195 1,235 ------- ------- $19,451 $19,806 ======= =======
Proceeds from sales of investments in debt securities during 1993 were $2,555,000. Gross gains of $62,000 and gross losses of $-0- were realized on those sales. Proceeds from sales of investments in debt securities during 1992 were $2,016,000. Gains of $35,000 and gross losses of $20,000 were realized on those sales. Proceeds from such sales were $2,183,000 in 1991. Gains of $41,000 were realized on those sales and a loss of $7,000 was realized on the sale of an interest-bearing time deposit. 4. Related Party Loans Certain directors and executive officers of the Corporation and the Bank, including their associates and companies, have loans with the Bank. Such loans were made in the ordinary course of business at the Bank's normal credit terms including interest rate and collateralization and do not represent more than a normal risk of collection. Total loans to these persons amounted to approximately $1,893,000 and $1,958,000 at December 31, 1993 and 1992, respectively. During 1993, $257,000 of new loans were made and repayments totalled $322,000. 10 F-29 - -------------------------------------------------------------------------------- 5. Allowance for Loan Losses Changes in the allowance for loan losses for each of the three years ended December 31, 1993 were as follows:
1993 1992 1991 ------ ------ ------ (In Thousands) (In Thousands) Balance beginning of year $1,061 $ 910 $ 802 Provision charged to operations 473 325 300 Recoveries on loans 24 36 12 Loans charged off (369) (210) (204) ------ ------ ----- Balance end of year $1,189 $1,061 $ 910 ====== ====== =====
6. Regulatory Matters Dividends are paid by the Corporation from its assets which are mainly provided by dividends from the Bank. However, certain regulatory restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans, or advances. As of December 31, 1993, the Bank had retained earnings of $7,982,000 of which $3,070,000 was available for distribution to the Corporation as dividends without prior regulatory approval. Under Federal Reserve regulation, the Bank also is limited as to the amount it may loan to its affiliates, including the Corporation, unless such loans are collateralized by specified obligations. At December 31, 1993, the maximum amount available for transfer from the Bank to the Corporation in the form of loans approximated 20 percent of consolidated net assets. The Bank is also required to maintain minimum amounts of capital to total "risk-weighted" assets, as defined by the banking regulators. At December 31, 1993, the Bank was required to have minimum Tier I and total capital ratios of 4.00 percent and 8.00 percent, respectively. The Bank's actual ratios at that date were 10.72 percent and 11.76 percent, respectively. The Bank's leverage ratio at December 31, 1993 was 8.26 percent. 7. Income Taxes Effective January 1, 1993, the Corporation changed its method of accounting for income taxes from the deferred method to the liability method required by FASB Statement No. 109, "Accounting for Income Taxes" (see Note 1, "Accounting Changes"). As permitted under the new rules, prior years' financial statements have not been restated. There was no cumulative effect of adopting Statement No. 109 as of January 1, 1993. There was no effect on the pre-tax income from continuing operations as a result of the adoption of Statement No. 109. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 31, 1993 are as follows (In Thousands): Deferred tax liabilities: Leasing activity $2,205 Other 99 ------ Total Deferred tax liabilities 2,304 Deferred tax assets: Allowance for loan loss 188 Alternative minimum tax carryforward 1,182 ------ Total deferred tax assets 1,370 ------ Net deferred tax liabilities $ 934 ======
11 F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 7. Income Taxes (continued) The provision for income taxes is summarized as follows:
Liability Method Deferred Method ------------------------------------- 1993 1992 1991 ------ ------ ------ (In Thousands) Current $ 485 $ 461 $ 327 Deferred 373 180 19 ------ ------ ------ Income taxes $ 858 $ 641 $ 346 ====== ====== ======
Deferred taxes resulted from the following timing differences for the years ended December 31, 1992 and 1991:
1992 1991 ------ ------ (In Thousands) Leasing activities $ 199 $ (42) Allowance for loan losses (69) (66) Alternative minimum tax 58 178 Other (8) (51) ----- ----- $ 180 $ 19 ===== =====
Income taxes applicable to investment securities gains included in the provision for income taxes totaled $21,000 in 1993, $5,000 in 1992, and $12,000 in 1991. A reconciliation of the provision for income taxes and the amount which would have been provided at statutory rates is as follows:
Liability Method Deferred Method ----------------------------------- 1993 1992 1991 ------ ------ ------ Tax at statutory rate on pre-tax income $ 911 $ 700 $ 425 Effect of tax-exempt income (53) (59) (68) Other -- -- (11) ----- ----- ----- Income taxes $ 858 $ 641 $ 346 ===== ===== =====
8. Pension Plan The Corporation has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation. The Corporation's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. No contributions were made in 1993, 1992, or 1991. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The following table sets forth the Plan's funded status and amounts recognized in the Corporation's financial statements at December 31:
1993 1992 ------ ------ (In Thousands) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $751 in 1993 and $574 in 1992 $ (764) $ (588) ======= ====== Projected benefit obligation for service rendered to date $(1,100) $ (890) Plan assets at fair value, primarily listed stocks and bonds 1,126 1,064 ------- ------ Plan assets in excess of projected benefit obligation 26 174 Unrecognized net loss from past experience different from that assumed 188 78 Unrecognized net transition asset (195) (215) ------- ------ Prepaid pension cost included in other assets $ 19 $ 37 ======= ======
12 F-31 - -------------------------------------------------------------------------------- 8. Pension Plan (continued) Net pension expense (income) included the following components:
1993 1992 1991 ------ ------ ------ (In Thousands) Service cost-benefits earned during the period $ 60 $ 48 $ 40 Interest cost on projected benefit obligation 77 63 53 Actual return on plan assets (83) (79) (74) Net amortization and deferral (14) (20) (20) ----- ----- ---- Net periodic pension expense (income) $ 40 $ 12 $ (1) ===== ===== ====
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 8 percent and 7 percent, respectively, at December 31, 1993 and 1992. The expected long-term rate of return on plan assets was 8 percent in 1993 and 7 percent in 1992 and 8.5 percent in 1991. 9. Loan Commitments and Standby Letters of Credit Loan commitments are made to accommodate the financial needs of the Bank's customers. Standby letters of credit commit the Bank to make payments on behalf of customers when certain specified future events occur. They primarily are issued to facilitate customers' trade transactions. Historically, more than 90 percent of standby letters of credit expire unfunded. Both arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Bank's normal credit policies. Collateral (e.g., securities, receivables, inventory, equipment) is obtained based on management's credit assessment of the customer. The Bank's maximum exposure to credit loss for loan commitments (unfunded loans and unused lines of credit, including home equity lines of credit) and standby letters of credit outstanding at December 31, 1993 was as follows (In Thousands):
Loan commitments: Home equity loans $ 828 Lines of credit 793 Real estate construction 907 Standby letters of credit 498 ------ Total $3,026 ======
Loan commitments and standby letters of credit were $1,828,000 and $651,000, respectively, at December 31, 1992. 10. Concentration of Credit Risk Most of the Bank's business is with customers in the five county area of Central Pennsylvania where it has full-service branch locations. The Bank's consumer and real estate loan portfolios are principally to borrowers throughout this market area. The Bank requires collateral on all real estate exposures and generally requires loan-to-value ratios of no greater than 80 percent. The Bank's lease portfolio includes customers in this area as well as other parts of South Central Pennsylvania. The commercial, financial, and agricultural portfolio is diversified with no industry comprising greater than 10 percent of total loans outstanding. Collateral requirements on such loans are determined on a case-by-case basis based on management's credit evaluations of the respective borrower. 13 F-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED - -------------------------------------------------------------------------------- 11. Shareholders' Equity In 1987, the Corporation established a dividend reinvestment and stock purchase plan. Shareholders of common stock may participate in the plan which provides that additional shares of common stock may be purchased with reinvested dividends at prevailing market prices. To the extent that shares are not available on the open market, the Corporation has reserved 266,200 shares of common stock to be issued under the dividend reinvestment plan. The Corporation has reserved 133,100 shares covered by the 1986 Stock Option Plan which expires January 1997. The Plan permits the granting of stock options, including incentive stock options (ISOs) and nonqualified stock options (NQSOs) to key employees. Options may be accompanied by stock appreciation rights (SARs). The exercise of a SAR requires the surrender of an unexercised related option. The purchase price of the common stock covered by each ISO will not be less than 100 percent (85 percent for NQSOs) of the fair market value of the stock on the date of the grant of such option. The duration of each option granted under the Plan will not exceed 10 years from the date of grant. No option will be exercisable during the year ending on the first anniversary date of the granting of such option. The Plan provides that SARs will be automatically exercised on the last business day prior to the expiration of the related option if, on that date, the fair market value of a share of common stock exceeds the per share price of the related option. In the event of termination of employment, options will generally remain exercisable until the earlier of the expiration of the option term or three months from the date of termination of employment. At December 31, 1993, all option holders have expressed their intention to exercise the fixed award portion of their plan. Accordingly, no compensation expense has been recorded. Had the holders intended to exercise the SAR portion of their plan, compensation expense of approximately $528,000, based on the market value of the Corporation's shares at December 31, 1993, would have been recorded. The changes in option shares outstanding are as follows:
Year Ended December 31 1993 1992 1991 ------ ------ ------ Options outstanding at beginning of year 34,243 17,303 17,303 Options granted at $10.52-$16.14 per share 15,400 16,940 -- ------ ------ ------ Options outstanding at end of year 49,643 34,243 17,303 ====== ====== ====== Options available for grant at December 31 83,457 ====== Options exercisable at December 31 34,243 ======
12. United National Bancorporation (Parent Company Only) Financial Information
December 31 1993 1992 ------ ------ (In Thousands) Balance Sheet Assets Cash $ 37 $ 43 Investment in: Bank subsidiary 12,209 10,770 Nonbank subsidiaries 36 18 ------- ------- Total Assets $12,282 $10,831 ======= ======= Shareholders' Equity $12,282 $10,831 ======= =======
14 F-33 - -------------------------------------------------------------------------------- 12. United National Bancorporation (Parent Company Only) Financial Information (continued)
Year Ended December 31 1993 1992 1991 ------ ------ ------ Statements of Income (In Thousands) Income: Dividends from Bank subsidiary $ 404 $ 370 $ 351 Other 12 40 -- ------- ------- ------- 416 410 351 Expenses 53 41 35 ------- ------- ------- Income before equity in undistributed net income of subsidiaries 363 369 316 Equity in undistributed net income of: Bank subsidiary 1,439 1,049 583 Nonbank subsidiaries 18 -- 4 ------- ------- ------- Net income $ 1,820 $ 1,418 $ 903 ======= ======= =======
Year Ended December 31 1993 1992 1991 ------ ------ ------ Statements of Cash Flows (In Thousands) Operating activities Net income $ 1,820 $ 1,418 $ 903 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (1,457) (1,049) (587) Other (5) (8) (3) ------- ------- ----- Net cash provided by operating activities 358 361 313 Financing activities Cash dividends (364) (331) (301) ------- ------- ----- Net cash used by financing activities (364) (331) (301) ------- ------- ----- Increase (decrease in cash) (6) 30 12 Cash at beginning of year 43 13 1 ------- ------- ----- Cash at end of year $ 37 $ 43 $ 13 ======= ======= =====
15 F-34 United National Bancorporation and Subsidiaries Consolidated Balance Sheets (Unaudited)
March 31, December 31, 1994 1993 ---------- ------------- (In thousands) Assets Cash and due from banks $ 4,089 $ 3,758 Federal funds sold 200 1,600 -------- -------- Cash and cash equivalents 4,289 5,358 Interest-bearing deposits in banks 36 33 Investment Securities: Held to Maturity (fair value 1994 - 6,718 20,008 $6,821; 1993 - $20,363) Available for Sale at fair value 14,584 -- Loans: Real estate 36,591 37,550 Installment and Consumer 38,025 38,446 Commercial, financial, and agricultural 23,284 24,881 Lease financing 28,252 28,113 -------- -------- Total Loans 126,152 128,990 Less: Allowance for loan losses (1,257) (1,189) Unearned income (10,136) (10,514) -------- -------- Net Loans 114,759 117,287 Premises and equipment, net of accumulated depreciation (1994-$2,644; 1993-$2,378) 2,597 2,570 Other assets 2,539 2,347 -------- -------- Total Assets $145,522 $147,603 ======== ======== Liabilities Deposits: Noninterest-bearing $ 8,192 $ 8,776 Interest-bearing 119,811 120,543 -------- -------- Total Deposits 128,003 129,319 Securities sold under agreements to repurchase 3,347 4,687 Other liabilities 1,651 1,315 -------- -------- Total Liabilities 133,001 135,321 Shareholders' Equity Preferred Stock-$10.00 par value: Authorized and unissued 5,000,000 shares -- -- Common Stock-$2.50 par value: Authorized 10,000,000 shares: issued and outstanding - 769,147 shares 1,923 1,923 Surplus 4,115 4,115 Retained earnings 6,483 6,244 -------- -------- Total Shareholders' Equity 12,521 12,282 -------- -------- Total Liabilities and Shareholders' Equity $145,522 $147,603 ======== ========
See accompanying notes. F-35 United National Bancorporation and Subsidiaries Consolidated Statements of Income (unaudited)
Three Months Ended March 31, ----------------- 1994 1993 ---- ---- (In thousands except per share data) Interest Income Loans Including Fees $ 2,640 $ 2,704 Investments 281 429 Other 13 38 -------- -------- Total Interest Income 2,934 3,171 Total Interest Expense 991 1,293 -------- -------- Net Interest Income 1,943 1,878 Provision for Loan Losses 99 75 -------- -------- Net Interest Income After Provision for Loan Losses 1,844 1,803 Gain on Sale of Mortgage Loans 9 239 Other Income 169 122 Other Expense 1,406 1,266 -------- -------- Income Before Income Taxes 616 898 Income Taxes 198 286 -------- -------- Net Income $ 418 $ 612 ======== ======== Per share data: Net income $0.54 $0.80 Cash dividends $0.13 $0.12 Average number of shares outstanding 769,147 769,147
See accompanying notes. F-36 United National Bancorporation and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
Unrealized Common Retained Gain (Loss) Stock Surplus Earnings AFS Securities Total ------- -------- -------- -------------- ----------- (in thousands) Balance at 12/31/92 $1,748 $2,476 $6,607 $ 0 $10,831 Net income 612 612 Cash Dividends (92) (92) ------ ------ ------ ---- ------- Balance at 3/31/93 $1,748 $2,476 $7,127 $ 0 $11,351 ====== ====== ====== ==== ======= Balance at 12/31/93 $1,923 $4,115 $6,244 $ 0 $12,282 Net Income 418 418 Cash Dividends (100) (100) Changes in unrealized gain (loss) on securities available for sale, net of tax effect (79) (79) ------ ------ ------ ---- ------- Balance at 3/31/94 $1,923 $4,115 $6,562 $(79) $12,521 ====== ====== ====== ==== =======
See accompanying notes. F-37 United National Bancorporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, ------------------------- 1994 1993 ------- -------- (In Thousands) Operating Activities: Net Income $ 418 $ 612 Adjustments to reconcile net income to net cash provided by operating activities: Provision for Loan Losses 99 75 Provision for Other Real Estate Owned 0 0 Provision for Depreciation & Amortization 78 61 Amortization of Investment Security Premiums and Accretion of Discounts, net 18 (16) Deferred Income Taxes 198 166 Gain on Sale of Loans (8) (239) Realized Investment Security Gains (19) (2) (Increase) Decrease in Other Assets (192) 132 Increase (Decrease) in Other Liabilities 180 61 ------- ------- Net Cash Provided By (Used In) Operating Activities 772 850 Investing Activities: Net (Increase) Decrease in Loans 2,286 (4,652) Proceeds from sale of Mortgage Loans 153 5,009 Purchase of premises and equipment, net (105) (183) Proceeds from sales of investment securities 545 0 Proceeds from maturities of investment securities 3,627 1,468 Purchase of investment securities (5,588) (6,794) Net (increase) decrease in short term investments (3) 1,566 ------- ------- Net Cash Provided By (Used In) Investing Activities 915 (3,586) Financing Activities: Net Increase (Decrease) in Deposits (1,316) 1,002 Net increase (decrease) in short-term borrowings (1,340) 106 Cash Dividends (100) (91) ------- ------- Net Cash Provided By (Used In) Financing Activities (2,756) 1,017 Decrease in Cash and Cash Equivalents (1,069) (1,719) Cash and Cash Equivalents, Beginning of Period 5,358 6,030 ------- ------- Cash and Cash Equivalents, End of Period $ 4,289 $ 4,311 ======= =======
See accompanying notes. F-38 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 1994 BASIS OF PRESENTATION - --------------------- Note 1 Management Representation: The accompanying unaudited consolidated - ------ -------------------------- financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1994 are not necessarily indicative of the results that may be expected for the year ended December 31, 1994. For further information, refer to the consolidated financial statements and footnotes thereto included in United National Bancorporation's annual report on Form 10-K for the year ended December 31, 1993. Note 2 Reserve For Possible Loan Losses: (In thousands) - ------ ---------------------------------
1994 1993 ------ ------ Reserve balance January 1 $1,189 $1,061 Additions: Provision charged to operating expenses 99 75 Recoveries of previously charged off loans 17 12 Deductions: Loans charged off 48 19 ------ ------ Reserve balance March 31 $1,257 $1,129
Note 3 Cash Flow Disclosures: (In thousands) - ------ ---------------------- Cash paid during the first three months of the year for interest and income taxes were as follows:
1994 1993 ------ ------ Interest $977 $1,210 Income Taxes 0 53
Note 4 Change in Accounting Method: The Corporation adopted Statement of - ------ ---------------------------- Financial Accounting Standards No. 109 ("FAS No. 109"), "Accounting for Income Taxes" effective January 1, 1993. FAS No. 109 is an asset and liability approach for financial accounting and reporting for income taxes. As permitted by Statement 109, UNB has elected not to restate the financial statements of any prior year and the cumulative effect of the change had no material impact on the balance sheet or income statement in the first quarter of 1993. F-39 UNITED NATIONAL BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 1994 Note 5 Proposed Business Combination: On March 25, 1994, UNB signed a - ------ ------------------------------ definitive agreement to merge the Corporation into First Commonwealth Financial Corporation of Indiana, PA ("FCFC"). Total assets of the combined entity will exceed $2.0 billion, affording our bank subsidiary, Unitas National Bank, and active nonbank subsidiary, Unitas Mortgage Corporation, excellent long term growth and profitability potential. We are confident that this partnership will open significant opportunities for these subsidiaries as they become independent affiliates of FCFC. Management of UNB anticipates acquisition costs to UNB in excess of $200 thousand during 1994; however, Management is not aware of forseeable future events which would otherwise materially alter the profitability or safety and soundness of UNB. We expect certain cost savings in noninterest expenditures subsequent to the merger. F-40 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- Independent Auditors' Report [LETTERHEAD OF EDWARDS LEAP & SAUER APPEARS HERE] To the Board of Directors and Stockholders Reliable Financial Corporation Reliable Savings Bank, PaSA Bridgeville, Pennsylvania We have audited the accompanying consolidated balance sheets of Reliable Financial Corporation (the "Corporation") and subsidiary as of September 30, 1993 and 1992 and the related consolidated statements of income, changes in retained earnings and stockholders' equity and cash flows for the years ended September 30, 1993 and 1992 and the statements of income, changes in retained earnings and stockholders' equity and cash flows of Reliable Savings Bank, PaSA (the "Savings Bank") for the year ended September 30, 1991. These financial statements are the responsibility of the Corporation's and the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 Reliable Financial Corporation and subsidiary as of September 30, 1993 and 1992 and the results of their operations and cash flows for the years then ended and the results of operations and cash flows of Reliable Savings Bank, PaSA for the year ended September 30, 1991, in conformity with generally accepted accounting principles. Edwards Leap & Sauer Pittsburgh, Pennsylvania November 5, 1993 F-41 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- Consolidated Balance Sheets ================================================================================
September 30, 1993 1992 ------------------------- (in thousands) ASSETS Cash $ 1,029 $ 955 Interest-bearing deposits in other institutions 20,587 33,763 Investment securities, at cost (approximate market value of $35,856 and $12,796, respectively) 30,718 7,813 Federal Home Loan Bank stock, at cost 922 1,101 Loans 85,255 99,459 Allowance for loan losses (700) (495) Mortgage-backed securities, at cost (approximate market value of $6,117 and $226, respectively) 5,930 224 Accrued interest receivable 348 91 Premises and equipment, net 2,553 2,627 Other assets 141 265 -------- -------- $146,783 $145,803 ======== ======== ================================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposit accounts $114,619 $114,099 Accrued interest payable 829 924 Advances from borrowers for taxes and insurance 707 650 Other liabilities 824 553 -------- -------- 116,979 116,226 RETAINED EARNINGS AND STOCKHOLDERS' EQUITY Common stock, par value $0.01 per share, 4,000,000 shares authorized, 1,460,242 shares issued of which 1,398,862 are outstanding 15 15 Additional paid-in capital 13,657 13,657 Retained earnings--substantially restricted 17,348 15,905 -------- -------- 31,020 29,577 Less: Treasury stock; 61,380 shares at cost (1,216) -0- -------- -------- $146,783 $145,803 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-42 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- Consolidated Statements of Income ================================================================================
