ITEM 1. Business
Description of Business
First Commonwealth Financial Corporation (the "Corporation") was incorporated as a Pennsylvania business corporation on November 15, 1982 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. After its incorporation it became affiliated as a result of statutory mergers with the following: On April 29, 1983 it affiliated with National Bank of the Commonwealth ("NBOC"), a national bank in Indiana, Indiana County; on March 19, 1984 with Deposit Bank ("Deposit"), a Pennsylvania-chartered bank and trust company in DuBois, Clearfield County; on August 16, 1985 with Dale, a national bank in Dale (Johnstown), Cambria County; and on December 14, 1985 with the First National Bank of Leechburg ("Leechburg"), a national bank in Leechburg, Armstrong County; December 31, 1986 with CNB CORP, Inc. ("CNB"), a one-bank holding company and its wholly-owned subsidiary, Citizens National Bank in Windber ("Citizens"). CNB was then combined with the Corporation. Immediately thereafter, and on the same day, Citizens was combined with Dale and the resulting entity was named Cenwest National Bank ("Cenwest"). On May 31, 1990 the Corporation affiliated with Peoples Bank and Trust Company ("PBT"), a Pennsylvania-chartered bank and trust company in Jennerstown, Somerset County. On April 30, 1992 the Corporation affiliated with Central Bank ("Central"), a Pennsylvania-chartered bank in Hollidaysburg, Blair County. On December 31, 1993 the Corporation affiliated with Peoples Bank of Western Pennsylvania ("BPWPA"), a Pennsylvania-chartered commercial bank in New Castle, Lawrence County. On September 27, 1994 the Corporation affiliated with United National Bancorporation, ("United"), a bank holding company, and its wholly-owned subsidiaries. Unitas National Bank ("Unitas Bank") and Unitas Mortgage Corporation ("Unitas Mortgage") were the only active subsidiaries of United. Unitas Bank is a national bank headquartered in Chambersburg, Franklin County, Pennsylvania. Unitas Mortgage engages in the origination of mortgages for sale in the secondary mortgage market and is headquartered in Carlisle, Pennsylvania. Upon merger, United was combined with the Corporation and its subsidiaries became subsidiaries of the Corporation. On September 29, 1994 the Corporation affiliated with Reliable Financial Corporation ("RFC"), a savings and loan holding company and its wholly-owned subsidiary, Reliable Savings Bank, PaSA ("RSB"), a state- chartered, federally insured savings bank headquartered in Bridgeville, Pennsylvania. As a result of the merger, RFC became a wholly-owned subsidiary of the Corporation, with its principal places of business in Allegheny and Washington Counties in western Pennsylvania. NBOC, Deposit, Cenwest, Leechburg, Peoples, Central, PBWPA and Unitas Bank (the "Subsidiary Banks") are now wholly owned subsidiaries of the Corporation with their principal places of business in central and western Pennsylvania. Commonwealth Systems Corporation ("CSC") was incorporated as a Pennsylvania business corporation in 1984 by the Corporation to function as its data processing subsidiary and it has its principal place of business in Indiana, Pennsylvania. Before August 1984, it had operated as the data processing department of NBOC. First Commonwealth Trust Company ("FCTC") was incorporated on January 18, 1991 as a Pennsylvania chartered trust company to render general trust services. The trust departments of Subsidiary Banks were combined to form FCTC, and the corporate headquarters are located in Indiana, Pennsylvania. The Corporation and its subsidiaries employed approximately 1,050 persons (full-time equivalents) at December 31, 1994.
Through the Subsidiary Banks, the Corporation traces its banking origins to 1866. The Subsidiary Banks conduct their business through 82 community banking offices in 52 communities in the counties of Adams (1 office), Allegheny (2), Armstrong (3), Beaver (1), Bedford (4), Blair (7), Cambria (11), Centre (4), Clearfield (5), Elk (3), Franklin (2), Huntingdon (7), Indiana (9), Jefferson (5), Lawrence (6), Somerset (6), Washington (1) and Westmoreland (5).
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
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; mortgage, consumer installment and commercial loans; and credit card loans through MasterCard and VISA. RSB is a full service savings association. Although approximately 90% of its loan portfolio consists of loans secured by mortgages on 1-4 family residences, it offers various loan services, including secured and unsecured, commercial and consumer loans, construction and commercial mortgages and lease financing. RSB also offers a full range of deposit products.