Years Ended September 30, 1993 1992 1991 ------------------------------------------ (in thousands, except per share data) INTEREST INCOME Loans $ 9,012 $ 10,537 $ 11,250 Investment securities 1,662 1,224 941 Dividends 191 215 222 --------- --------- ------- 10,865 11,976 12,413 ================================================================================================================ INTEREST EXPENSE Deposit accounts 4,500 6,147 7,912 --------- --------- ------- NET INTEREST INCOME 6,365 5,829 4,501 - ---------------------------------------------------------------------------------------------------------------- PROVISION FOR LOAN LOSSES 250 200 155 --------- --------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,115 5,629 4,346 ================================================================================================================ NON-INTEREST INCOME Net gain on sales of investment securities 1,133 261 -0- Net gain on sales of real estate owned 49 11 -0- Other 317 191 162 --------- --------- ------- 7,614 6,092 4,508 ================================================================================================================= NON-INTEREST EXPENSES Compensation 859 766 660 Employee benefits 183 114 124 Occupancy expense 308 295 287 Deposit insurance 236 267 221 Data processing 343 332 296 Other 646 446 336 --------- --------- ------- 2,575 2,220 1,924 --------- --------- ------- INCOME BEFORE INCOME TAXES 5,039 3,872 2,584 ================================================================================================================ PROVISION FOR INCOME TAXES 1,884 1,529 872 --------- --------- ------- NET INCOME $ 3,155 $ 2,343 $ 1,712 ========= ========= ======= ================================================================================================================ NET INCOME PER COMMON SHARE $ 2.21 $ 1.61 N/A* ========= ========= ======= Weighted average shares used in computing net income per common share 1,425,596 1,457,944 N/A* ========= ========= =======
* Not Applicable The accompanying notes are an integral part of these consolidated financial statements. F-43 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- Consolidated Statement of Changes in Stockholders' Equity ================================================================================
Additional Common Paid-In Retained Treasury Stock Capital Earnings Stock Total ------------------------------------------------------------------- (in thousands) Balance at September 30, 1990 (Reliable Savings Bank) $-0- $ -0- $12,361 $ -0- $12,361 Net Income -0- -0- 1,712 -0- 1,712 ======================================================================================================================= Balance at September 30, 1991 (Reliable Savings Bank) -0- -0- 14,073 -0- 14,073 Proceeds from issuance of common stock 15 13,657 -0- -0- 13,672 Net Income -0- -0- 2,343 -0- 2,343 Dividends declared -0- -0- (511) -0- (511) ======================================================================================================================= Balance at September 30, 1992 15 13,657 15,905 -0- 29,577 Net Income -0- -0- 3,155 -0- 3,155 Treasury stock (purchased 72,712 shares) -0- -0- -0- (1,420) (1,420) Treasury stock (reissued 11,332 shares) -0- -0- (91) 204 113 Dividends declared -0- -0- (1,621) -0- (1,621) ======================================================================================================================= Balance at September 30, 1993 $ 15 $13,657 $17,348 $(1,216) $29,804 ==== ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-44 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows ================================================================================
Years Ended September 30, 1993 1992 1991 ---------------------------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,155 $ 2,343 $ 1,712 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 137 138 134 Net accretion/amortization of premiums and discounts 13 (1) (1) Net gain on sales of investment securities (1,133) (261) -0- Net gain on sales of real estate owned (49) (11) -0- Unamortized loan fees (427) (73) (51) Provision for loan losses 250 200 155 Increase (decrease) in cash due to changes in assets and liabilities: Accrued interest receivable (257) (13) 160 Other assets 124 (118) (15) Accrued interest payable (95) (200) 16 Other liabilities 73 137 (29) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,791 2,141 2,081 ==================================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities -0- 800 1,000 Proceeds from sales of and redemption of investment securities 1,766 424 -0- Purchase of investment securities (23,550) (6,709) -0- Redemption (purchase) of FHLB stock 179 -0- (140) Net loans repaid by customers 13,742 11,357 519 Purchase of mortgage-backed securities (5,977) -0- -0- Proceeds from sales of real estate owned 1,163 39 13 Premises and equipment expenditures (63) (45) (94) Net change in long-term interest-bearing deposits in other institutions -0- -0- 790 ------- ------- ------- NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (12,740) 5,866 2,088 ==================================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposit accounts 520 (5,332) 7,782 Net increase (decrease) in advances from borrowers for taxes and insurance 57 (103) (123) Proceeds from issuance of common stock, net of issuance costs of $930 -0- 13,672 -0- Purchase of treasury stock (1,420) -0- -0- Proceeds from reissuance of treasury stock 113 -0- -0- Dividends paid (1,423) (219) -0- ------- ------- ------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,153) 8,018 7,659 ==================================================================================================================== NET CHANGE IN CASH AND CASH EQUIVALENTS (13,102) 16,025 11,828 Cash and cash equivalents at beginning of year 34,718 18,693 6,865 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $21,616 $34,718 $18,693 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-45 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- Notes To Consolidated Financial Statements Years ended September 30, 1993, 1992 and 1991 ================================================================================ Note A--Significant Accounting Policies Principles of Consolidation: The consolidated financial statements as of and for the years ended September 30, 1993 and 1992 include Reliable Financial Corporation and its wholly-owned subsidiary, Reliable Savings Bank, PaSA. The consolidated financial statements for the year ended September 30, 1991 include Reliable Savings Bank, PaSA and its wholly-owned subsidiary, Reliable Savings Service Corporation. All significant intercompany balances and transactions have been eliminated. Investment Securities: Investment securities are carried at cost, adjusted for amortization of premium and accretion of discount over the term of the security using the interest method or methods which approximate the interest method. Gains or losses on the sale of securities are recognized upon realization using both the weighted average and the specific-identification methods. All securities currently owned are classified as held for investment as management has the ability to hold such investments until maturity and the intent to hold them for the foreseeable future. Mortgage-Backed Securities: Mortgage-backed securities are stated at cost, adjusted for amortization of premium and accretion of discount using the interest method or methods which approximate the interest method. The Corporation has the ability and management's intention is to hold such assets to maturity. Should any be sold, gains and losses will be recognized based on the specific identification method. Loans and Allowance for Loan Losses: Loans are stated at the amount of unpaid principal less the undisbursed portion of loans and unamortized loan fees. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. Real Estate Owned (REO): Real estate acquired in satisfaction of a loan and in-substance foreclosures are reported in other assets. In-substance foreclosures are properties in which a borrower with little or no equity in the collateral, effectively abandons control of the property or has no economic interest to continue involvement in the property. The borrower's ability to rebuild equity based on current financial conditions is also considered doubtful. Properties acquired by foreclosure or deed in lieu of foreclosure and properties classified as in-substance foreclosures are transferred to REO and recorded at the lower of cost or fair value at the date actually or constructively received. Fair value is measured by market transactions. If there are no active markets for similar items, fair value is determined by discounting a forecast of expected cash flows at a rate commensurate with the risk involved. F-46 - -------------------------------------------------------------------------------- Interest Income: Interest on loans is recorded when earned. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection is questionable. Loan origination fees are deferred and recognized over the life of the loan as an adjustment of yield (interest income). Depreciation: The Savings Bank generally computes depreciation on the straight-line method for financial reporting purposes over the assets' estimated useful lives which range from 7 to 50 years for buildings and leasehold improvements and from 5 to 10 years for furniture and fixtures. Depreciation for tax purposes is computed under the straight-line method for assets placed in service prior to January 1, 1981. Assets placed in service after December 31, 1980 are depreciated under the provisions of Accelerated Cost Recovery System (ACRS) or the Modified Accelerated Cost Recovery System (MACRS), which stipulates that the cost of assets be recovered over recovery lives as determined by the Internal Revenue Code. As a result, there may be timing differences between book depreciation and tax depreciation. Income Taxes: Deferred income taxes are reported for timing differences between items of income or expense reported in the financial statements and those reported for income tax purposes. The differences relate principally to depreciation of premises and equipment, recognition of interest income and the provision for loan losses. Earnings per Share: Earnings per share are calculated on the basis of the weighted average number of shares outstanding. As a result of the stock conversion, as described in Note P, the newly issued stock was outstanding for 184 days during the fiscal year ended September 30, 1992. Options to purchase an additional 34,000 shares at $10/share, as described in Note L, were available for the year ended September 30, 1993, with 11,332 shares actually purchased during the quarter ended March 31, 1993. Therefore, the weighted average number for shares outstanding was 1,425,596 and 1,457,944 at September 30, 1993 and 1992, respectively. Cash Equivalents: For the purposes of the Statements of Cash Flows, the Corporation and the Savings Bank consider all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. Cash equivalents totaled $20,586,837, $33,762,891 and $18,201,160 at September 30, 1993, 1992 and 1991, respectively. Net loans transferred to real estate owned, a non-cash operating activity, totaled $1,138,140, $0 and $32,943 in the years ended September 30, 1993, 1992 and 1991, respectively. Reclassification of Prior Years' Statements: Certain items previously reported in the prior years' financial statements have been reclassified to conform with the current year's classifications. These reclassifications have no effect on net income. F-47 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- Note B--Investment Securities Investment securities at September 30 are summarized as follows:
September 30, 1993 --------------------------------------------------------- Carrying Unrealized Unrealized Market Amount Gains Losses Value ----------- ---------- ----------- ----------- U.S. Treasury notes $ 8,983,966 $ 69,784 $-0- $ 9,053,750 U.S. agency obligations 17,000,000 129,662 -0- 17,129,662 State and municipal obligations 3,264,441 81,893 -0- 3,346,334 Corporate debt 499,044 5,656 -0- 504,700 Federal Home Loan Mortgage Corporation common stock 970,103 4,851,772 -0- 5,821,875 ----------- ---------- ---------- ----------- $30,717,554 $5,138,767 $-0- $35,856,321 =========== ========== ========== ===========
September 30, 1993 --------------------------------------------------------- Carrying Unrealized Unrealized Market Amount Gains Losses Value ----------- ---------- ----------- ----------- U.S. Treasury notes $ 1,997,485 $ 33,765 -0- $ 2,031,250 U.S. agency obligations 2,500,000 85,781 -0- 2,585,781 State and municipal obligations 1,715,000 14,580 -0- 1,729,580 Corporate debt 497,666 1,709 -0- 499,375 Federal Home Loan Mortgage Corporation common stock 1,102,353 4,847,647 -0- 5,950,000 ----------- ---------- --------- ----------- $ 7,812,504 $4,983,482 $-0- $12,795,986 =========== ========== ========= ===========
Years Ended September 30, --------------------------- 1993 1992 ----------- ---------- Gross realized gains: Federal Home Loan Mortgage Corporation common stock $ 1,133,333 $ 261,061 =========== ===========
The maturities of investment securities at September 30, 1993 were as follows:
Carrying Market Amount Value ----------- ----------- Due in one year or less $ 2,143,883 $ 2,165,600 Due from one to five years 25,693,568 25,879,269 Due from five to ten years 1,910,000 1,989,577 Due after ten years -0- -0- Marketable equity security 970,103 5,821,875 ----------- ----------- $30,717,554 $35,856,321 =========== ===========
F-48 - --------------------------------------------------------------------------- Note C--Loans Loans at September 30 consisted of the following:
1993 1992 ----------- ------------ Residential mortgage $78,782,333 $ 93,049,040 Real estate construction 5,765,420 5,450,472 Commercial real estate 1,837,585 456,171 Non-residential and land 1,941,955 2,391,215 Loans on deposit accounts 1,047,040 1,020,583 Home improvement loans 53,662 64,077 Consumer 570,623 391,259 ----------- ------------ 89,998,618 102,822,817 Less: Undisbursed portion of loans 3,555,533 1,749,066 Unamortized loan fees 1,188,441 1,615,346 ----------- ------------ $85,254,644 $ 99,458,405 =========== ============
As of September 30, loans secured by one-to-four family residences represented 93.94% and 95.80% of the total loan portfolio for 1993 and 1992, respectively. Total loans on non-accrual status at September 30, 1993 and 1992 totaled approximately $2,600,000 and $1,200,000, respectively. Changes in the allowance for loan losses were as follows:
Years Ended September 30, ------------------------------------ 1993 1992 1991 -------- -------- -------- Balance, beginning of year $495,000 $295,000 $155,000 Provision charged to operations 250,000 200,000 154,619 Loans charged off (44,768) -0- (14,619) -------- -------- -------- $700,232 $495,000 $295,000 ======== ======== ========
The Savings Bank primarily grants residential mortgage loans to customers in Allegheny and Washington counties, Pennsylvania. The Savings Bank maintains a diversified loan portfolio and the ability of its debtors to honor their contracts is not substantially dependent on any particular economic business sector. - -------------------------------------------------------------------------------- Note D--Accrued Interest Receivable Accrued interest receivable at September 30 consisted of the following:
1993 1992 --------- --------- Loans $ 1,449 $ 5,254 Investments 346,343 86,126 -------- ------- $347,792 $91,380 ======== =======
F-49 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- Note E--Premises and Equipment Premises and equipment at September 30 consisted of the following:
1993 1992 ---------- ---------- Land $ 120,253 $ 120,253 Building 2,305,845 2,301,456 Leasehold improvements 258,024 242,691 Furniture and fixtures 862,535 819,555 ---------- ---------- 3,546,657 3,483,955 Less: Accumulated depreciation 993,171 856,769 ---------- ---------- $2,553,486 $2,627,186 ========== ==========
Depreciation expense totaled $136,402, $138,110 and $133,844 for the years ended September 30, 1993, 1992 and 1991, respectively. - -------------------------------------------------------------------------------- Note F--Federal Home Loan Bank Stock The Savings Bank is required to own stock of the Federal Home Loan Bank based on a percentage of net residential mortgages outstanding. During the year ended September 30, 1993, the Savings Bank was required to redeem stock to the Federal Home Loan Bank at its cost basis. The amount of common stock owned was $922,100 and $1,100,800 at September 30, 1993 and 1992, respectively. - -------------------------------------------------------------------------------- Note G--Deposit Accounts Deposit accounts at September 30 consisted of the following:
Weighted Average Rate At 1993 1992 September 30, ---------------------- ----------------------- 1993 Amount % Amount % --------------- ------------ ---- ------------ ---- Regular Passbook Savings 2.75% $ 29,843,096 26% $ 28,599,688 25% Other Passbook Savings 2.75% 774,857 1% 1,229,640 1% Christmas Club Savings 2.75% 630,625 1% 670,033 1% Money Market Accounts 2.80% 14,771,856 13% 14,035,181 12% NOW Checking Accounts 2.25% 6,296,495 5% 5,633,579 5% Certificate Accounts Maturities: 6 months or less 3.07% 15,680,504 14% 17,098,033 15% 6 months to 1 year 3.34% 10,430,759 9% 12,458,547 11% 1 year to 3 years 4.79% 12,272,065 11% 13,576,041 12% More than 3 years 7.00% 19,762,189 17% 17,334,740 15% ------------ ---- ------------ ---- 58,145,517 51% 60,467,361 53% Non-Interest Bearing Accounts 4,156,062 3% 3,463,672 3% ------------ ---- ------------ ---- $114,618,508 100% $114,099,154 100% ============ ==== ============ ====
Certificates of deposit with balances exceeding $100,000 totaled $1,234,650 and $1,026,810 at September 30, 1993 and 1992, respectively. The Savings Bank paid cash of approximately $4,600,000, $6,300,000, and $7,900,000 in interest on deposits during the years ended September 30, 1993, 1992 and 1991, respectively. F-50 - -------------------------------------------------------------------------------- Interest expense for the years ended September 30 is summarized as follows:
1993 1992 1991 -------------- -------------- -------------- Savings and NOW accounts $ 1,494,143 $ 1,890,983 $ 1,976,217 Time deposits 3,005,806 4,256,044 5,936,262 -------------- -------------- -------------- $ 4,499,949 $ 6,147,027 $ 7,912,479 ============== ============== ==============
- -------------------------------------------------------------------------------- Note H--Stockholders' Equity Retained earnings at September 30, 1992, the most recent date for which tax returns were filed, included approximately $4,917,000 for which no provision for federal income tax has been made. These amounts represent allocations of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses will create income for tax purposes only, which will be subject to the then current corporate income tax rate. Treasury stock is shown at cost and consists of 61,380 shares of the Corporation's stock at September 30, 1993. The Corporation purchased 72,712 shares of Treasury stock at an average price per share of approximately $19.50 and reissued 11,332 shares which cost approximately $18.00 per share, at $10.00 per share during the year ended September 30, 1993. The reissuance was in conjunction with the Benefit Plans as described in Note L. - -------------------------------------------------------------------------------- Note I--Income Taxes In addition to charging income for taxes actually paid or payable, the provision for income taxes can reflect deferred income tax credits which result from timing differences in computing income for financial and income tax reporting. There were no deferred tax credits included in the income tax provisions for the years ended September 30, 1993, 1992 and 1991. The principal timing differences are a result of recognition of bad debt deductions, interest income, loan fees and accelerated depreciation methods. For Federal income tax purposes the Savings Bank is permitted a tax bad debt deduction unrelated to any loan loss provision for book purposes. This deduction is computed by one of two methods, the experience method taking into account the six year moving average of net charge-offs to loans, and the percentage of taxable income method, subject to certain limitations. The amount of the tax bad debt deduction for the year ended September 30, 1992 was $-0-and approximately $145,000 for the short tax year ended September 30, 1991. Due to the limitations referenced above, no tax bad debt deduction is anticipated for the tax year ended September 30, 1993. The Corporation made income tax payments of $1,847,644 and $1,442,703 during the years ended September 30, 1993 and 1992, respectively. The Savings Bank made income tax payments of $866,270 during the year ended September 30, 1991. The income tax provision at September 30 consisted of the following:
1993 1992 1991 -------------- -------------- ------------ Federal income taxes $ 1,587,873 $ 1,209,935 $ 687,308 State income taxes 296,037 318,782 184,705 -------------- -------------- ------------ $ 1,883,910 $ 1,528,717 $ 872,013 ============== ============== ============
F-51 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- The provision for federal income taxes differs from that computed at the statutory corporate tax rate primarily due to the following:
1993 1992 1991 -------------- -------------- ------------ Statutory tax rate 34.0% 34.0% 34.0% Decrease in deferred loan fees (2.9) (.6) (1.4) Exempt interest, dividends, net (.9) (.6) (.7) Change in accounting method -0- -0- .2 Bad debt deduction 1.7 1.8 .1 Capital loss carryover -0- (.5) -0- Other, net (.4) (2.8) (5.6) -------------- -------------- ------------ Effective tax rate 31.5% 31.3% 26.6% ============== ============== ============
State income taxes are paid on income determined in accordance with generally accepted accounting principles. In February of 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes", that supersedes SFAS No. 96 and APB 11. The primary changes incorporated in SFAS 109 include, among other things, relaxation of the criteria for recognizing deferred tax assets and reduction in the complexity of calculating deferred taxes by reducing the need to schedule the reversal of temporary differences year-by-year. The statement is effective for fiscal years beginning after December 15, 1992. The Corporation plans to adopt SFAS 109 in the first quarter of fiscal 1994. The adoption of SFAS 109 will require the Corporation to change to the liability method for financial accounting and reporting for income taxes. The Corporation currently estimates that its deferred tax liability would be decreased by approximately $370,000. The resulting benefit will be recorded through the income statement and reported as a cumulative effect of a change in an accounting principle. - -------------------------------------------------------------------------------- Note J--Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") of 1989 FIRREA was signed into law on August 9, 1989 and regulations for savings institutions' minimum capital requirements went into effect on December 7, 1989. In addition to its capital requirements, FIRREA includes provisions for changes in the federal regulatory structure for institutions including a new deposit insurance system, increased deposit insurance premiums, and restricted investment activities with respect to noninvestment-grade corporate debt and certain other investments. FIRREA also increases the required ratio of housing-related assets in order to qualify as a savings institution. The regulations require institutions to have a minimum regulatory tangible capital equal to 1.5 percent of total assets and, a minimum 3 percent core capital ratio. The risk-based capital ratio requirement is 8.0 percent of total risk adjusted assets as of December 31, 1992. Prior to December 31, 1992 it was 7.2% of total risk adjusted assets. The Savings Bank, at September 30, 1993, meets all regulatory tangible capital, core capital and risk-based capital requirements of 8.0 percent, as defined by FIRREA. Failure to meet these capital requirements would expose the Savings Bank to regulatory sanctions, including limitations on asset growth. The following table shows that the Savings Bank is in compliance with regulatory capital standards: F-52 - --------------------------------------------------------------------------------
Percent of Adjusted Amount Total Assets ---------- -------------- (dollars in thousands) GAAP capital $ 25,903 18.19% ========== ============== Tangible capital $ 25,903 18.19% Tangible capital requirement 2,135 1.50% ---------- -------------- Excess $ 23,768 16.69% ========== ============== Core capital $ 25,903 18.19% Core capital requirement 4,271 3.00% ---------- -------------- Excess $ 21,632 15.19% ========== ============== Risk-based capital $ 26,603 42.71% Minimum risk-based capital requirement 4,984 8.00% ---------- -------------- Excess $ 21,619 34.71% ========== ==============
Risk-based capital includes supplementary capital of $700,232, representing the general allowance for loan losses. The following is a reconciliation of net income and retained earnings (as shown in these audited financial statements) to net income and retained earnings as presented in the Office of Thrift Supervision quarterly reports:
September 30, 1993 September 30, 1992 ------------------------- ------------------------- Twelve Twelve Months Ended Balance Months Ended Balance ------------ ------- ------------ ------- Retained Retained Net Income Earnings Net Income Earnings ------------ -------- ------------ -------- (in thousands) Balances on regulatory reports $3,203 $19,067 $2,208 $15,864 Add (deduct) audit adjustments for: Income (loss) of parent (48) (7) 41 41 Other activity -0- (1,712) 94 -0- ------ ------- ------ ------- Balances on accompanying consolidated financial statements $3,155 $17,348 $2,343 $15,905 ====== ======= ====== =======
Other activity for the year ended September 30, 1993 consists of dividends declared of approximately $1,621,000 and the effect of treasury stock reissued at approximately $91,000 less than the purchase price. - -------------------------------------------------------------------------------- Note K--Commitments In the normal course of business, there are various outstanding commitments and contingent liabilities, such as commitments to extend credit. These commitments involve, to varying degrees, elements of credit risk in excess of amounts recognized in the balance sheets. Loan commitments are made to accommodate the financial needs of the Savings Bank's customers. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Savings Bank's normal credit policies and loan underwriting standards. Collateral is obtained based on management's credit assessment of the customer. Management currently expects no loss from these activities. F-53 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- The Savings Bank's maximum exposure to credit loss for loan commitments (unfunded loans) outstanding at September 30, 1993 and 1992, was $3,330,720 and $1,272,000, respectively. Commitments for fixed rate loans totaled $2,741,720 and $773,000 at September 30, 1993 and 1992, respectively, with rates ranging from 6.5% to 12%. The Savings Bank had outstanding commitments at September 30, 1993 and 1992 of $-0- and $324,000, respectively to purchase investment securities. Lease commitments: Annual rentals under long-term monthly operating leases for property amounted to $22,800 in 1993, 1992 and 1991. At September 30, 1993, the minimum rental commitment, including any current renewal options under existing leases with initial or remaining terms of more than one year was as follows:
Years Ending Gross Rental September 30 Expense ------------ ----------- 1994 $ 23,900 1995 24,000 1996 24,000 1997 13,900 1998 10,800 Remaining term 1,800 -------- TOTAL COMMITMENT $ 98,400 ========
- -------------------------------------------------------------------------------- Note L--Pension, Retirement and Benefit Plans On August 9, 1991, the Savings Bank elected to terminate its previously existing defined benefit pension plan. Under Statement of Financial Accounting Standards No. 88 (SFAS 88), "Employer's Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", a termination of a defined benefit plan is considered both a settlement (an irrevocable transaction relieving an employer of the responsibility for a pension benefit obligation) and a curtailment (elimination for employees of the accrual of defined benefits for future service). All balances in the plan as of September 30, 1991, which were determined by actuaries to equal $845,627 vested in the plan participants in relation to their respective present values determined at a weighted average discount rate and long-term rate of return on plan assets of 7.5% in the plan as of the termination date. Therefore, there was no settlement or curtailment gain or loss associated with the termination. The plan trust continued to hold the plan assets until distribution of $861,351 on January 20, 1992. By definition, the accumulated benefit obligation is the value of the assets. Pension expense for 1991 totaled $31,377. On June 25, 1991, the Savings Bank adopted a 401(k) retirement plan, whereby the employees may elect to make pre-tax contributions through a salary reduction of up to 10% of their monthly salary. The Savings Bank may match dollar for dollar up to 5% of employees' monthly salary reduction or make elective contributions to the Plan. The Savings Bank's contributions to the Plan were $29,047, $22,786 and $1,770 for the years ended September 30, 1993, 1992 and 1991, respectively. On January 23, 1992, the Board of Directors of the Savings Bank adopted the Reliable Savings Bank, PaSA Recognition and Retention Plan ("RRP") as a method of providing officers and key employees with a proprietary interest in Reliable Financial Corporation. All employees of the Savings Bank and its affiliates are eligible to receive awards from the plan. The standard vesting rate of an award is 20% per year commencing one year from the date of the award. In August, 1992 an award under the RRP was granted to President Stephen Grippi, representing 6,000 shares which were purchased at $17.50 per share. Vesting under this award is 33 1/3% over three years. Amortization, on a straight line basis over three (3) years, of this award for the years F-54 ended September 30, 1993 and 1992 totaled $49,500 and $3,500, respectively. During the year ended September 30, 1993, 2,000 shares had vested. On January 14, 1992, the Board of Directors of Reliable Financial adopted Reliable Financial Corporation 1992 Incentive Stock Option Plan (the "Option Plan") and the Reliable Financial Corporation 1992 Stock Option Plan for Nonemployee Directors (the "Directors' Plan"). Under the Option Plan, options may only be granted to officers and other key employees. The Option Plan is designed to encourage the continued employment of these employees and to attract new employees by facilitating their purchase of a stock interest in Reliable Financial. Options granted under the Option Plan may include both incentive stock options ("ISOs") within the meaning of Section 422A of the Internal Revenue Code and nonstatutory stock options ("Nonstatutory Options"). The Pension Committee will, from time to time, select employees to whom Options are to be granted and the number of Options to be granted based upon the employee's performance, compensation and the nature of his responsibilities, duties and functions. Pursuant to the Option Plan, up to 109,518 shares of Reliable Financial common stock may be issued or transferred for the exercise of options to purchase shares of common stock. The Committee will determine the dates on which each Option will become exercisable. Each ISO will continue to be exercisable over a maximum period of ten years from the date granted, and each Nonstatutory Option will be exercisable over a period of ten years and one day from the date granted. Under circumstances set forth in the Option Plan, all or a portion of the Options may be exercised for specified periods following termination of employment. An Option may not be transferred by an optionee during his or her lifetime. The exercise price per share of Common Stock covered by an Option shall be the fair market value of Common Stock on the date of grant. The shares purchased upon exercise of an Option are to be paid for in cash or through the delivery of previously-acquired shares of Common Stock or in a combination of cash and such shares. The Pension Committee, with shareholder ratification, has granted to President Grippi options under the Option Plan to purchase 12,000 shares of stock. One-third of these options were exercised on the first anniversary date of the conversion. The Directors' Plan is designed to promote the growth and profitability of Reliable Financial and the Savings Bank and to provide non-employee directors with an incentive to assume the significant duties and responsibilities entailed therewith. Benefits under the Directors' Plan are granted to non-employee directors, a group currently consisting of 4 people. Pursuant to the Directors' Plan, up to 36,506 shares of the common stock of Reliable may be issued or transferred pursuant to the exercise of options to purchase shares of common stock ("Directors' Options"). Directors' Options may only be granted to members of Reliable's Board of Directors who are not employees of Reliable, the Savings Bank or any other subsidiary or affiliate thereof on the date the Directors' Options are granted. Directors' Options granted under the Directors' Plan are nonstatutory stock options. The Directors' Plan provides that each of the 4 non-employee directors serving at the consummation of the conversion of the Savings Bank from mutual to stock form receive options to purchase 5,500 shares of Reliable common stock. New directors, subsequently elected, also receive the option to purchase 5,500 shares, to the extent shares remain available under the Directors' Plan. The exercise price of the outstanding Directors' Options is $10.00 per share, which was the fair market value of Reliable's common stock on the date of grant. No Directors' Option may be exercised after the expiration of ten years and one day from the date of grant of such option. One-third of these Directors' Options were exercised on the first anniversary of the date of grant. F-55 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- Note M--Reliable Financial Corporation Reliable Financial Corporation was formed on November 7, 1991 to acquire 100% of the common stock of Reliable Savings Bank, PaSA as a result of the Savings Bank's conversion from mutual to stock form. Prior to March 30, 1992, Reliable Financial Corporation had no significant assets. Reliable Financial Corporation currently has no independent business operations. Certain items previously reported in the prior years' financial statements have been reclassified to conform with the current year's classifications. These reclassifications have no effect on the consolidated net income. The condensed financial information for Reliable Financial Corporation as of and for the years ended September 30, 1993 and 1992 is as follows:
BALANCE SHEETS 1993 1992 ------------ ----------- ASSETS Interest-bearing deposits $ 4,416,208 $ 7,134,702 Investment in Reliable Savings Bank 11,830,791 8,627,252 Prepaid taxes 839 42,572 ----------- ----------- $16,247,838 $15,804,526 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Dividends Payable $ 489,602 $ 292,048 Accrued expenses 27,212 8,148 ----------- ----------- 516,814 300,196 Stockholders' Equity Common stock, par value $0.01 per share, 4,000,000 shares authorized, 1,460,242 shares issued and outstanding 14,602 14,602 Additional paid-in capital 13,657,743 13,657,743 Retained earnings 3,275,153 1,831,985 Treasury stock, at cost (1,216,474) -0- ----------- ----------- 15,731,024 15,504,330 ----------- ----------- $16,247,838 $15,804,526 =========== =========== STATEMENTS OF INCOME Interest and other operating income $ 159,708 $ 108,733 Dividends from Reliable Savings Bank -0- 511,086 ----------- ------------ 159,708 619,819 EXPENSES Operating expenses 208,344 16,586 ----------- ------------ INCOME (LOSS) BEFORE TAXES (48,636) 603,233 PROVISION FOR INCOME TAXES -0- 51,243 ----------- ------------ INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY (48,636) 551,990 EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 3,203,539 1,791,080 ----------- ----------- NET INCOME $ 3,154,903 $ 2,343,070 =========== ===========
F-56 - ------------------------------------------------------------------------------ STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES 1993 1992 --------------- --------------- Net income $ 3,154,903 $ 2,343,070 Adjustments to reconcile net income to net cash provided by operating activities: Increase (decrease) in cash due to changes in assets and liabilities: Equity in undistributed earnings of subsidiary (3,203,539) (1,791,080) Prepaid taxes 41,732 (42,572) Accrued expenses 19,064 8,148 --------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 12,160 517,566 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Reliable Savings Bank stock -0- (6,836,171) --------------- --------------- NET CASH USED BY INVESTING ACTIVITIES -0- (6,836,171) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock, net -0- 13,672,345 Purchase of treasury stock (1,420,240) -0- Proceeds from reissuance of treasury stock 113,320 -0- Dividends paid (1,423,734) (219,038) --------------- --------------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,730,654) 13,453,307 --------------- --------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (2,718,494) 7,134,702 Cash and cash equivalents at beginning of year 7,134,702 -0- --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,416,208 $ 7,134,702 =============== ===============
- -------------------------------------------------------------------------------- Note N--Supplemental Information The following condensed statement summarizes the financial position of the Savings Bank's wholly-owned subsidiary, Reliable Savings Service Corporation, which has been consolidated with the financial statements of Reliable Savings Bank, PaSA at September 30, 1992 (immediately prior to liquidation). Under the authority of the Board of Directors of the Savings Bank, liquidation of the service corporation was approved as of September 30, 1992. The statement is presented as supplemental information only and is not necessary for the fair presentation of the consolidated financial statements. RELIABLE SAVINGS SERVICE CORPORATION CONDENSED BALANCE SHEET September 30, 1992 (immediately prior to liquidation) ASSETS Cash in bank $ -0- Receivable--Parent 5,764 ----------- $ 5,764 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Common stock $ 21,000 Additional paid-in capital 40,000 Retained earnings (deficit) (55,236) ----------- $ 5,764 ===========
F-57 Reliable Financial Corporation and Subsidiary - -------------------------------------------------------------------------------- Note O--Related-Party Transactions Certain officers and directors and their affiliates of Reliable Savings Bank, PaSA were indebted to the Savings Bank at September 30, 1993 and 1992. Related party loans are made on substantially the same terms as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans (exclusive of loans to any such person which in the aggregate do not exceed $60,000 at September 30, 1993) was $706,387 and $726,979 at September 30, 1993 and 1992, respectively. During the year ended September 30, 1993 and 1992, $67,000 and $87,900 of new loans were made to related parties and repayments by any such person(s) totaled $87,592 and $90,336, respectively. - -------------------------------------------------------------------------------- Note P--Conversion On March 16, 1992, the members of the Savings Bank formally approved the Plan of Conversion under which the Savings Bank converted from a Pennsylvania-chartered mutual savings and loan association to a Pennsylvania-chartered permanent reserve fund capital stock savings and loan association. Included in the Plan of Conversion was the formation of a holding company, Reliable Financial Corporation, which owns all of the common stock of Reliable Savings Bank, PaSA, as its wholly-owned subsidiary. The conversion was consummated on March 30, 1992. - -------------------------------------------------------------------------------- Note Q--Accounting Standards In addition to SFAS 109, as previously discussed in Note I, certain other recent accounting standards relating to the Corporation have been promulgated by the Financial Accounting Standards Board. Statement of Financial Accounting Standards No. 107 requires entities to disclose the fair value of "Financial Instruments" for which it is practicable to estimate fair value, with certain exceptions. Statement of Financial Accounting Standards No. 114 addresses the accounting by creditors for impairment of certain loans. Statement of Financial Accounting Standards No. 115 relates to accounting for certain investments in debt and equity securities. The Corporation is not currently required to and has elected not to adopt early implementation of any of these standards. The impact of such adoption was not determined at this time. F-58 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) - --------------------------------------------------------------------------------
March 31, September 30, 1994 1993 ---------- ------------- ASSETS Cash $ 820 $ 1,029 Interest-bearing deposits in other institutions 16,910 20,587 FHLMC stock available for sale (market value 928 - of $5,583 at March 31, 1994) Investment securities, at cost (market value 35,698 30,718 of $37,133 and $35,586) Mortgage-backed securities, at cost (market value 5,336 5,930 of $5,426 and $6,117) Federal Home Loan Bank stock, at cost 848 922 Loans 87,165 85,255 Allowance for possible loan losses (800) (700) Accrued interest receivable 423 348 Premises and equipment, net 2,484 2,553 Other assets 589 141 -------- -------- $150,401 $146,783 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposit accounts $116,817 $114,619 Accrued interest payable 307 829 Advances from borrowers for taxes and insurance 2,238 707 Other liabilities 663 824 -------- -------- 120,025 116,979 STOCKHOLDERS' EQUITY Common stock, $0.01 par value; 4,000,000 shares 15 15 authorized; 1,460,242 shares issued; 1,410,194 and 1,398,862 shares outstanding Additional paid-in capital 13,657 13,657 Retained earnings - substantially restricted 17,702 17,348 -------- -------- 31,374 31,020 Less: Treasury stock, at cost 998 1,216 -------- -------- 30,376 29,804 -------- -------- $150,401 $146,783 ======== ========
See notes to consolidated financial statements. F-59 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share and share data) - --------------------------------------------------------------------------------
Three Months Six Months Ended March 31, Ended March 31, --------------------- --------------------- 1994 1993 1994 1993 ---- ---- ---- ---- INTEREST INCOME Loans $ 1,890 $ 2,148 $ 3,846 $ 4,572 Investment securities 522 366 1,023 726 Mortgage-backed securities 80 61 159 70 Dividends 39 50 80 99 ---------- ---------- ---------- ---------- 2,531 2,625 5,108 5,467 INTEREST EXPENSE Deposit accounts 1,039 1,133 2,092 2,310 ---------- ---------- ---------- ---------- NET INTEREST INCOME 1,492 1,492 3,016 3,157 PROVISION FOR POSSIBLE LOAN LOSSES 50 50 100 100 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 1,442 1,442 2,916 3,057 NON-INTEREST INCOME Net gain on sales of FHLMC stock 234 483 234 483 Net (loss) on real estate owned - (5) - (5) Other 102 76 189 145 ---------- ---------- ---------- ---------- 1,778 1,996 3,339 3,680 ---------- ---------- ---------- ---------- NON-INTEREST EXPENSE Compensation 230 223 443 420 Employee benefits 47 59 91 91 Occupancy expense 79 71 156 148 Deposit insurance 66 51 133 117 Data processing 79 83 161 171 Other 152 154 320 305 ---------- ---------- ---------- ---------- 653 641 1,304 1,252 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE IN TAX ACCOUNTING METHOD 1,125 1,355 2,035 2,428 PROVISION FOR INCOME TAXES 474 564 818 952 ---------- ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE IN TAX ACCOUNTING METHOD 651 791 1,217 1,476 CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE IN TAX ACCOUNTING METHOD - - 365 - ---------- ---------- ---------- ---------- NET INCOME $ 651 $ 791 $ 1,582 $ 1,476 ========== ========== ========== ========== PER SHARE DATA (BASED ON AVERAGE SHARES OUTSTANDING) Income before cumulative effect of change in tax accounting method $0.46 $0.56 $0.86 $1.03 ---------- ---------- ---------- ---------- Cumulative effect of change in tax accounting method - - 0.26 - ---------- ---------- ---------- ---------- Net income $0.46 $0.56 $1.12 $1.03 ========== ========== ========== ========== Cash dividends declared $0.40 $0.25 $0.80 $0.50 ========== ========== ========== ========== Weighted average shares outstanding 1,406,299 1,405,038 1,409,938 1,437,277 ========== ========== ========== ==========
See notes to consolidated financial statements. F-60 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED MARCH 31, 1994 AND 1993 (Unaudited) (In thousands) - --------------------------------------------------------------------------------
Common Additional Retained Treasury Total stock Paid-In Capital Earnings Stock ----------------------------------------------------------- Balance at September 30, 1992 $15 $13,657 $15,905 $-0- $29,577 Net Income -0- -0- 1,476 -0- 1,476 Treasury stock (purchased -0- -0- -0- (1,420) (1,420) 72,712 shares) Treasury stock (reissued -0- -0- (91) 204 113 11,332 shares) Dividends declared -0- 0- (712) -0- (712) --- ------- ------- ------- ------- Balance at March 31, 1993 $15 $13,657 $16,578 $(1,216) $29,034 === ======= ======= ======= ======= - --------------------------- Balance at September 30, 1993 $15 $13,657 $17,348 $(1,216) $29,804 Net Income -0- -0- 1,582 -0- 1,582 Treasury stock (reissued -0- -0- (105) 218 113 11,332 shares) Dividends declared -0- -0- (1,123) -0- (1,123) --- ------- ------- ----- ------- Balance at March 31, 1994 $15 $13,657 $17,702 $(998) $30,376 === ======= ======= ===== =======
See notes to consolidated financial statements. F-61 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 1994 AND 1993 (Unaudited) (In thousands) - --------------------------------------------------------------------------------