The Subsidiary Banks currently offer a Retirement Advantage Certificate of Deposit, a product which is licensed by American Deposit Corp., (U.S. Patent pending) which offers competitive interest rates and the interest on which is tax deferred to the depositor for Federal income tax purposes. Before the "maturity date", during the accumulation period, deposits plus accrued interest are insured by the Federal Deposit Insurance Corporation ("FDIC") for up to an aggregate amount of $100,000. After the Maturity Date, during the withdrawal phase, FDIC insurance covers the maturity balance less the amounts withdrawn to date. At the maturity date, the depositor, at his option, may withdraw any amount not to exceed two-thirds of the balance at that time. Beginning one month after the maturity date, the depositor will receive monthly payments to be paid over the remaining life (lives) of the account owner(s). This product is expected to provide a stable, long-term and lower cost source of funds.
The Subsidiary Banks and RSB (Banks) operate a network of 57 automated teller machines ("ATMs") which permit their customers to conduct routine banking transactions 24 hours a day. Of the ATMS, 37 are located on the premises of their main or branch offices and 20 are in remote locations. All the ATMs are part of the MAC network which consist of nearly 13,000 ATMs owned by numerous banks, savings and loan associations and credit unions located throughout 16 states, of which 14 are east of Mississippi River. The Banks' MAC customers may use the HONOR Network, which has 9,800 ATM's located primarily in the southeast quadrant of the United States. The ATM's operated by the Banks are also part of the global MasterCard/Cirrus network which is comprised of more than 168,900 ATMs located in the United States, Canada and 58 other countries and territories, which services over 365 million card holders. Such networks allow the Bank's customers to withdraw cash and in certain cases conduct other banking transactions from ATMs of all participating financial institutions.
CSC is the data processing subsidiary of the Corporation. It provides on- line general ledger accounting services and bookkeeping services for deposit and loan accounts to the Corporation, the Subsidiary Banks and two other bank customer located in Pennsylvania. It competes, principally with data processing subsidiaries of other, mostly larger, banks, on the basis of the price and quality of its services and the speed with which such services are delivered.
FCTC has six branch offices in the service areas of the Banks and offers personal and corporate trust services, including administration of estates and trusts, individual and corporate investment management and custody services and employee benefit trust services.
On June 1, 1989 Commonwealth Trust Credit Life Insurance Company began operations. The Corporation owns 50% of the voting common stock of the new company. The Commonwealth Trust provides reinsurance for credit life and credit and health insurance activities sold by the subsidiaries of the two unrelated 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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
The Corporation does not engage in any significant business activities other than holding the stock of its subsidiaries. The Corporation does not at present have any plans to expand or modify its business or that of its subsidiaries, other than as described herein. Nevertheless, it will be receptive to and may actively seek out mergers and acquisitions in the event opportunities which management considers advantageous to the development of the Corporation's business arise, and may otherwise expand or modify its business as management deems necessary to respond to changing market conditions or the laws and regulations affecting the business of banking.
Competition
Each of the Banks, FCTC and Unitas Mortgages faces intense competition, both from within and without its service area, in all aspects of its business. The Subsidiary Banks compete for deposits, in such forms as checking, savings and NOW (negotiable order of withdrawal) accounts, MMDA (money market deposit accounts) and certificates of deposit, and in making consumer loans and loans to smaller businesses, with numerous other commercial banks and savings banks doing business within their service areas. With respect to loans to larger businesses the Banks also complete 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 they have encountered significant competition for deposits from money market funds and institutions that offer annuities located throughout the United States. Money market funds pay dividends to their shareholders (which are the equivalent are the equivalent of the interest paid by banks on deposits) and they are able to offer services and conveniences similar to those offered by the Subsidiary Banks. Annuities accumulate interest on the amounts deposited over predetermined time period. The depositor is then entitled to withdraw his funds for a fixed period of time or until death. The effect of such competition has been to increase the costs of the rest of deposits, which provide the funds with which loans are made. In addition to savings and loan associations and credit unions, the Banks also compete for consumer loans with local offices of national finance companies and finance subsidiaries of automobile manufacturers and with national credit card companies such as MasterCard and VISA, whose cards, issued through financial institutions, are held by consumer throughout their service areas. The Banks believe that the principal means by which they compete for deposits and consumer and smaller commercial loans are the number and desirability of the locations of their offices and ATMs, the sophistication and quality of their services and the prices (primarily interest rates) of their services. Additionally, the Banks intend to remain competitive by offering financial services that target specific customer needs, such as the Retirement Advantage CD.