1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,582 $ 1,476 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 69 68 Net accretion of discounts on investment securities (7) (3) Gain on sales of FHLMC stock (234) (483) Unamortized loan fees (121) (144) Deferred income taxes (355) - Provision for possible loan losses 100 100 Increase (decrease) in cash due to changes in assets and liabilities: Accrued interest receivable (75) (52) Other assets (93) 10 Accrued interest payable (522) (593) Other liabilities (161) 39 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 183 418 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of mortgage-backed securities - (4,997) Purchases of investment securities (8,943) (6,570) Proceeds from sales of FHLMC stock 276 489 Proceeds from redemptions and maturities of investment securities 3,000 - Proceeds from redemption of FHLB stock 74 179 Net (increase) decrease in loans (1,862) 7,342 Principal payments on mortgage-backed securities 594 - Premises and equipment expenditures - (42) ------- ------- NET CASH USED IN INVESTING ACTIVITIES (6,861) (3,599) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposit accounts 2,198 1,761 Net increase in advances from borrowers for taxes and insurance 1,530 1,148 Purchase of treasury stock - (1,420) Proceeds from sale of treasury stock 113 113 Dividends paid (1,049) (654) ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,792 948 ------- ------- NET CHANGE IN CASH AND CASH EQUIVALENTS (3,886) (2,233) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 21,616 34,718 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $17,730 $32,485 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid on deposits $ 2,614 $ 2,903 Income taxes paid $ 978 $ 863 Loans transferred to real estate owned $ - $ 983 Investment securities transferred to FHLMC stock available for sale $ 928 $ -
See notes to consolidated financial statements. F-62 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED MARCH 31, 1994 AND 1993 - ------------------------------------------------------------------------------- NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended March 31, 1994, are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 1994. The interim consolidated financial statements and the following discussion should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Corporation's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. NOTE 2. EARNINGS PER SHARE Earnings per common share are based on the weighted average number of common shares outstanding and common share equivalents in each period. Weighted average shares outstanding include common share equivalents under the available stock option plans. NOTE 3. FHLMC STOCK AVAILABLE FOR SALE Investment securities to be held for indefinite periods of time including investment securities that management intends to use as part of its asset/liability strategy, and that may be sold in response to changes in interest rates, changes in prepayment risk, or other similar factors are classified as available for sale and are recorded at the lower of aggregate cost or market. Specifically, management has classified only the FHLMC stock as available for sale. NOTE 4. INVESTMENT SECURITIES Investments in debt securities which management has the ability and intent to hold to maturity or on a long-term basis are carried at cost. Premiums and discounts are amortized to expense and accreted to income over the life of the securities using a method which approximates the level yield method. Gain or loss on the sale of investment securities, if any, are based on the specific identification method. F-63 RELIABLE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) SIX MONTHS ENDED MARCH 31, 1994 AND 1993 - ------------------------------------------------------------------------------- NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement No. 114 "Accounting by Creditors for the Impairment of a Loan" which is effective for fiscal years beginning after December 15, 1994. Statement No. 114 addresses the methods to be used by a creditor to measure the impairment of a loan and the proper recognition of a change in the value of an impaired loan. Management believes that the effect of adopting this statement on Reliable's consolidated financial statements would not be material. Also in May 1993, the FASB issued Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities" which is effective for fiscal years beginning after December 15, 1993. Statement No. 115 addresses the definition of, accounting for and disclosure of debt and equity securities. In accordance with this statement, securities will be classified into and accounted for based on three distinct categories: securities held to maturity, securities available for sale and trading securities. Management is currently evaluating the impact of this statement on Reliable's consolidated financial statements. NOTE 6. RECLASSIFICATIONS Certain items previously reported in the September 30, 1993 consolidated financial statements have been reclassified to conform with the current quarter's classifications. These reclassifications have no effect on net income. NOTE 7. SUBSEQUENT EVENT On April 21, 1994, the registrant entered into a definitive agreement to be acquired by First Commonwealth Financial Corporation ("FCFC") of Indiana, Pennsylvania. FCFC was incorporated in Pennsylvania in 1982 and is registered as a bank holding company which is currently affiliated with 7 wholly owned bank subsidiaries. In addition, FCFC owns a data processing subsidiary and a trust company subsidiary both headquartered in Indiana, Pennsylvania and FCFC also has a joint venture interest in a credit life insurance company. Through its subsidiary banking network, FCFC traces it banking origins to 1880 and conducts its business through 69 community banking offices in 51 communities throughout 14 counties of central and western Pennsylvania. FCFC has total assets of approximately $2 billion and employs over 900 persons. The shares of FCFC are traded on the New York Stock Exchange under the symbol "FCF". The agreement provides for the issuance of 1.6 shares of FCFC's common stock for each share of the registrant's common stock. It is anticipated that the acquisition will be accounted for as a pooling of interests. F-64 ANNEX I AGREEMENT AND PLAN OF REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION made as of April 21, 1994 (the "Agreement") by FIRST COMMONWEALTH FINANCIAL CORPORATION, a Pennsylvania business corporation having its principal place of business at Old Courthouse Square, 22 North Sixth Street, Indiana, Pennsylvania ("FCFC"), and RELIABLE FINANCIAL CORPORATION, a Delaware corporation having its principal place of business at 428 Station Street, Bridgeville, Pennsylvania ("Reliable"). W I T N E S S E T H: FCFC is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"); Reliable is a savings and loan holding company registered under the Savings and Loan Holding Company Act, as amended (the "Savings and Loan Holding Company Act"); and the Boards of Directors of FCFC and Reliable have determined that it is in the best interests of FCFC and Reliable to become affiliated by means of a merger of Reliable into a new Pennsylvania business corporation to be created by FCFC for the purposes of the merger and to be called Interim Reliable, Inc. ("Interim Reliable"), in which Interim Reliable will become a wholly-owned subsidiary of FCFC and the shareholders of Reliable will become shareholders of FCFC. NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements herein contained and each intending to be legally bound hereby, covenant and agree as follows: 1. The Reorganization. The reorganization contemplated by this ------------------ Agreement is the merger of Reliable into Interim Reliable (the "Merger") pursuant to the Plan of Merger substantially in the form attached hereto as Appendix A (the "Plan of Merger"). As provided in the Plan of Merger, on the Effective Date (as defined in Section 8(g) hereof) Reliable will be merged into Interim Reliable, which will be the surviving corporation; each share of Common Stock, par value $.01 per share, of Reliable (the "Reliable Stock") outstanding immediately before the Merger becomes effective will be converted into 1.6 shares of Common Stock, par value $1 per share, of FCFC (the "FCFC Stock"). 2. Conditions. This Agreement and the consummation of the Merger are ---------- subject to the fulfillment at or before the Closing (as defined in Section 8(a) hereof) of the following conditions: (a) Shareholder Approvals. This Agreement and the Plan of Merger --------------------- shall have been approved by the affirmative votes of the holders of at least a majority of the issued and outstanding shares of Reliable Stock A-I-1 entitled to vote at the Reliable Shareholders' Meeting referred to in Section 6(b) hereof. (b) Regulatory Approvals. The Merger shall have been approved by the -------------------- Pennsylvania Department of Banking under the Pennsylvania Banking Code of 1965, as amended (the "Pennsylvania Banking Code") and the Pennsylvania Savings Association Code of 1967, as amended (the "Pennsylvania Savings Association Code"); the Merger shall have been approved by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act; the Merger shall have been approved by the Office of Thrift Supervision ("OTS") under the Savings and Loan Holding Company Act, and any other regulatory approvals necessary to the formation of Interim Reliable and the consummation of the Merger shall have been obtained. No action or suit to enjoin or prohibit the Merger shall have been filed by the United States under the antitrust laws in the periods of 30 days following the dates of the approvals by the Federal Reserve Board and the OTS. (c) Federal Tax Opinion. FCFC and Reliable shall have received from ------------------- Reed Smith Shaw & McClay, special counsel for FCFC and Reliable, an opinion in form and substance satisfactory to the parties and their respective counsel to the effect that: (i) The Merger will constitute a reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986 (the "Code"); (ii) No gain or loss will be recognized to Reliable, Interim Reliable or FCFC as a result of the Merger; (iii) No gain or loss will be recognized to the Reliable shareholders upon the exchange of Reliable Stock for FCFC Stock (including fractional share interests to which they may be entitled); (iv) The basis of the FCFC Stock (including fractional share interests to which they may be entitled) to be received by the Reliable shareholders will be the same as the basis of the Reliable Stock surrendered in exchange therefor; (v) The holding period of the FCFC Stock (including fractional share interests to which they may be entitled) to be received by the Reliable shareholders will include the holding period of the Reliable Stock surrendered in exchange therefor, provided that the Reliable A-I-2 Stock was held as a capital asset in the hands of the Reliable shareholders on the date of the exchange; and (vi) The payment in cash in lieu of fractional share interests of FCFC Stock will be treated for federal income tax purposes as if the fractional shares were distributed as part of the exchange and then were redeemed by FCFC; these cash payments will be treated as having been received in full payment in exchange for the shares redeemed as provided in Section 302(a) of the Code. (d) Securities Act Registration. The Registration Statement --------------------------- contemplated by Section 5(e) hereof shall have been filed by FCFC with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"), and shall have been declared effective before the proxy statement/prospectus contained therein (the "Proxy Statement/Prospectus") is first mailed to the Reliable shareholders, and no stop order with respect to the effectiveness of the Registration Statement shall have been issued or any proceeding therefor initiated or threatened under the Securities Act. The Registration Statement, when and as declared effective by the SEC and on the date of the Reliable Shareholders' Meeting referred to in Section 6(b) hereof, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading. In addition, the FCFC Stock to be issued pursuant to the Plan of Merger shall have been duly registered or qualified under the securities or "blue sky" laws of all states in which such action is required for purposes of the initial issuance of such stock and its distribution to the Reliable shareholders entitled to receive it. (e) Investment Banking Opinion. Reliable shall have received the -------------------------- fairness opinion of Ryan, Beck & Co., dated as of the date hereof and as of a date no earlier than five days before the Registration Statement is first filed with the SEC, to the effect that, as of that date, the terms of the Merger are fair, from a financial point of view, to Reliable and its shareholders. (f) Representations and Warranties; Performance of Covenants. Except ---------------------------------------------- --------- for changes approved by the other party or contemplated by this Agreement, the representations and warranties of the parties contained herein shall be true and correct on the Closing Date (as defined in Section 8(a) hereof) as though made on such date, and the parties shall have performed and complied A-I-3 with their respective agreements, covenants and conditions contained herein to be performed or complied with on or before the Closing Date. (g) NYSE Listing. The shares of FCFC Stock issuable to the Reliable ------------ shareholders pursuant to this Agreement shall have been authorized for listing on the New York Stock Exchange (the "NYSE") upon official notice of issuance. (h) Closing Requirements. All documents required to be exchanged at -------------------- the Closing shall have been delivered. (i) Affiliates' Agreements. FCFC shall have received from each of ---------------------- the persons identified by Reliable pursuant to Section 6(g) hereof an executed counterpart of an affiliate's agreement in the form contemplated by such Section which will be in full force and effect. (j) Accountant's Opinion. FCFC shall have received from Jarrett * -------------------- Stokes & Co., certified public accountants, an opinion in form and substance satisfactory to FCFC and its counsel to the effect that, as of the Closing, the Merger meets the requirements for pooling of interests accounting treatment under generally accepted accounting principles and the accounting rules of the SEC; provided, however, that the requirements of paragraphs (i) and (j) shall be conditions to the consummation of the Merger only if asserted by FCFC. 3. Representations and Warranties of FCFC. FCFC represents and -------------------------------------- warrants to Reliable that: (a) Organization. FCFC is a business corporation duly organized, ------------ validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and is duly registered under the Bank Holding Company Act. FCFC has full corporate power and legal authority (including all licenses, franchises, permits and other governmental authorizations that are legally required) to own its assets and to transact the business in which it is engaged and proposes to engage. (b) Capitalization. The authorized capital stock of FCFC consists of -------------- 3,000,000 shares of Preferred Stock, par value $1 per share, none of which has been issued, and 25,000,000 shares of Common Stock, par value $5 per share, of which 18,642,024 shares are presently issued and outstanding. The Board of Directors of FCFC has submitted to a vote of its shareholders at their annual meeting to be held on April 23, 1994 a proposal to amend its articles of incorporation to increase its authorized Common Stock to 100,000,000 shares and reduce the par value from $5 to $1 per share. If approved by the shareholders, the amendments are expected to become effective on or about April 26, 1994. All of such issued shares are, and A-I-4 upon consummation of the Merger and issuance thereof the shares of FCFC Stock to be issued pursuant to the Plan of Merger will be, duly and validly authorized and issued, fully paid and nonassessable. Other than the provisions of this Agreement calling for the issuance of FCFC Stock, shares of FCFC Common Stock that may be issued from time to time under FCFC's employee stock ownership plan and except as previously disclosed in writing to Reliable, FCFC is not a party to or bound by any option, call, warrant or other commitment or agreement obligating FCFC at present or upon the occurrence of any event to issue or sell any FCFC Stock or other capital stock of FCFC. (c) Subsidiaries. FCFC has the following subsidiaries (the ------------ "Subsidiaries"): Central Bank, a Pennsylvania-chartered bank and trust company having its principal place of business in Hollidaysburg, Pennsylvania; Cenwest National Bank, a national banking association having its principal place of business in Johnstown, Pennsylvania; Deposit Bank, a Pennsylvania-chartered bank and trust company having its principal place of business in DuBois, Pennsylvania; First National Bank of Leechburg, a national banking association having its principal place of business in Leechburg, Pennsylvania; National Bank of the Commonwealth, a national banking association having its principal place of business in Indiana, Pennsylvania; Peoples Bank and Trust Company, a Pennsylvania-chartered bank and trust company having its principal place of business in Jennerstown, Pennsylvania; Peoples Bank of Western Pennsylvania, a Pennsylvania- chartered bank having its principal place of business in New Castle, Pennsylvania; First Commonwealth Trust Company, a Pennsylvania-chartered trust company having its principal place of business in Indiana, Pennsylvania and engaged in rendering general trust services; Commonwealth Systems Corporation, a Pennsylvania business corporation having its principal place of business in Indiana, Pennsylvania and engaged in rendering data processing services; and Commonwealth Trust Credit Life Insurance Company, an Arizona insurance corporation having its principal place of business in Phoenix, Arizona ("Commonwealth Trust") and engaged as a reinsurer of credit life and credit accident and health insurance. Each Subsidiary has full corporate power and legal authority (including all licenses, franchises, permits and other governmental authorizations that are legally required) to own its assets and to transact the business in which it is engaged and proposes to engage. FCFC owns all the issued and outstanding shares of capital stock of its Subsidiaries free and clear of any liens, security interests or other encumbrances, except for Commonwealth Trust which is 50% owned. FCFC has no other direct or indirect subsidiaries. A-I-5 (d) Corporate Authority; Absence of Violation. The Board of ----------------------------------------- Directors of FCFC has authorized the execution, delivery and performance of this Agreement and the Plan of Merger and no approval of the FCFC shareholders is required therefor, FCFC has the full power, authority and legal right to enter into this Agreement, this Agreement has been duly and validly executed and delivered by FCFC and this Agreement constitutes a valid and binding obligation of FCFC enforceable in accordance with its terms except to the extent enforcement is limited by bankruptcy, insolvency or other similar laws of general application affecting creditors' rights or by the application by a court of equitable principles. Neither the execution or delivery hereof, the consummation of the Merger nor compliance by FCFC with any of the provisions of this Agreement will violate any provision of the Articles of Incorporation or By-Laws of FCFC or any of its Subsidiaries or conflict with or result in a material breach of or material default under any material agreement, obligation or instrument to which FCFC or any of its Subsidiaries is a party or by which any is bound, or violate any order or decree of any court or any statute, rule or regulation applicable to FCFC or any of its Subsidiaries or the properties or assets of any of them. (e) Financial Statements. FCFC has delivered to Reliable FCFC's -------------------- Annual Reports on Form 10-K for 1989, 1990, 1991, 1992 and 1993 and Annual Reports to Shareholders for 1989, 1990, 1991, 1992 and 1993, containing consolidated balance sheets of FCFC at December 31, 1989, 1990, 1991, 1992 and 1993 and consolidated statements of income, changes in shareholders' equity and cash flows of FCFC for each of the five years in the period ended December 31, 1993, all audited by Jarrett * Stokes & Co. (or its predecessor Jarrett & Co.), certified public accountants. All such financial statements (including the related notes and schedules) have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and present fairly, in all material respects, the consolidated financial position of FCFC and its wholly-owned Subsidiaries and the consolidated results of their operations and cash flows at their respective dates and for the respective periods then ended. (f) Absence of Undisclosed Liabilities. Except as reflected or ---------------------------------- reserved against in FCFC's December 31, 1993 consolidated balance sheet and except as previously disclosed in writing to Reliable, as of December 31, 1993 there was no liability or obligation of FCFC or any of its Subsidiaries of any nature, due or to become due, absolute, contingent or otherwise, including liability for or in respect of taxes, required to be reflected or reserved against therein by generally accepted accounting principles. A-I-6 (g) Absence of Certain Changes. Except as previously disclosed in -------------------------- writing to Reliable, since December 31, 1993 there has not been: (i) any material change in the condition, financial or otherwise, or in the assets, liabilities or business of FCFC or any of its Subsidiaries, other than changes in the ordinary course of business which do not in the aggregate materially and adversely affect the business of FCFC and its Subsidiaries; (ii) any damage to or destruction or loss of property of FCFC or any of its Subsidiaries (whether or not insured) which has had or may be reasonably expected to have a material adverse effect on the business of FCFC and its Subsidiaries; or (iii) any sale or transfer of any assets or any cancellation of any debts or claims of FCFC or any of its Subsidiaries except in the ordinary course of business or any mortgage, pledge or subjection to lien, charge or encumbrance of any kind of any material assets of any of them other than statutory liens for obligations not yet delinquent. (h) Taxes. The Federal income tax returns of FCFC and its ----- Subsidiaries have either been audited by the IRS or closed by statute for all periods ending on or before December 31, 1990. All taxes, deficiencies, interest and penalties which are reflected as due under such returns or which have been assessed as a result of such audits have been paid in full, and there are no outstanding agreements to extend periods during which additional assessments may be made. Federal income tax returns required for all periods beginning after December 31, 1990 and all returns in respect of all other Federal, state and local taxes of any kind required to be filed by FCFC and its Subsidiaries have been timely filed, and all taxes, interest and penalties due in respect of such periods have been paid. To the best of FCFC's knowledge there is no proposed deficiency, assessment, penalty or delinquency with respect to any of such returns or any of the taxes reflected as due and payable thereby. (i) Properties. Except as previously disclosed in writing to ---------- Reliable, FCFC and its Subsidiaries have good and marketable title to all of their real estate and assets (including those reflected in FCFC's December 31, 1993 consolidated balance sheet except such as have been disposed of in the ordinary course of business) free of any mortgage, encumbrance, lien or security interest, except pledges of assets to secure public deposits and minor imperfections in title and encumbrances which do not materially detract from the value or impair the use of the properties A-I-7 affected thereby. All material leases under which FCFC or any of its Subsidiaries leases real or personal property, as lessee, are valid and effective in accordance with their terms, and there is no material existing default by FCFC or any of its Subsidiaries under such leases or any event which with notice or the lapse of time or both would constitute such a material default. (j) Compliance with Laws. To the best of FCFC's knowledge, FCFC and -------------------- its Subsidiaries are in substantial compliance with all laws, rules, regulations and other legal requirements applicable to them. (k) Litigation and Administrative Proceedings. Except as previously ----------------------------------------- disclosed in writing to Reliable, there is no action, suit, arbitration or administrative proceeding or investigation to which FCFC or any of its Subsidiaries is or may be a party or subject which is pending, or to FCFC's knowledge threatened, in which there could be a judgment, order, decree, liability, fine, penalty, injunction or cease-and-desist order which would have a material adverse effect on its condition, financial or otherwise, or the conduct of its business. (l) Employee Benefit Plans. All retirement and employee benefit or ---------------------- welfare plans of FCFC or its Subsidiaries have been maintained and operated in accordance with their terms, and all such plans which are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), have been maintained and operated in material compliance with all applicable provisions of ERISA and the regulations thereunder and are not subject to any accumulated funding deficiency within the meaning of ERISA and the regulations thereunder or to any outstanding liability to the Pension Benefit Guaranty Corporation. No "prohibited transaction" has occurred and is continuing with respect to any such plan, nor has any "reportable event" occurred with respect thereof, as such terms are defined in ERISA and the regulations thereunder, and no such plan is a "Multiemployer Plan" or a "Multiple Employer Plan", as such terms are defined in ERISA and the regulations thereunder. (m) Registration Statement. The Registration Statement will not ---------------------- contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading at the time the Registration Statement is declared effective by the SEC, at the time the Proxy Statement/Prospectus is distributed to the Reliable shareholders or at the time of the Reliable Shareholders' Meeting, except that no representation or warranty is made A-I-8 with respect to the information furnished by Reliable specifically for inclusion therein. 