Supervision and Regulation
The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("the Bank Holding Company Act") and is registered such with the Federal Reserve Board. As a registered bank holding company, it is required to file with the Federal Reserve Board an annual report and other information. The Federal Reserve Board is also empowered to make examinations and inspections of the Corporation and its subsidiaries.
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 merger 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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Supervision and Regulation (Continued)
The Bank Holding Company Act generally prohibits a bank holding company from engaging in a non-banking business or acquiring direct or indirect ownership or control of more that 5% of the outstanding voting shares of any non- banking corporation subject to certain exceptions, the principal exception being where the business activity in question is determined by the Federal Reserve Board to be closely related to banking or to managing or controlling banks to be a proper incident thereto. The Bank Holding Company Act does not place territorial restrictions on the activities of such banking related subsidiaries of bank holding companies.
Under the Federal Reserve Act, subsidiary banks of a bank holding company are subject to certain restrictions on extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or other securities thereof, or acceptance of such stock or securities as collateral for loans to any one borrower. A bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or the furnishing of property or services.
Under the Pennsylvania Banking Code, there is no limit on the number of Pennsylvania banks that may be owned or controlled by a Pennsylvania bank holding company.
Upon the acquisition of RFC, the Corporation also became a savings and loan holding company subject to regulation and supervision of the Office of Thrift Supervision ("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 the regulation and supervision of multiple regulators increase the Corporation's cost of compliance with federal and state banking laws and regulations, it is not excepted to have a significant adverse effect on its operations or financial condition.
RFC is a unitary savings and loan holding company. Its only subsidiary, RSB is a Qualified Thrift Lender ("QTL") because more than 65% of its portfolio assets (as defined by law) are invested in residential mortgages, and certain mortgage backed and housing related assets such as Federal Home Loan Bank stock and stock issued by the Federal National Mortgage Association. As a unitary savings and loan holding company, RFC 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.
If RFC 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. If RSB were to lose its QTL status, thereafter RFC would be regulated and supervised by the OTS as a bank holding company, as described above for the Corporation, with each savings institution subsidiary being treated as a bank for this purpose.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Subsidiary Banks and RSB
Of the Subsidiary Banks, NBOC, Cenwest, Leechburg, and Unitas Bank are subject to the supervision of and are regularly examined by the Comptroller of the Currency. In addition, because they are members of the Federal Reserve System, they are subject to the supervision of and examination by that System. Deposit, PBT, Central and PBWPA are Pennsylvania-chartered banks and not members of the Federal Reserve System, are subject to the supervision of and regularly examined by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation ("FDIC"), and subject to certain regulations of the Federal Reserve Board. In addition, since they are a Pennsylvania-chartered bank, they are subject to the supervision of the Pennsylvania Department of Banking. RSB 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. RSB is a member of the Savings and Loan Insurance Fund of the FDIC. As such, all are subject to examination by the FDIC.
The areas of operation subject to regulation by Federal and Pennsylvania laws, regulations and regulatory agencies include reserves against deposits, maximum interest rates for specific classes of loans, truth-in-lending disclosure, permissible types of loans and investments, trust operations, mergers and acquisitions, issuance of securities, payment of dividends. Community Reinvestment Act evaluations, mandatory external audits, establishment of branches and other aspects of operations. Under the Pennsylvania Banking Code, a state or national bank or a savings association located in Pennsylvania may establish branches anywhere in the state.
Reciprocal Regional Interstate Banking
As already noted, a bank holding company located in one state cannot acquire a bank or a bank holding company located in another state unless the law of such other state specifically permits such acquisition. On June 25, 1986, Pennsylvania passed a law (Act No. 1986-69) which provides that a bank holding company located in any state or the District of Columbia can acquire a Pennsylvania bank or bank holding company if the jurisdiction where the acquiring bank holding company is located has passed an enabling law that permits a Pennsylvania bank holding company to acquire a bank or a bank holding company in such jurisdiction. As of December 31, 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 law is applicable to savings associations and savings and loan holding companies.
It is difficult to determine the precise effects that reciprocal regional interstate banking will have on the Corporation, but the law has increased, and as reciprocity becomes effective will increase further, the number of potential buyers for Pennsylvania banks and bank holding companies. The law also will permit Pennsylvania bank holding companies and Pennsylvania savings and loan holding companies that desire to expand outside Pennsylvania to acquire banks, savings institutions and bank holding companies located in jurisdictions with which Pennsylvania has reciprocity.