4. Representations and Warranties of Reliable. Reliable represents ------------------------------------------ and warrants to FCFC that: (a) Organization. Reliable is a corporation duly organized, validly ------------ existing and in good standing under the laws of the State of Delaware and is duly registered under the Savings and Loan Holding Company Act. Reliable has full corporate power and legal authority (including all licenses, franchises, permits and other governmental authorizations that are legally required) to own its assets and to transact the business in which it is engaged and proposes to engage. (b) Capitalization. The authorized capital stock of Reliable -------------- consists of 1,000,000 shares of Preferred Stock, par value $.01 per share, none of which has been issued, and 4,000,000 shares of Common Stock, par value $.01 per share, of which 1,410,194 shares are presently issued and outstanding, 50,048 shares are held as treasury shares and 11,336 shares are covered by outstanding stock options. All of such issued shares have been duly authorized and are duly and validly issued, fully paid and nonassessable. Except for shares of Reliable Common Stock that may be issued upon exercise of the foregoing stock options, Reliable is not a party to or bound by any option, call, warrant or other commitment or agreement obligating Reliable at present or upon the occurrence of any event to issue or sell any Reliable Stock or other capital stock of Reliable. (c) Subsidiaries. Reliable has the following subsidiary (the ------------ "Subsidiary"): Reliable Savings and Loan Association of Bridgeville, PA, trading and doing business as Reliable Savings Bank, PaSA ("Reliable Savings Bank"). Reliable Savings Bank is a permanent reserve fund stock savings and loan association duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania having its principal place of business in Bridgeville, Pennsylvania; it is duly authorized to engage in the savings and loan business as an insured savings and loan association under the Federal Deposit Insurance Act, as amended; it is a member in good standing of the Federal Home Loan Bank of Pittsburgh; and all eligible accounts of depositors issued by Reliable Savings Bank are insured by the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC") to the fullest extent permitted by law. The Subsidiary has full corporate power and legal authority (including all licenses, franchises, permits and other governmental authorizations that are legally required) to own its assets and to transact the business in which it is engaged and proposes to engage. A-I-9 Reliable owns all the issued and outstanding shares of capital stock of its Subsidiary free and clear of any liens, security interests or other encumbrances. Reliable has no other direct or indirect subsidiaries. (d) Corporate Authority; Absence of Violation. The Board of ----------------------------------------- Directors of Reliable has authorized the execution and delivery of this Agreement and the Plan of Merger, has directed or will direct that this Agreement and the Plan of Merger be submitted to the Reliable shareholders for their approval and, subject to such approval, has authorized the performance of this Agreement and the Plan of Merger and the consummation of the Merger. Reliable has the full power, authority and legal right to enter into this Agreement and the Plan of Merger, this Agreement has been duly and validly executed and delivered by Reliable and this Agreement constitutes and the Plan of Merger when executed and delivered by Reliable as herein provided will constitute, a valid and binding obligation of Reliable enforceable in accordance with its terms except to the extent enforcement is limited by bankruptcy, insolvency or other similar laws of general application affecting creditors' rights or by the application by a court of equitable principles. Neither the execution or delivery hereof or of the Plan of Merger, the consummation of the Merger nor compliance by Reliable with any of the provisions of this Agreement or the Plan of Merger will violate any provision of the Articles of Incorporation or By-Laws of Reliable or its Subsidiary or conflict with or result in a material breach of or material default under any material agreement, obligation or instrument to which Reliable or its Subsidiary is a party or by which any is bound, or violate any order or decree of any court or any statute, rule or regulation applicable to Reliable or its Subsidiary or the properties or assets of any of them. (e) Financial Statements. Reliable has delivered to FCFC (i) -------------------- Auditors' Reports for the years ended September 30, 1989, 1990 and 1991, containing consolidated balance sheets of Reliable at September 30, 1989, 1990 and 1991 and consolidated statements of income and retained earnings and cash flows of Reliable for each of the three years in the period ended September 30, 1991, all audited by Edwards Leap & Sauer, certified public accountants, (ii) Reliable's Annual Reports on Form 10-K for the fiscal years ended September 30, 1992 and 1993 and Annual Reports to Stockholders for the fiscal years ended September 30, 1992 and 1993, containing consolidated balance sheets of Reliable at September 30, 1992 and 1993 and consolidated statements of income, changes in stockholders' equity and cash flows of Reliable for each of the two years in the period ended September 30, 1993, all audited by Edwards Leap & Sauer, certified public accountants, and (iii) Reliable's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993, containing a consolidated balance sheet A-I-10 of Reliable at December 31, 1993 and consolidated statements of income, changes in stockholders' equity and cash flows for the three-month periods ended December 31, 1992 and 1993, all unaudited. All of such financial statements (including the related notes and schedules) have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and present fairly, in all material respects, the consolidated financial position of Reliable and its Subsidiary and the consolidated results of their operations and cash flows at their respective dates and for the respective periods then ended. The total equity capital of Reliable as of December 31, 1993 was not less than $30,175,000. In the case of the unaudited interim statements, all normal recurring adjustments and such additional adjustments as are, in the opinion of management, necessary for a fair statement of the results for the interim period were made. (f) Absence of Undisclosed Liabilities. Except as reflected or ---------------------------------- reserved against in Reliable's December 31, 1993 consolidated balance sheet and except as previously disclosed in writing to FCFC, as of December 31, 1993 there was no liability or obligation of Reliable or its Subsidiary of any nature, due or to become due, absolute, contingent or otherwise, including liability for or in respect of taxes, required to be reflected or reserved against therein by generally accepted accounting principles. (g) Absence of Certain Changes. Except as previously disclosed in -------------------------- writing to FCFC, since December 31, 1993 there has not been: (i) any material change in the condition, financial or otherwise, or in the assets, liabilities or business of Reliable or its Subsidiary, other than changes in the ordinary course of business which do not in the aggregate materially and adversely affect the business of Reliable and its Subsidiary; (ii) any damage to or destruction or loss of property of Reliable or its Subsidiary (whether or not insured) which has had or may have a material adverse effect on the business of Reliable and its Subsidiary; (iii) any sale or transfer of any assets or any cancellation of any debts or claims of Reliable or its Subsidiary except in the ordinary course of business or any mortgage, pledge or subjection to lien, charge or encumbrance of any kind of any material assets of any of them other than statutory liens for obligations not yet delinquent; A-I-11 (iv) any increase in the compensation payable or to become payable to any of the officers, agents or employees of Reliable or its Subsidiary or any bonus arrangement with any of them other than merit increases in accordance with past practices, normal cost-of-living increases, regular bonuses and normal increases related to promotions or increased job responsibilities; or any adoption or modification of any pension, profit sharing or other compensation plan or arrangement; or (v) any declaration, payment or setting aside of a dividend or distribution in respect of Reliable Stock other than as would be permissible under Section 7(b) hereof or any direct or indirect purchase of any Reliable Stock. (h) Taxes. The Federal income tax returns of Reliable and its ----- Subsidiary have either been audited by the IRS or closed by statute for all periods ending on or before September 30, 1989. All taxes, deficiencies, interest and penalties which are reflected as due under such returns or which have been assessed as a result of such audits have been paid in full, and there are no outstanding agreements to extend periods during which additional assessments may be made. Federal income tax returns required for all periods beginning after September 30, 1989 and all returns in respect of all other Federal, state and local taxes of any kind required to be filed by Reliable and its Subsidiary have been timely filed, and all taxes, interest and penalties due in respect thereof have been paid. Except as previously disclosed in writing to FCFC, to the best of Reliable's knowledge there is no proposed deficiency, assessment, penalty or delinquency with respect to any of such returns or any of the taxes reflected as due and payable thereby. (i) Properties. Except as previously disclosed in writing to FCFC, ---------- Reliable and its Subsidiary have good and marketable title to all of their real estate and assets (including those reflected in Reliable's December 31, 1993 consolidated balance sheet except such as have been disposed of in the ordinary course of business) free of any mortgage, encumbrance, lien or security interest, except pledges of assets to secure public deposits and minor imperfections in title and encumbrances which do not materially detract from the value or impair the use of the properties affected thereby. All material leases under which Reliable or its Subsidiary leases real or personal property, as lessee, are valid and effective in accordance with their terms, and there is no material existing default by Reliable or its Subsidiary under such leases or any event which with notice or the lapse of time or both would constitute such a material default. A-I-12 (j) Employment Contracts. Except as previously disclosed in writing -------------------- to FCFC, neither Reliable nor its Subsidiary is a party or subject to any contract of employment not terminable at will or any profit sharing, incentive compensation, bonus, thrift, savings or other employee benefit or welfare plan providing for employer contributions other than the profit sharing plan referred to in Section 4(m) hereof or group insurance or medical plans. (k) Compliance with Laws. To the best of Reliable's knowledge, -------------------- Reliable and its Subsidiary are in substantial compliance with all laws, rules, regulations and other legal requirements applicable to them. (l) Litigation and Administrative Proceedings. Except as previously ----------------------------------------- disclosed in writing to FCFC, there is no action, suit, arbitration or administrative proceeding or investigation to which Reliable or its Subsidiary is or may be a party or subject which is pending, or to Reliable's knowledge threatened, in which there could be a judgment, order, decree, liability, fine, penalty, injunction or cease-and-desist order which would have a material adverse effect on its condition, financial or otherwise, or the conduct of its business. (m) Employee Benefit Plans. Except as previously disclosed in ---------------------- writing to FCFC, neither Reliable nor its Subsidiary has any contract or plan providing for retirement benefits. All retirement and employee benefit or welfare plans of Reliable or its Subsidiary have been maintained and operated in accordance with their terms, and all such plans which are subject to ERISA have been maintained and operated in material compliance with all applicable provisions of ERISA and the regulations thereunder and are not subject to any accumulated funding deficiency within the meaning of ERISA and the regulations thereunder or to any outstanding liability to the Pension Benefit Guaranty Corporation. No "prohibited transaction" has occurred and is continuing with respect to any such plan, nor has any "reportable event" occurred in respect thereof, as such terms are defined in ERISA and the regulations thereunder, and no such plan is a "Multiemployer Plan" or a "Multiple Employer Plan", as such terms are defined in ERISA and the regulations thereunder. (n) Proxy Statement/Prospectus. None of the information relating to -------------------------- Reliable to be included in the Proxy Statement/Prospectus will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading at the time the Proxy Statement/Prospectus is distributed to the Reliable shareholders or at the time of the Reliable Shareholders' Meeting, except A-I-13 that no representation or warranty is made with respect to the information furnished by FCFC specifically for inclusion therein. 5. Covenants and Actions of FCFC Pending the Closing. Between the ------------------------------------------------- date hereof and the Closing Date: (a) Formation of Interim Reliable. FCFC shall cause Interim Reliable ----------------------------- to be incorporated as a business corporation under the Pennsylvania Business Corporation Law of 1988, as amended (the "Pennsylvania Business Corporation Law"), and as a wholly-owned subsidiary of FCFC by filing with the Pennsylvania Department of State Articles of Incorporation of Interim Reliable in substantially the form attached hereto as Appendix B and by filing with the Federal Reserve Board an application for approval of the Merger under the Bank Holding Company Act. FCFC shall take or cause to be taken all actions (including the payment of all fees in connection therewith) necessary for such applications to be approved. FCFC shall contribute to the capital, surplus and expense fund of Interim Reliable such amounts as may be required by the Pennsylvania Department of Banking under the Pennsylvania Banking Code to permit Interim Reliable to be incorporated and to consummate the Merger. (b) Plan of Merger. After Interim Reliable is incorporated and may -------------- execute and deliver the Plan of Merger, FCFC will cause Interim Reliable to execute and deliver the Plan of Merger and will ensure that all issued and outstanding shares of the capital stock of Interim Reliable are voted to approve the Merger. (c) Proxy Statement/Prospectus. FCFC will cooperate with Reliable in -------------------------- the preparation and filing of the Proxy Statement/Prospectus in accordance with the requirements of the proxy rules of the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (d) Regulatory Approvals. FCFC will file an application with the -------------------- Pennsylvania Department of Banking for its approval of the Merger under the Pennsylvania Banking Code and the Pennsylvania Savings Association Code, an application with the OTS for its approval of the Merger under the Savings and Loan Holding Company Act and any other applications with any other regulatory agencies having jurisdiction that may be necessary for the consummation of the Merger. FCFC will take all actions necessary for such applications to be approved and will provide Reliable with copies of all correspondence and notices to or from such agencies concerning such applications. (e) Registration Statement. As soon as practicable after the date ---------------------- hereof, FCFC will prepare and file with the SEC under the Securities Act a A-I-14 registration statement on Form S-4, or other appropriate form, for the registration of the shares of FCFC Stock to be issued pursuant to the Plan of Merger (the "Registration Statement"), which will include a preliminary form of the Proxy Statement/Prospectus. FCFC will not be liable for any untrue statement of a material fact or omission to state a material fact in the Registration Statement made in reliance upon, and in conformity with, information furnished to FCFC by Reliable for use therein. FCFC will provide Reliable with copies of all correspondence, comment letters or notices to or from the SEC concerning or relating to the Registration Statement and will advise Reliable promptly after it receives notice thereof, of the time when the Registration Statement has become effective or any supplement or amendment thereto has been filed, of the issuance of any stop order with respect to the effectiveness thereof, of the suspension of the qualification of the FCFC Stock issuable in connection with the Merger for offering or sale in any jurisdiction, of the initiation or threat of any proceeding for any such purpose, or of any request by the SEC for the amendment or supplement of the Registration Statement or the filing or submission of additional information. (f) Stock Exchange Listing. FCFC will use all reasonable efforts to ---------------------- cause the shares of FCFC Stock to be issued in the Merger to be approved for listing on the NYSE, subject to official notice of issuance, prior to the Closing Date. (g) Access to Properties and Records. Between the -------------------------------- date of this Agreement and the Effective Date, FCFC will give Reliable and its authorized representatives reasonable access during normal business hours to the properties, books and records of FCFC and its Subsidiaries and will cause their officers to furnish such additional financial and operating data and other information as Reliable may reasonably request, subject to the obligation of Reliable and its authorized representatives to maintain the confidentiality of all information concerning FCFC and its Subsidiaries furnished to Reliable or obtained by Reliable by reason of such access, whether before or after the date of this Agreement. (h) Notice of Actions and Proceedings. FCFC will promptly notify --------------------------------- Reliable of any actions, claims or legal, administrative or arbitration proceedings or investigations threatened or commenced against FCFC or its Subsidiaries, which, if pending on the date hereof, would have been required to be disclosed to Reliable to assure the accuracy of the representations of FCFC contained in Section 3(k) hereof or which otherwise relate to, or affect, the business or assets of FCFC or its Subsidiaries in A-I-15 any material respect or the consummation of the Merger and the transactions contemplated hereby. 6. Covenants and Actions of Reliable Pending the Closing. Between the --------------------------------------------- ------- date hereof and the Closing Date: (a) Plan of Merger. After Interim Reliable is incorporated and may -------------- execute and deliver the Plan of Merger, Reliable will execute and deliver the Plan of Merger. (b) Shareholders' Meeting. Reliable will take appropriate action to --------------------- call a meeting of its shareholders (the "Reliable Shareholders' Meeting"), to be held not more than 45 days following the effective date of the Registration Statement, to consider approval of this Agreement and the Plan of Merger. Subject to its continuing fiduciary duties to Reliable's shareholders, Reliable's Board of Directors will use its best efforts to secure such approval. In connection with the Reliable Shareholders' Meeting, Reliable will duly solicit, in compliance with Section 14(a) of the Exchange Act, the vote of the Reliable shareholders by mailing or delivering to each such shareholder on the date such Registration Statement is declared effective by the SEC or as soon thereafter as practicable the Proxy Statement/Prospectus in the form filed by FCFC with the SEC pursuant to Rule 424(b) under the Securities Act in connection with the Registration Statement. (c) Proxy Statement/Prospectus. Reliable will cooperate with FCFC in -------------------------- the preparation and filing of the Proxy Statement/Prospectus in accordance with the requirements of the proxy rules of the SEC under the Exchange Act and the filing thereof as part of the Registration Statement. Reliable will not be liable for any untrue statement of a material fact or omission to state a material fact in the Proxy Statement/Prospectus made in reliance upon, and in conformity with, information furnished to Reliable by FCFC for use therein. (d) Regulatory Approvals. Reliable will cooperate with FCFC in the -------------------- preparation and filing of an application with the OTS for its approval of the Merger under the Savings and Loan Holding Company Act and any other applications with any other regulatory agencies having jurisdiction that may be necessary for the consummation of the Merger. Reliable will publish all notices in connection with such applications, supply all information reasonably requested by FCFC or any such regulatory agency in connection with such applications and take any other actions required on the part of Reliable for such applications to be approved. (e) Access to Properties and Records. Between the date of this -------------------------------- Agreement and the Effective Date, Reliable will give FCFC and its A-I-16 authorized representatives reasonable access during normal business hours to the properties, books and records of Reliable and its Subsidiary and will cause their officers to furnish such additional financial and operating data and other information as FCFC may reasonably request, subject to the obligation of FCFC and its authorized representatives to maintain the confidentiality of all information concerning Reliable and its Subsidiary furnished to FCFC or obtained by FCFC by reason of such access, whether before or after the date of this Agreement. (f) Notice of Actions and Proceedings. Reliable will promptly notify --------------------------------- FCFC of any actions, claims or legal, administrative or arbitration proceedings or investigations threatened or commenced against Reliable or its Subsidiary, which, if pending on the date hereof, would have been required to be disclosed to FCFC to assure the accuracy of the representations of Reliable contained in Section 4(1) hereof or which otherwise relate to, or affect, the business or assets of Reliable or its Subsidiary in any material respect or the consummation of the Merger and the transactions contemplated hereby. (g) Reliable Affiliates. Reliable will furnish FCFC with a schedule ------------------- of all holders of Reliable Stock and other persons who on the date of the Reliable Shareholders' Meeting may be deemed to be affiliates of Reliable within the meaning of Rule 145 under the Securities Act and will use its best efforts to assist FCFC in obtaining from each of such persons an executed affiliate's agreement in a form reasonably satisfactory to counsel for FCFC and counsel for Reliable. To permit the Merger to be accounted for as a pooling of interests, each affiliate's agreement will include an undertaking that the affiliate will not sell, assign, pledge, transfer or otherwise dispose of any of his Reliable Stock or any of the FCFC Stock to be received by the affiliate in the Merger, except at such time and in such quantities as are permitted in Section 201.01 of the SEC's Codification of Financial Reporting Polices and Staff Accounting Bulletin Nos. 65 and 76. 7. Covenants and Actions of FCFC and Reliable Pending the Closing. -------------------------------------------------------------- Between the date hereof and the Closing Date: (a) Conduct of Business in Ordinary Course. Pending the Merger, the -------------------------------------- business and operations of each of FCFC and Reliable and their Subsidiaries will be conducted only in the ordinary course, and each will use its best efforts, and will cause each of its Subsidiaries to use its best efforts, to preserve its business organization intact and to preserve its goodwill with its customers and others having business relations with it, and neither FCFC nor Reliable will, without the prior written consent of the A-I-17 other or except as expressly contemplated herein or previously disclosed in writing to the other: (i) amend its Articles of Incorporation or its By-Laws; (ii) issue, sell, purchase, acquire or redeem, or grant options or rights to purchase, any shares of its capital stock or other securities other than, in the case of FCFC, transactions in connection with its employee stock ownership plan and, in the case of Reliable, shares issued upon proper exercise of any of the options described in Section 4(b) hereof; or (iii) take any action which if taken prior to the date hereof would have constituted a breach of any representation or warranty contained herein or permit any of its Subsidiaries to do so. (b) Reliable Dividends. Reliable will not declare, pay or set aside ------------------ a dividend or other distribution in respect of its capital stock other than cash dividends declared prior to the date hereof and regular quarterly cash dividends each in an amount no greater than $.40 per share and each having both a record date and a payment date the same as the regular quarterly cash dividend of FCFC. (c) Satisfaction of Conditions. Each party will exercise its best -------------------------- efforts to assure that all conditions to the obligations of the other party under this Agreement are fulfilled. 8. Closing and Effective Date. -------------------------- (a) Closing Date. The transactions contemplated hereby will be ------------ consummated at a closing (the "Closing") to be held at the offices of Reliable, 428 Station Street, Bridgeville, Pennsylvania, at 10:00 A.M., local time, on September 26, 1994, on such earlier date as the parties may agree or, in the event all conditions to the consummation of the Merger other than the Closing shall not have been satisfied prior to September 26, 1994, on the earliest practicable date following satisfaction of such conditions (the "Closing Date"). At the Closing the parties will exchange the certificates and other documents provided for in this Section. (b) Closing Certificate of FCFC. At the Closing, FCFC will deliver --------------------------- to Reliable a certificate dated the Closing Date of its chief executive officer, its chief financial officer and its Secretary to the effect that: A-I-18 (i) except for changes approved by Reliable or contemplated hereby, the representations and warranties of FCFC contained herein are true and correct in all material respects on the Closing Date as if made on such date; (ii) FCFC has performed and complied with all agreements, covenants and conditions to be performed or complied with by FCFC hereunder on or before the Closing Date; (iii) Interim Reliable has been duly organized under the Pennsylvania Business Corporation Law; (iv) the Merger has been approved by the Pennsylvania Department of Banking under the Pennsylvania Banking Code and the Pennsylvania Savings Association Code; (v) the Merger has been approved by the OTS under the Savings and Loan Holding Company Act; (vi) the Merger has been approved by the Federal Reserve Board under the Bank Holding Company Act; (vii) periods of 30 days have expired since the dates of the approvals by the OTS and the Federal Reserve Board referred to in (v) and (vi) above without a stay of effectiveness of either such approval by reason of the filing of an action by the United States under the antitrust laws during that period; and (viii) the Registration Statement has been declared effective by the SEC by an order, and that, to the best knowledge of such officers after due inquiry, no stop order with respect to the effectiveness of the Registration Statement has been issued nor any proceeding therefor initiated or threatened under the Securities Act. (c) Closing Certificate of Reliable. At the Closing, Reliable will ------------------------------- deliver to FCFC a certificate dated the Closing Date of its chief executive officer, its chief financial officer and its Secretary to the effect that: (i) except for changes approved by FCFC or contemplated hereby, the representations and warranties of Reliable contained herein are true and correct in all material respects on the Closing Date as if made on such date; (ii) Reliable has performed and complied with all agreements, covenants and conditions to be performed or complied with by Reliable hereunder on or before the Closing Date; A-I-19 (iii) the holders of the requisite number of shares of Reliable Stock have approved this Agreement and the Plan of Merger; and (iv) lists submitted to FCFC contain the names of all holders of Reliable Stock who voted in favor of the Merger and the number of shares owned by each such shareholder. (d) Opinion of Counsel for FCFC. Reliable will receive from counsel --------------------------- for FCFC, an opinion or opinions, dated the Effective Date and in form and substance satisfactory to Reliable and its counsel, with respect to the validity of the Merger, the due authorization and issuance of the FCFC Stock to be issued in connection with the Merger and such other matters related thereto as may be agreed upon by FCFC and Reliable. In rendering such opinions, such counsel may rely as to matters of fact, to the extent such counsel deems such reliance necessary or appropriate, upon certificates of public officials and of responsible officers of FCFC, provided that the extent of such reliance is specified in the opinion and executed counterparts of such certificates have been furnished to Reliable. (e) Opinion of Counsel for Reliable. FCFC will receive from counsel ------------------------------- for Reliable, an opinion or opinions, dated the Effective Date and in form and substance satisfactory to FCFC and its counsel, with respect to the validity of the Merger and such other matters related thereto as may be agreed upon by FCFC and Reliable. In rendering such opinions, such counsel may rely as to matters of fact, to the extent such counsel deems such reliance necessary or appropriate, upon certificates of public officials and responsible officers of Reliable, provided that the extent of such reliance is specified in the opinion and executed counterparts of such certificates have been furnished to FCFC. (f) Additional Documents. At or before the Closing, each party shall -------------------- have received from the other such certified or other copies of such documents and proceedings in connection with the transactions contemplated hereby as such party or its counsel may reasonably request. (g) Effective Date of Merger. Upon the delivery of all documents to ------------------------ be delivered at the Closing, FCFC and Reliable will file with the Delaware Secretary of State and the Pennsylvania Department of State the Certificate A-I-20 of Merger and Articles of Merger, respectively, provided for in the Plan of Merger, specifying that the Merger will be effective as of the close of business on the last day of the month in which the Closing occurs or such other date and time as the parties may agree (the "Effective Date"). 9. Board of Directors of Reliable Savings Bank Following Effective --------------------------------------------------------------- Date. Upon the Merger becoming effective and without the necessity of any - ---- further corporate action by Reliable Savings Bank, the number of directors of Reliable Savings Bank shall be increased by two and such vacancies shall be filled by E. James Trimarchi and Joseph E. O'Dell, who shall hold office until the 1995 and 1997 annual meetings of the Reliable Savings Bank shareholders, respectively, and until their respective successors have been duly elected and qualified. 10. Other Agreements of FCFC and Reliable. ------------------------------------- (a) FCFC covenants that it will issue to the former holders of Reliable Stock the shares of FCFC Stock to which they are entitled in accordance with the provisions of the Plan of Merger and that it will perform all other obligations of FCFC under the Plan of Merger. (b) FCFC covenants that it will advance funds to Interim Reliable to make any required payments to the holders of Reliable Stock. 11. Termination. ----------- (a) Mutual Consent. FCFC and Reliable may terminate this Agreement -------------- and the Plan of Merger by written mutual consent of their respective Boards of Directors at any time before the Effective Date, without liability of any party, notwithstanding prior approval by the Reliable shareholders, and such consent shall not be unreasonably withheld by FCFC or Reliable. (b) Failure of Conditions. Notwithstanding prior approval by the --------------------- Reliable shareholders, either FCFC or Reliable may, without liability of any party, terminate this Agreement and the Plan of Merger by written notice to the other in the event of a failure to satisfy before June 30, 1995 any of the conditions to its obligations under this Agreement, if such failure occurred despite the good faith effort of the party electing to terminate to perform all agreements and covenants and to satisfy all conditions required to be performed or satisfied by it. A-I-21 12. Miscellaneous. ------------- (a) Brokers. FCFC and Reliable each represents and warrants that ------- except as previously disclosed in writing to the other party, it is not obligated to pay any brokerage commissions, finder's fees or other like payments in connection with the transactions contemplated hereby. Each party agrees to pay or discharge and to indemnify and hold the other harmless from and against any and all claims or liabilities for brokerage commissions, finder's fees and other like payments incurred by such party in connection with the transactions contemplated hereby. (b) Expenses. The fees and expenses of Reed Smith Shaw & McClay -------- related to this Agreement and the Plan of Merger, the federal tax opinion referred to in Section 2(c) hereof, the Proxy Statement/Prospectus and the consummation of the Merger shall be borne equally by the parties hereto. The fees and expenses of Reed Smith Shaw & McClay related to the regulatory approvals referred to in Section 2(b) hereof shall be borne by FCFC. Each party shall bear its own other expenses incurred in connection with this Agreement, the Merger and all related transactions, including fees of accountants, attorneys and investment advisors. The obligations of the parties under this Section 12(b) shall survive any termination of this Agreement. (c) Further Assurances. Each party shall execute and deliver such ------------------ instruments and take such other actions as the other party hereto may reasonably request in order to carry out the intent and purposes hereof and the Plan of Merger. (d) Survival. Except for those contained in Sections 3(m) and 4(n) -------- hereof, the representations and warranties of the parties contained herein or in any schedule or certificate delivered in connection herewith shall not survive the Closing and Effective Date but expire with and be terminated and extinguished by the consummation of the Merger contemplated hereby. (e) Amendment and Waiver. Subject to applicable law, this Agreement -------------------- may be amended in any respect by an instrument in writing signed by an authorized officer of each of FCFC and Reliable, whether before or after the Reliable Shareholders' Meeting, at any time before the Effective Date, except that no such amendment after such Shareholders' Meeting shall affect the rates of exchange of FCFC Stock for Reliable Stock provided in the Plan of Merger, alter or change any term of the certificate of incorporation of the surviving corporation to be effected by the Merger, or alter or change any of the terms and conditions of this Agreement if such alteration or change would adversely affect the holder of any class or series thereof A-I-22 of Reliable or Interim Reliable. FCFC or Reliable may (i) extend the time for the performance of any of the obligations of the other party, (ii) waive any inaccuracies in the representations and warranties of the other party, (iii) waive compliance by the other party with any of the covenants or agreements contained herein and the performance of any obligations of the other party and (iv) waive the fulfillment of any condition (other than Sections 2(a), (b), (d) and (g) hereof) that is precedent to the performance by it of any of its obligations under this Agreement, all of the above to the fullest extent permitted by law. (f) Communications. All notices and other communications hereunder -------------- shall be in writing and shall be deemed to have been given if delivered by hand or mailed, first-class, registered or certified mail, postage prepaid, addressed as follows: If to FCFC: First Commonwealth Financial Corporation Old Courthouse Square P.O. Box 400 Indiana, Pennsylvania 15701-0400 Attention: E. James Trimarchi, Chairman With a copy to: Tomb and Tomb 402 Indiana Theatre Building Indiana, Pennsylvania 15701 Attention: David R. Tomb, Jr., Esquire If to Reliable: Reliable Financial Corporation 428 Station Street Bridgeville, Pennsylvania 15017-2002 Attention: Stephen Grippi, President With a copy to: Raymond J. Gustini, Esquire Kelley Drye & Warren 2300 M Street, N.W. Washington, D.C. 20037 or at such other address or addresses as may hereafter be furnished by the addressee party. A-I-23 (g) Counterparts; Headings. This Agreement may be executed in ---------------------- several counterparts, each of which will constitute an original. The headings and captions contained herein are for reference purposes only and do not constitute a part hereof. (h) Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the law of the Commonwealth of Pennsylvania and, to the extent applicable, the law of the United States. (i) Entire Agreement. This Agreement, together with the Plan of ---------------- Merger, sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous agreements or understandings among the parties with respect thereto. IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Agreement as of the date first above written. Attest: FIRST COMMONWEALTH FINANCIAL CORPORATION /s/ David R. Tomb, Jr. By /s/ E. James Trimarchi - ------------------------------ ----------------------------- David R. Tomb, Jr., Secretary E. James Trimarchi, Chairman [Corporate Seal] Attest: RELIABLE FINANCIAL CORPORATION /s/ Jean L. David By /s/ Stephen Grippi - ------------------------------ ----------------------------- Jean L. David, Secretary Stephen Grippi, President [Corporate Seal] A-I-24 APPENDIX A PLAN OF MERGER PLAN OF MERGER (the "Plan") made by RELIABLE FINANCIAL CORPORATION, a Delaware corporation having its principal place of business at 428 Station Street, Bridgeville, Allegheny County, Pennsylvania ("Reliable"), and INTERIM RELIABLE, INC., a Pennsylvania business corporation having its principal place of business at 428 Station Street, Bridgeville, Allegheny County, Pennsylvania ("Interim Reliable"). Reliable and Interim Reliable are hereinafter sometimes referred to as the "Constituent Corporations." W I T N E S S E T H: WHEREAS, First Commonwealth Financial Corporation, a Pennsylvania business corporation having its principal place of business at Old Courthouse Square, 22 North Sixth Street, Indiana, Pennsylvania ("FCFC"), is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and prior to the merger contemplated hereby will be the owner of all the issued and outstanding capital stock of Interim Reliable; and WHEREAS, FCFC and Reliable have entered into an Agreement and Plan of Reorganization dated as of April , 1994 (the "Reorganization Agreement"), which provides, among other things, for the execution of this Plan and the acquisition of Reliable by FCFC by means of the merger (the "Merger") of Reliable into Interim Reliable; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and for the purpose of stating the method, terms and conditions of the Merger, including the rights of the shareholders of Reliable and Interim Reliable, and such other details and provisions as are deemed desirable, the parties hereto, each intending to be legally bound hereby, agree as follows: 1. The Merger. Subject to the terms and conditions of this Plan and ---------- the Reorganization Agreement, and in accordance with the laws of the State of Delaware and the Commonwealth of Pennsylvania, on the Effective Date (as defined in Section 8(g) of the Reorganization Agreement) Reliable shall be merged into Interim Reliable, which shall be the surviving corporation. 2. Articles of Incorporation and By-Laws. Upon the Merger becoming ------------------------------------- effective, the Articles of Incorporation and By-Laws of Interim Reliable as in effect on the Effective Date shall continue in effect without change therein by reason of the Merger, except that Article 1 of the Articles of Incorporation shall be changed to and be as follows in its entirety: App. A-1 1. The name of the corporation is Reliable Financial Corporation. 3. Directors, Officers, Employees. Upon the Merger becoming ------------------------------ effective, the persons who are then members of the Board of Directors of Reliable plus E. James Trimarchi and Joseph E. O'Dell shall become the Board of Directors of the surviving corporation, the persons who are then officers of Reliable shall become the officers of, and shall hold the same offices with, the surviving corporation and the persons who are then employees of Reliable shall become the employees of, and shall hold the same positions with, the surviving corporation. 4. Conversion of Reliable Shares. ----------------------------- (a) Subject to the provisions of Section 6 hereof with respect to the payment of fractional shares in cash, each share of Common Stock, par value $.01 per share, of Reliable ("Reliable Common Stock") issued and outstanding immediately before the Merger becomes effective shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into 1.6 shares of Common Stock, par value $1 per share, of FCFC ("FCFC Common Stock"). (b) Each share of Reliable Common Stock which is issued and owned by Reliable as treasury stock on the Effective Date shall, by virtue of the merger and without any action on the part of Reliable, be retired and cancelled. (c) Each outstanding option to purchase shares of Reliable Common Stock under Reliable's 1992 Stock Option Plans shall be converted into and become an option to purchase FCFC Common Stock at the rate of 1.6 shares of FCFC Common Stock for each share of Reliable Common Stock subject to the option. Except as provided in the preceding sentence, each such option shall be upon the same terms and conditions and have the same provisions that were contained therein immediately before the Merger becomes effective. 5. Surviving Corporation Stock. The number of shares of Common --------------------------- Stock, par value $1 per share, of the surviving corporation ("Surviving Corporation Common Stock") issued and outstanding immediately before the Merger becomes effective, all of which will be owned by FCFC, shall, by virtue of the Merger and without any action on the part of the holder thereof, be increased to 1,000,000 shares of Surviving Corporation Common Stock, all of which shares shall be owned by FCFC, and the capital surplus of the surviving corporation shall by virtue of the Merger be increased to $11,500,000. 6. Surrender and Exchange of Reliable Stock Certificates. Upon the ---------------------------------------- ------------ Merger becoming effective, holders of certificates that represent shares of Reliable Common Stock outstanding immediately before the Merger becomes App. A-2 effective (hereinafter called "Old Certificates") shall cease to be, and shall have no rights as, shareholders of Reliable. Old Certificates shall be exchangeable by the holders thereof (upon surrender of such Old Certificates in the manner provided in the transmittal materials described below) for a certificate or certificates for that number of shares of FCFC Common Stock equal to the product of 1.6 times the number of shares of Reliable Common Stock represented by the Old Certificates so surrendered; provided, however, that each -------- ------- holder of Old Certificates who would otherwise be entitled to receive a fraction of a share of FCFC Common Stock (after taking into account all shares of Reliable Common Stock represented by the Old Certificates then surrendered by such holder) shall receive from FCFC, in lieu thereof, cash in an amount equal to such fractional part of a share multiplied by the value of $19 for one whole share of FCFC Common Stock, which was the price per share that was the basis of the negotiations between FCFC and Reliable. As promptly as practicable after the Effective Date, FCFC shall send or cause to be sent to each holder of record of Reliable Common Stock as of the close of business on the Effective Date transmittal materials for use in surrendering Old Certificates in exchange for certificates representing FCFC Common Stock. The letter of transmittal will contain instructions with respect to the surrender of Old Certificates. No interest shall accrue or be payable in respect of any cash payable upon surrender for exchange of Old Certificates. If any dividend on FCFC Common Stock is declared by FCFC after the Effective Date, the declaration shall include dividends on all whole shares of FCFC Common Stock into which shares of Reliable Common Stock have been converted under this Plan, but no former holder of record of Reliable Common Stock will be entitled to receive a distribution of any such dividend until surrender of the shareholder's Old Certificates shall have been effected in accordance with the instructions furnished by FCFC. Upon surrender for exchange of a shareholder's Old Certificates, such shareholder shall be entitled to receive from FCFC an amount equal to all such dividends declared (without interest thereon and less the amount of taxes, if any, which may have been imposed or paid thereon), and for which the payment date has occurred, on the whole shares of FCFC Common Stock into which the shares of Reliable Common Stock represented by such Old Certificates have been converted. After the Merger becomes effective, there shall be no transfers on the stock transfer books of Reliable or FCFC of shares of Reliable Common Stock. If, after the Effective Date, Old Certificates are presented for transfer, they shall be cancelled and certificates representing whole shares of FCFC Common Stock (and cash in lieu of any fractional share) shall be issued or paid in exchange therefor as provided herein. App. A-3 7. No Dissenters' Rights. Under Section 262 of the Delaware General --------------------- Corporation Law, the rights and remedies of a dissenting shareholder are not available to a holder of Reliable Common Stock who objects to this Plan. 8. Certificate and Articles of Merger. Upon fulfillment of all ---------------------------------- conditions in Section 2 of the Reorganization Agreement other than completion of the Closing (as defined in Section 8(a) of the Reorganization Agreement), Reliable and Interim Reliable will execute a Certificate of Merger in compliance with the requirements of the Delaware General Corporation Law and Articles of Merger in compliance with the requirements of the Pennsylvania Business Corporation Law of 1988, as amended (the "Pennsylvania Business Corporation Law"), and will deliver them to the Delaware Secretary of State and Pennsylvania Department of State, respectively, specifying that the Merger shall be effective as of the close of business on the last day of the month in which the Closing occurs or such other date and time as the parties may agree. 9. Termination and Amendment. Notwithstanding approval by the ------------------------- shareholders of Reliable or Interim Reliable or both of them, this Plan shall be terminated and the Merger shall be abandoned in the event of termination of the Reorganization Agreement as provided therein. If there is such termination after delivery of the Certificate of Merger to the Delaware Secretary of State and Articles of Merger to the Pennsylvania Department of State, such Certificate of Merger and Articles of Merger shall be withdrawn, terminated and cancelled. Subject to applicable law, this Plan may be amended in any respect by an instrument in writing signed by an authorized officer of each of Reliable and Interim Reliable before or after the shareholders' meeting referred to in Section 6(b) of the Reorganization Agreement at any time before the Merger becomes effective, except that no such amendment after such shareholders' meeting shall affect the rates of exchange provided in Sections 4 and 6 of this Plan, alter or change any term of the certificate of incorporation of the surviving corporation to be effected by the Merger, or alter or change any of the terms and conditions of this Plan if such alteration or change would adversely affect the holder of any class or series thereof of Reliable or Interim Reliable. 10. Effect of Merger. On the Effective Date, the separate existence ---------------- of Reliable shall cease, and all of the property (real, personal and mixed), rights, powers, duties and obligations of Reliable and Interim Reliable shall be taken and deemed to be transferred to and vested in Interim Reliable, as the surviving corporation, without further act or deed, all as provided in the Delaware General Corporation Law and the Pennsylvania Business Corporation Law. 11. Further Assurances. If at any time Interim Reliable shall ------------------ consider or be advised that any further assignments, conveyances or assurances App. A-4 in law are necessary or desirable to vest, perfect or confirm of record in Interim Reliable the title to any property or rights of the Constituent Corporations, or otherwise to carry out the provisions hereof, the proper officers and directors of the Constituent Corporations immediately before the Effective Date shall, on behalf of the Constituent Corporations, execute and deliver any and all proper deeds, assignments and assurances in law, and do all things necessary or proper to vest, perfect or confirm title to such property or rights in Interim Reliable and otherwise to carry out the provisions hereof. 12. Counterparts; Headings. This Plan may be executed in several ---------------------- counterparts, each of which will constitute an original. The headings and captions contained herein are for reference purposes only and do not constitute a part hereof. 13. Governing Law. This Plan shall be governed by and construed and ------------- enforced in accordance with the law of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties have executed this Agreement this 21st day of April, 1994. Attest: RELIABLE FINANCIAL CORPORATION /s/ Jean L. David By /s/ Stephen Grippi - ----------------------------- ----------------------------- Jean L. David, Secretary Stephen Grippi, President [Corporate Seal] Attest: INTERIM RELIABLE, INC. /s/ David R. Tomb, Jr. By /s/ E. James Trimarchi - ----------------------------- ----------------------------- David R. Tomb, Jr., Secretary E. James Trimarchi, President [Corporate Seal] App. A-5 APPENDIX B COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF STATE CORPORATION BUREAU Articles of Incorporation ------------------------- In compliance with the requirements of (Section)1306 of the Business Corporation Law of 1988, Act of December 21, 1988 (P.L. 1444, No. 177), as amended (15 Pa.C.S. (Section)1306), the undersigned, desiring to incorporate a business corporation, hereby certifies that: 1. Corporate Name. The name of the Corporation is Interim Reliable, -------------- Inc. 2. Registered Office. The location and post office address of the ----------------- initial registered office of the Corporation in this Commonwealth is 428 Station Street, Bridgeville, Allegheny County, Pennsylvania 15017-2002. 3. Business Corporation Law of 1988. The Corporation is incorporated -------------------------------- under the provisions of the Business Corporation Law of 1988. 4. Capital Stock. The aggregate number of shares that the ------------- Corporation shall have authority to issue is 10,000,000 shares of Common Stock, par value $1 per share. 5. No Cumulative Voting. The shareholders of the Corporation shall -------------------- not be entitled to cumulate their votes for the election of directors. 6. Incorporator. The name and post office address of the ------------ incorporator is Joseph E. O'Dell, 152 Timber Springs Lane, White Township, Indiana, Pennsylvania 15701. 7. Personal Liability of Directors. ------------------------------- (a) Elimination of Liability. To the fullest extent that the laws of ------------------------ the Commonwealth of Pennsylvania, as now in effect or as hereafter amended, permit elimination or limitation of the liability of directors, no director of App. B-1 the Corporation shall be personally liable for monetary damages as such for any action taken, or any failure to take any action, as a director. (b) Nature and Extent of Rights. The provisions of this Article --------------------------- shall be deemed to be a contract with each director of the Corporation who serves as such at any time while this Article is in effect and each such director shall be deemed to be so serving in reliance on the provisions of this Article. Any amendment or repeal of this Article or adoption of any By-Law or provision of the Articles of the Corporation which has the effect of increasing director liability shall operate prospectively only and shall not have any effect with respect to any action taken, or any failure to act, by a director prior thereto. 8. By-Laws. The power to make, alter, amend and repeal the By-Laws ------- of the Corporation is expressly vested in the Board of Directors, subject, however, to the power of the shareholders of the Corporation to change such action. IN WITNESS WHEREOF, the Incorporator has signed and sealed these Articles of Incorporation this 18th day of April, 1994. /s/ Joseph E. O'Dell (Seal) -------------------------- Joseph E. O'Dell App. B-2 ANNEX II June 29, 1994 The Board of Directors Reliable Financial Corporation 428 Station Street Bridgeville, PA 15017-2002 Members of the Board: You have requested our opinion as to the fairness, from a financial point of view, to Reliable Financial Corporation ("RESB") and its shareholders of the proposed merger ("Proposed Merger") between RESB and First Commonwealth Financial Corporation ("FCF"). The terms of the Agreement and Plan of Merger dated April 21, 1994 by and between RESB and FCF ("the Agreement"), indicate that the consummation of the Proposed Merger is subject to receipt of approvals from the shareholders of RESB and from various regulatory agencies, and is further subject to the satisfaction of certain other conditions. As provided for in the Agreement, RESB will merge with a subsidiary of FCF. Under the terms of the Agreement, each of the outstanding shares of RESB will be converted into and become the right to receive 1.6 shares of FCF common stock. No adjustment in this specified rate will be made as of the Closing Date to compensate for any change in the market value of the shares of common stock of either FCF or RESB between June 29, 1994 and the Closing Date. Ryan, Beck & Co., Inc., as a customary part of its investment banking business, is engaged in the valuation of banking and thrift institutions and their securities in connection with mergers and acquisitions. In conducting our investigation and analysis of this transaction, we have met separately with senior management of FCF, RESB and United National Bankcorporation ("UNB") to discuss their respective operations, financial statements, and future prospects, and have reviewed and analyzed material prepared in connection with the Proposed Merger, including, among other things, the following: (1) the RESB Agreement; (2) the Agreement and Plan of Reorganization by and between FCF and UNB dated March 25, 1994 concerning the proposed merger (the "UNB Merger") of UNB with and into FCF (the "UNB Agreement"); (3) the Joint Proxy Statement/Prospectus and Registration Statement on Form S-4 concerning the Proposed Merger A-II-1 and the UNB merger; (4) FCF's Annual Reports to Shareholders for the years ended December 31, 1991 through December 31, 1993 and Annual Reports on Form 10-K for the years ended December 31, 1991 through December 31, 1993 and Quarterly Report on Form 10-Q for the period ended March 31, 1994; (5) RESB's Annual Reports to Shareholders and Annual Reports on Form 10-K for the fiscal years ended September 30, 1991 through September 30, 1993, and Quarterly Reports on Form 10-Q for the periods ended March 31, 1994 and December 31, 1993; (6) UNB's Annual Reports to Shareholders and Annual Reports on Form 10-K for the fiscal years ended December 31, 1991 through December 31, 1993, and Quarterly Report on Form 10-Q for the period ended March 31, 1994; (7) certain operating and financial information, provided to us by the management FCF, RESB and UNB relating to their respective businesses and prospects; (8) the historical stock prices and trading volume of the common shares of RESB and FCF; (9) the publicly-available financial data and stock market performance data of publicly-traded banking institutions and savings institutions which we deemed generally comparable to FCF and RESB; (10) the terms of recent acquisitions of savings institutions which we deemed generally comparable to RESB; and (11) other such studies, analyses, inquiries and examinations as we deemed appropriate. We also met separately with the management of RESB, FCF and UNB to discuss their respective past and current business, operations, financial condition and future prospects. While we have taken care in our investigation and analyses, we have relied upon and assumed the accuracy, completeness and fairness of the financial and other information provided to us by the respective institutions or publicly available, and have not attempted to verify such information. We have also relied upon the managements of RESB, UNB and FCF as to the reasonableness and achievability of the prospects for their respective institutions indicated to us. We also did not independently verify and have relied on and assumed that the allowances for loan losses set forth in the balance sheets of FCF, RESB and UNB at March 31, 1994 were adequate and complied fully with applicable law, regulatory policy and sound banking practice as of the date of such financial statements. We also assumed that the Proposed Merger and the UNB Merger in all respects is, and will be in compliance with all laws and regulations applicable to FCF, RESB and UNB. We have not made or obtained any independent evaluations or appraisals of the assets or liabilities of either UNB, RESB or FCF or their respective subsidiaries. In conducting our analysis and arriving at our opinion as expressed herein, we have considered such financial and other factors as we have deemed appropriate in the circumstances. In A-II-2 rendering our opinion, we have assumed that in the course of obtaining the necessary regulatory approvals for the Proposed Merger and in preparation of the final Joint Proxy Statement/Prospectus, no conditions will be imposed that will have a material adverse effect on the contemplated benefits of the Proposed Merger to either RESB or, on a pro forma basis, to FCF. Our opinion is based upon conditions and projections as they exist and can be evaluated on the date hereof. Based upon and subject to the foregoing, it is our opinion as investment bankers that the terms of the Proposed Merger as provided and described in the Agreement are fair, from a financial point of view, to RESB and its shareholders. Very truly yours, RYAN, BECK & CO., INC. A-II-3 RELIABLE FINANCIAL CORPORATION PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JULY __, 1994 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS KNOW ALL MEN BY THESE PRESENTS that the undersigned shareholder of Reliable Financial Corporation ("Reliable") does hereby nominate, constitute and appoint Stephen Grippi and S.A. Russo, or each of them acting individually, the true and lawful attorney(s) and proxy (proxies) of the undersigned with full power of substitution, for the undersigned and in the name, place and stead of the undersigned to vote all the shares of Reliable Common Stock standing in the name of the undersigned on Reliable's books at the close of business on June 30, 1994, at the Special Meeting of Reliable's Shareholders to be held in the Norwood Party House, 316 Station Street, Bridgeville, Pennsylvania at 10:30 A.M., local time, or at any adjournment or adjournments thereof, with all the powers the undersigned would possess if personally present as follows: (1) FOR |_| AGAINST |_| ABSTAIN |_| the proposal to approve the (i) Agreement and Plan of Reorganization and (ii) the Plan of Merger which are attached as Annex I and as Appendix A to said Annex I, respectively, to, and are described in, the Proxy Statement/Prospectus dated July __, 1994. (2) Upon such other matters as may properly come before the Special Meeting or any adjournment or adjournments thereof in their discretion. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" NO. 1. UNLESS OTHERWISE SPECIFIED BY THE UNDERSIGNED, THIS PROXY WILL BE VOTED FOR NO. 1. Any other proxy heretofore given by the undersigned to vote shares of Reliable Common Stock which the undersigned would be entitled to vote if personally present at said Special Meeting or any adjournment or adjournments thereof is hereby expressly revoked. This proxy may be revoked at any time prior to the voting hereof. The undersigned hereby acknowledges receipt of the Notice of Special Meeting of Shareholders of Reliable and the Proxy Statement/Prospectus dated July __, 1994. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed his seal this _____ day of __________, 1994. _____________________________ (SEAL) _____________________________ (SEAL) Please date and sign exactly as name appears hereon. When signing as attorney, executor, administrator, trustee, guardian, etc., full title as such should be shown. For joint accounts, each joint owner must sign. If more than one trustee, all should sign. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. Indemnification of Directors and Officers. Pennsylvania Business Corporation Law of 1988. Section 1741 of the Pennsylvania Business Corporation Law of 1988 (the "BCL") provides that unless otherwise restricted in its bylaws, a business corporation shall (subject to the limitations described below) have the power to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that such person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another domestic or foreign corporation for profit or not-for-profit, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action or proceeding, if such person acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action or proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that such person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal proceeding, had reasonable cause to believe that his conduct was unlawful. Section 1742 of the BCL provides that unless otherwise restricted in its bylaws, a corporation shall (subject to the limitations described below) have the power to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another domestic or foreign corporation for profit or not-for-profit, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation. Indemnification shall not be made under Section 1742 in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless, and only to the II-1 extent that, the court of common pleas of the judicial district embracing the county in which the registered office of the corporation is located or the court in which such action was brought determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court of common pleas or such other court shall deem proper. Section 1744 of the BCL provides that unless ordered by a court, any indemnification under Section 1741 or 1742 shall be made by the business corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the relevant section. Such determination shall be made: (1) By the board of directors of the corporation by a majority vote of a quorum consisting of directors who were not parties to the action or proceeding; or (2) If such a quorum is not obtainable, or, if obtainable and a majority vote of a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (3) By the shareholders. Notwithstanding the above, Section 1743 of the BCL provides that, to the extent that a director, officer, employee or agent of a business corporation has been successful on the merits or otherwise in defense of any action or proceeding referred to above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Section 1745 of the BCL provides that expenses (including attorneys' fees) incurred in defending any action or proceeding may be paid by a business corporation in advance of the final disposition of the action or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it is ultimately determined that such person is not entitled to be indemnified by the corporation. Section 1746 of the BCL provides that the indemnification and advancement of expenses provided by or granted pursuant to the subchapter on indemnification shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while II-2 holding such office. Section 1746 also provides that indemnification may not be made in any case where the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. The articles of incorporation may not provide for indemnification in the case of willful misconduct or recklessness. Section 1747 of the BCL provides that, unless otherwise restricted in its bylaws, a business corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another domestic or foreign corporation for profit or not-for-profit, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify the director, officer, employee or agent against such liability under the provisions of the subchapter governing indemnification. Section 1747 declares such insurance to be consistent with the public policy of the Commonwealth of Pennsylvania. Section 1750 of the BCL provides that the indemnification and advancement of expenses provided by, or granted pursuant to, the subchapter governing indemnification shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent of the corporation and shall inure to the benefit of the heirs and personal representatives of such director, officer, employee or agent. FCFC By-Laws. Article 23 of the By-Laws of the FCFC provides that FCFC shall indemnify any director, officer and/or employee or any former director, officer and/or employee who was or is a party to, or is threatened to be made a party to, or is called as a witness in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such person is or was a director, officer and/or employee of FCFC, or is or was serving at the request of FCFC as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. In the case of an action or suit by or in the right of the registrant, no indemnification shall be made in respect of a claim, issue or matter as to which such person shall have been adjudged to be liable for misconduct in the performance of his duty to the registrant. Article 23 further provides that, except as may be otherwise ordered by a court, there shall be a presumption that any officer, director and/or employee is entitled to indemnification in the foregoing circumstances unless either a majority of the directors not involved in the proceedings or, if there are less than three such directors, then the holders of one-third of the outstanding shares of FCFC, determine that the person is not entitled to such II-3 presumption. In the event of any such determination, a written opinion as to whether or not the parties involved are entitled to indemnification shall be requested from independent counsel. Section 12.3 of the By-Laws of FCFC further provides that except as specifically provided by law, a director of FCFC will not be personally liable for monetary damages with respect to any action taken, or any failure to act, unless such director has breached or failed to perform the duties of his office under Pennsylvania law relating to standard of care and justifiable reliance and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Any amendment or repeal of Section 12.3 which has the effect of increasing director liability shall operate prospectively only and shall not affect any action taken, or any failure to act, prior to the adoption of such amendment. FCFC maintains directors' and officers' liability insurance covering its directors and officers with respect to liabilities, including liabilities under the Securities Act of 1933, which they may incur in connection with their serving in such capacity. Under the provisions of this insurance policy, FCFC received reimbursement for amounts as to which the directors and officers are indemnified by FCFC under the indemnification provisions of Article 23 of the By-Laws of FCFC. Such insurance also provides certain additional coverage for the directors and officers against certain liabilities even though such liabilities may not be covered by the indemnification provisions described above. II-4 ITEM 21. Exhibits. EXHIBIT INDEX (Pursuant to Item 601 of Regulation S-K) Exhibit Number Description - ------ ----------- 2.1 Agreement and Plan of Reorganization dated as of Arpil 21, 1994 between First Commonwealth Financial Corporation and Reliable Financial Corporation and Plan of Merger dated as of April 21, 1994 between Interim Reliable, Inc. and Reliable Financial Corporation (filed herewith as Annex I and Appendix A to Annex I, respectively, to the Proxy Statement/Prospectus constituting part of this Registration Statement). 3.1* Articles of Incorporation of First Commonwealth Financial Corporation, as amended (filed as Exhibit 3(i) to the Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 1994 and incorporated herein by reference thereto). 3.2* By-Laws of First Commonwealth Financial Corporation, as amended (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 (Reg. No. 33-50611), filed with the Securities and Exchange Commission on October 15, 1993 and incorporated herein by reference thereto). 5.1 Opinion of Tomb and Tomb regarding the legality of the shares of Common Stock of First Commonwealth Financial Corporation being registered. 8.1 Opinion of Reed Smith Shaw & McClay as to certain tax matters. 10.1* Employment Agreement between Cenwest and Ronald C. Geiser (filed as Exhibit 10.2 to the Registrant's Form SE filed November 28, 1983 and incorporated herein by reference thereto). 10.2* Employment Agreement between Central and Sumner E. Brumbaugh (filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-4 (Reg. No. 33-50611), filed with the Securities and Exchange Commission on October 15, 1993 and incorporated herein by reference thereto). II-5 10.3* Employment Agreement between Peoples and Robert F. Koslow, including Amendment No. 1 thereto (filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-4 (Reg. No. 33-50611), filed with the Securities and Exchange Commission on October 15, 1993 and incorporated herein by reference thereto). 10.4* Employment Agreement between Reliable Savings Bank and Stephen Grippi (filed as Exhibit 10.1 to Reliable's Pre-Effective Amendment No. 1 to Form S-1 (Reg. No. 33-44517) filed with the Securities and Exchange Commission on January 29, 1992 and incorporated herein by referenced thereto). 10.5* Reliable Savings Bank, PaSA Recognition and Retention Plan and Trust (filed as Exhibit 10.2 to Reliable's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 and incorporated herein by reference thereto). 10.6* Reliable Financial Corporation 1992 Incentive Stock Option Plan (filed as Exhibit 10.3 to Reliable's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 and incorporated herein by reference thereto). 10.7* Reliable Financial Corporation 1992 Incentive Stock Option Plan for Nonemployee Directors (filed as Exhibit 10.4 to Reliable's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 and incorporated herein by reference thereto). 10.8* Agreement and Plan of Reorganization dated as of March 25, 1994 between First Commonwealth Financial Corporation and United National Bancorporation and Plan of Merger dated as of March 25, 1994 between First Commonwealth Financial Corporation and United National Bancorporation (filed as Exhibit 2.1 to Registrant's Registration Statement on Form S-4 (Reg. No. 33-54193) filed with the Securities and Exchange Commission on June 17, 1994 and incorporated herein by reference thereto). 21.1* List of subsidiaries of the Registrant (filed as Exhibit 21.1 to the Registrant's annual report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference thereto). 23.1 Consent of Jarrett * Stokes & Co., independent certified public accountants. 23.2 Consent of Ernst & Young, independent certified public accountants. II-6 23.3 Consent of Edwards Leap & Sauer, independent certified public accountants. 23.4* Consent of Tomb and Tomb (contained in their opinion filed as Exhibit 5.1 hereto). 23.5* Consent of Reed Smith Shaw & McClay (contained in their opinion filed as Exhibit 8.1 hereto). 24.1 Powers of Attorney. 99.1 Preliminary copy of letter to shareholders of Reliable Financial Corporation appears as a part of the Proxy Statement/Prospectus constituting part of this Registration Statement. 99.2 Preliminary copy of Notice of Special Meeting of Shareholders of Reliable Financial Corporation appears as a part of the Proxy Statement/Prospectus constituting part of this Registration Statement. 99.3 Preliminary copy of form of proxy for use by shareholders of Reliable Financial Corporation appears as a part of the Proxy Statement/Prospectus constituting part of this Registration Statement. - ---------------- * Incorporated herein by reference. II-7 ITEM 22. Undertakings. (1) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (2) The registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415 (Section 230.415 of this chapter), will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (4) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of II-8 the registration statement through the date of responding to the request. (5) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-9 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Indiana, Pennsylvania, on the 30th day of June, 1994. FIRST COMMONWEALTH FINANCIAL CORPORATION /s/ E. James Trimarchi By__________________________ E. James Trimarchi President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on the 30th day of June, 1994. Signature and Capacity /s/ E. James Trimarchi __________________________________ E. James Trimarchi, President and Principal Executive Officer and Director * __________________________________ Sumner E. Brumbaugh, Director * __________________________________ E.H. Brubaker, Director * __________________________________ Edward T. Cote, Director * __________________________________ Thomas L. Delaney, Director * __________________________________ Clayton C. Dovey, Jr., Director II-10 * __________________________________ Ronald C. Geiser, Director * __________________________________ Johnston A. Glass, Director * __________________________________ A.B. Hallstrom, Director * __________________________________ Thomas J. Hanford, Director * __________________________________ H.H. Heilman, Jr., Director * __________________________________ David F. Irvin, Director * __________________________________ David L. Johnson, Director * __________________________________ Robert F. Koslow, Director * __________________________________ Dale P. Latimer, Director * __________________________________ Joseph W. Proske, Director * __________________________________ Charles J. Szewczyk, Director * __________________________________ David R. Tomb, Jr., Director * __________________________________ John I. Whalley, Jr., Director II-11 * __________________________________ John J. Dolan, Senior Vice President, Principal Financial Officer and Principal Accounting Officer /s/ E. James Trimarchi *By_______________________________ E. James Trimarchi Attorney-in-Fact II-12 EX-5.1 2 OPINION OF TOMB & TOMB Exhibit 5.1 TOMB AND TOMB Attorneys at Law 402 Indiana Theatre Building Indiana, Pennsylvania 15701 June 30, 1994 First Commonwealth Financial Corporation Old Courthouse Square 22 North Sixth Street Indiana, Pennsylvania 15701 Gentlemen: We have acted as counsel to First Commonwealth Financial Corporation ("FCFC") in connection with the Agreement and Plan of Reorganization made as of April 21, 1994 by FCFC and Reliable Financial Corporation ("Reliable") and the related Plan of Merger dated April 21, 1994 between Reliable and Interim Reliable, Inc. ("Interim Reliable"), a new, wholly-owned subsidiary of FCFC to be created for the purposes of the transaction (collectively, the "Agreements"). The Agreements provide for the merger of Reliable into Interim Reliable (the "Merger"). In the Merger, each issued and outstanding share of common stock, par value $.01 per share, of Reliable ("Reliable Common Stock") will be converted into 1.6 shares of common stock, par value $1 per share, of FCFC ("FCFC Common Stock"). We have also acted as counsel to FCFC in connection with the Registration Statement on Form S-4 (the "Registration Statement") to be filed by FCFC with the Securities and Exchange Commission for the purpose of registering under the Securities Act of 1933, as amended, the 2,274,448 shares of FCFC Common Stock which may be issued to the shareholders of Reliable in connection with the Merger. This opinion is being furnished to you for the purpose of being filed as an Exhibit to the Registration Statement. In connection with this opinion, we have examined, among other things: (1) An executed copy of the Agreement and Plan of Reorganization; (2) A copy of the Articles of Incorporation and By-Laws of FCFC as in effect on the date hereof; and (3) Copies of resolutions adopted by the Board of Directors of FCFC, including resolutions approving the Agreements. Based upon the foregoing and upon an examination of such other documents, corporate proceedings, statutes and decisions as we have considered necessary to enable us to furnish this opinion, and assuming that the Merger is consummated in accordance with the terms of the Agreements, we are pleased to advise you that in our opinion, the shares of FCFC Common Stock into which Reliable Common Stock outstanding immediately before the Merger becomes effective will be converted will, at the time the Merger becomes effective, be duly authorized, validly issued, fully paid and nonassessable shares of FCFC Common Stock. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to us under the caption "Legal Opinions" in the Proxy Statement/Prospectus forming a part of the Registration Statement. Very truly yours, TOMB AND TOMB EX-8.1 3 OPINION OF RSS&M Exhibit 8.1 REED SMITH SHAW & McCLAY 435 Sixth Avenue Pittsburgh, PA 15219 June 30, 1994 Reliable Financial Corporation 428 Station Street Bridgeville, Pennsylvania 15017-2002 First Commonwealth Financial Corporation Old Courthouse Square P.O. Box 400 Indiana, Pennsylvania 15701-0400 Gentlemen: Reliable Financial Corporation, a Delaware business corporation ("Reliable"), and First Commonwealth Financial Corporation, a Pennsylvania business corporation ("FCFC"), have requested our opinion as to certain tax aspects of the proposed merger (the "Merger") of Reliable into Interim Reliable, Inc., a Pennsylvania business corporation ("Interim Reliable") and a wholly-owned subsidiary of FCFC to be created expressly for the purposes of the Merger. In the Merger, Interim Reliable will be the surviving corporation and on the effective date of the Merger each share of Common Stock, par value $.01 per share, of Reliable (the "Reliable Common Stock") will be converted into 1.6 shares of Common Stock, par value $1 per share, of FCFC (the "FCFC Common Stock"). No fractional share of FCFC Common Stock will be issued in the exchange; in lieu thereof, a cash payment will be made by FCFC in an amount equal to such fractional part of a share multiplied by the value of $19 for one whole share of FCFC Common Stock, which was the price per share that was the basis of the negotiations between Reliable and FCFC. With your consent, we have acted as special counsel for Reliable, FCFC and Interim Reliable in connection with the preparation and execution of the Agreement and Plan of Reorganization dated as of April 21, 1994 (the "Plan") between -2- FCFC and Reliable, the related Plan of Merger dated April 21, 1994 between Reliable and Interim Reliable and the Registration Statement of FCFC on Form S-4 to be filed with the Securities and Exchange Commission. Cash issued in lieu of fractional shares of FCFC Common Stock will be undertaken solely for the purpose of saving FCFC the expense and inconvenience of issuing and transferring fractional shares, and is not a separately bargained for consideration. You have represented to us that neither FCFC nor any of its subsidiaries own any Reliable Common Stock and neither Reliable nor its subsidiary owns any FCFC Common Stock; and that to the best knowledge of the managements of Reliable and FCFC, there is no plan or intention on the part of the Reliable shareholders to sell or otherwise dispose of any significant amount of FCFC Common Stock to be received in the Merger. Based upon the foregoing facts and representations and upon existing law and regulations, as presently interpreted by judicial decisions and administrative rulings, it is our opinion that: Federal Income Tax ------------------ (1) The Merger will constitute a reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986 (the "Code"). Reliable, FCFC and Interim Reliable will each be a party to the reorganization within the meaning of Section 368(b) of the Code. (2) No gain or loss will be recognized to Reliable upon the transfer of substantially all of its assets to Interim Reliable in exchange for FCFC Common Stock, cash and the assumption of all of Reliable's liabilities by Interim Reliable since the cash will be distributed to the Reliable shareholders. (3) No gain or loss will be recognized by either FCFC or Interim Reliable upon the acquisition by Interim Reliable of substantially all of the assets of Reliable in exchange for FCFC Common Stock. (4) The basis of the assets of Reliable acquired by Interim Reliable will be the same in the hands of Interim -3- Reliable as the basis of such assets in the hands of Reliable immediately prior to the exchange. (5) The basis of the Interim Reliable common stock in the hands of FCFC will be increased by an amount equal to the basis of the Reliable assets in the hands of Interim Reliable and decreased by the sum of the amount of the liabilities of Reliable assumed by Interim Reliable and the amount of liabilities to which the assets of Reliable are subject. (6) The holding period of the assets of Reliable received by Interim Reliable will, in each instance, include the period during which such assets were held by Reliable. (7) No gain or loss will be recognized to the Reliable shareholders upon the exchange of Reliable Common Stock for FCFC Common Stock (including fractional share interests to which they may be entitled). (8) The basis of the FCFC Common Stock (including fractional share interests to which they may be entitled) to be received by the Reliable shareholders will be the same as the basis of the Reliable Common Stock surrendered in exchange therefor. (9) The holding period of the FCFC Common Stock (including fractional share interests to which they may be entitled) to be received by the Reliable shareholders will include the holding period of the Reliable Common Stock surrendered in exchange therefor, provided that the Reliable Common Stock was held as a capital asset in the hands of the Reliable shareholders on the date of the exchange. (10) The payment of cash in lieu of fractional share interests of FCFC Common Stock will be treated as if the fractional shares were distributed as part of the exchange and then were redeemed by FCFC; these cash payments will be treated as having been received in full payment in exchange for the share redeemed as provided in Section 302(a) of the Code. Pennsylvania Personal Income Tax -------------------------------- (11) No gain or loss will be recognized to the Reliable shareholders who are subject to the Pennsylvania Personal Income Tax upon the receipt by them of FCFC Common Stock (including fractional share interests to which they may be -4- entitled) in exchange for their Reliable Common Stock, and the state tax basis for the FCFC Common Stock (including fractional share interests to which they may be entitled) to be received by the Reliable shareholders will be the same as the state tax basis of the Reliable Common Stock surrendered in exchange therefor. Cash received in lieu of a fractional share of FCFC Common Stock by a Reliable shareholder who is subject to the Pennsylvania Personal Income Tax will be treated as if the fractional share had actually been received by the Reliable shareholder and then immediately sold by him to FCFC for the cash received and taxed accordingly. Pennsylvania Personal Property Tax ---------------------------------- (12) Shares of FCFC Common Stock to be received by the Reliable shareholders are exempt from county personal property taxes imposed in Pennsylvania. The foregoing opinions cover only certain federal, Pennsylvania and local Pennsylvania tax aspects and are based upon existing law and regulations, as presently interpreted by judicial decisions and administrative rulings, all of which are subject to change without notice and any such change might be applied retroactively to the transactions contemplated by the Merger; and the foregoing opinions do not address the federal or state income tax considerations that may affect the treatment of a shareholder who acquired his Reliable Common Stock pursuant to an employee or nonemployee stock option. Accordingly, each Reliable shareholder should consult his personal tax advisor with specific reference to his own tax situation and potential changes in the applicable law as to all federal, state and local tax matters in connection with the Merger. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to us under the caption "Certain Tax Aspects of the Merger" in the Proxy Statement/Prospectus forming a part of the Registration Statement. Very truly yours, REED SMITH SHAW & McCLAY EX-23.1 4 CONSENT JARRETT STOKES Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the inclusion in this Registration Statement on Form S-4 of our report dated March 2, 1994, on our audits of the consolidated financial statements of First Commonwealth Financial Corporation and subsidiaries, and to the references to our firm under the captions "Experts" and "Relationships with Independent Public Accountants" in the Proxy Statement/Prospectus. JARRETT * STOKES & CO. Indiana, Pennsylvania June 30, 1994 EX-23.2 5 CONSENT ERNST & YOUNG Exhibit 23.2 Consent of Ernst & Young, Independent Auditors We consent to the reference to our firm under the captions "Experts" and to the use of our report dated January 14, 1994, with respect to the financial statements of United National Bancorporation included in the Registration Statement (Form S-4) and related Prospectus of First Commonwealth Financial Corporation dated June 30, 1994. ERNST & YOUNG Harrisburg, Pennsylvania June 29, 1994 EX-23.3 6 CONSENT EDWARDS LEAP Exhibit 23.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the inclusion in this Registration Statement on Form S-4 of our report dated November 5, 1993, on our audits of the consolidated financial statements of Reliable Financial Corporation and subsidiary, and to the references to our firm under the captions "Experts" and "Relationships with Independent Public Accountants" in the Proxy Statement/Prospectus. EDWARDS LEAP & SAUER Pittsburgh, Pennsylvania June 30, 1994 EX-24.1 7 POWER OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints E. James Trimarchi, David R. Tomb, Jr. and Joseph E. O'Dell, and each of them, with full power to act without the others, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Registration Statement and any and all amendments (including post-effective amendments) hereto, 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 be 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 any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Signature and Capacity Date ---------------------- ---- /s/ E. James Trimarchi 5/20/94 - ----------------------------- -------------- E. James Trimarchi (Principal Executive Officer and Director) /s/ John J. Dolan 5/23/94 - ----------------------------- -------------- John J. Dolan (Principal Financial Officer and Principal Accounting Officer) /s/ E. H. Brubaker 6/9/94 - ----------------------------- -------------- E. H. Brubaker (Director) /s/ Sumner E. Brumbaugh 5/26/94 - ----------------------------- -------------- Sumner E. Brumbaugh (Director) /s/ Edward T. Cote 6/7/94 - ----------------------------- -------------- Edward T. Cote (Director) /s/ Thomas L. Delaney 5/31/94 - ----------------------------- -------------- Thomas L. Delaney (Director) /s/ Clayton C. Dovey, Jr. 6/7/94 - ----------------------------- -------------- Clayton C. Dovey, Jr. (Director) /s/ Ronald C. Geiser 6/7/94 - ----------------------------- -------------- Ronald C. Geiser (Director) /s/ Johnston A. Glass 5/20/94 - ----------------------------- -------------- Johnston A. Glass (Director) /s/ A. B. Hallstrom 6/14/94 - ----------------------------- -------------- A. B. Hallstrom (Director) /s/ Thomas J. Hanford 6/6/94 - ----------------------------- -------------- Thomas J. Hanford (Director) /s/ H. H. Heilman, Jr. 5/19/94 - ----------------------------- -------------- H. H. Heilman, Jr. (Director) /s/ David F. Irvin 6/2/94 - ----------------------------- -------------- David F. Irvin (Director) /s/ David L. Johnson 6/9/94 - ----------------------------- -------------- David L. Johnson (Director) /s/ Robert F. Koslow 5/20/94 - ----------------------------- -------------- Robert F. Koslow (Director) /s/ Dale P. Latimer 6/1/94 - ----------------------------- -------------- Dale P. Latimer (Director) /s/ Joseph W. Proske 6/9/94 - ----------------------------- -------------- Joseph W. Proske (Director) /s/ Charles J. Szewczyk 6/7/94 - ----------------------------- -------------- Charles J. Szewczyk (Director) /s/ David R. Tomb, Jr. 5/20/94 - ----------------------------- -------------- David R. Tomb, Jr. (Director) /s/ John I. Whalley, Jr. 6/14/94 - ----------------------------- -------------- John I. Whalley, Jr. (Director) -----END PRIVACY-ENHANCED MESSAGE-----