Effects of Governmental Policies
The business and earnings of the Corporation is effected not only be general economic conditions, but also by the monetary and fiscal policies of the United State 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
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. Business (Continued)
Effects of Governmental Policies (Continued)
policy used by the Federal Reserve Board to implement these objectives are open market operations in United State government securities, changes in the discount rate on borrowings by member banks and savings institutions from the Federal Reserve System and changes in reserve requirements against bank and savings institution deposits. These instruments, together with fiscal and economic policies of various governmental entities, influence overall growth of bank loans, investments and deposits and may also effect interest rates charged on loans, received on investments or paid for deposits.
The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of bank holding companies and their subsidiary banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national and Pennsylvania economies and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels and loan demand or the effect of such changes on the business and earnings the Corporation or its subsidiaries.
ITEM 2.
ITEM 2. PROPERTIES
The Corporation's principal office is located in the old Indiana county Courthouse complex. This certified Pennsylvania and national historic landmark was built in 1870 and restored by NBOC in the early 1970s. The Corporation, NBOC and CSC occupy this grand structure, which provides 32,000 square feet of floor space, under a 25-year restoration lease agreement with Indiana County, which NBOC entered into in 1973 and which contains a renewal option. Under the lease, NBOC is obligated to pay all taxes, maintenance and insurance on the building and to restore it in conformity with historic guidelines. The building is now in excellent condition and provides ample space for the Corporation, NBOC and CSC's operations. The Banks have 82 banking facilities of which 22 are leased and 60 owned in fee, free of all liens and encumbrances. All of the facilities utilized by the Corporation and its subsidiaries are used primarily for banking activities. Management believes all such facilities to be in good repair and well suited to their uses. Management presently expects that such facilities will be adequate to meet the anticipated needs of the Corporation and its subsidiaries for the immediate future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The information appearing in NOTE 17 of the Notes to the Consolidated Financial Statements included in Item 8 of this filing is incorporated by reference.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
Part II
ITEM 5.
ITEM 5. Market for Registrant's Common Stock and Related Security Holder Matters
First Commonwealth Financial Corporation (the "Corporation") is listed on the New York Stock Exchange (NYSE) under the symbol "FCF". The table below sets forth the high and low sales prices per share and cash dividends declared per share for common stock of the Corporation. Prices per share and dividends per share have been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock dividend declared on January 18, 1994.
Cash Dividends Period High Sale Low Sale Per Share
First Quarter $20.250 $16.750 $0.140 Second Quarter $18.500 $15.500 $0.140 Third Quarter $19.000 $15.000 $0.140 Fourth Quarter $15.375 $13.500 $0.160
Cash Dividends Period High Sale Low Sale Per Share
First Quarter $14.625 $12.375 $0.125 Second Quarter $14.875 $13.250 $0.125 Third Quarter $16.000 $13.313 $0.125 Fourth Quarter $17.625 $14.875 $0.135
The approximate number of holders of record of the Corporation's common stock is 8,300.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 6.
ITEM 6. Selected Financial Data (Dollar Amounts in Thousands, except per share data)
The following selected financial data is not covered by the auditor's report and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, which follows, and with the consolidated financial statements and related notes. All amounts have been restated to reflect the poolings of interests.
(a) Average number of shares outstanding has been restated to reflect poolings of interests. Restatements also reflect two-for-one stock split on January 18, 1994 effected in the form of a 100% stock dividend.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and the results of operations of First Commonwealth Financial Corporation (the "Corporation") including its subsidiaries for the years ended December 31, 1994, 1993 and 1992 and are intended to supplement, and should be read in conjunction with, the consolidated financial statements and related footnotes.
The Corporation acquired United National Bancorporation and its subsidiaries ("United") and Reliable Financial Corporation and its subsidiary ("Reliable") effective September 27, 1994 and September 29, 1994, respectively. Effective December 31, 1993, the Corporation acquired Peoples Bank of Western Pennsylvania ("PBWPA"). The mergers were accounted for as poolings of interests and accordingly, all financial statements have been restated as though the mergers 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"). 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 1994 was $28.7 million, an increase of $326 thousand over the 1993 level of $28.4 million and compared to $24.5 million reported in 1992. Earnings per share before the cumulative effect of the change in accounting method increased $0.05 per share in 1994 to $1.28. Merger costs in 1994 reduced earnings by $0.07. Earnings per share from operations was $1.23 in 1993 and $1.12 in 1992. The cumulative effect of change in the method of accounting for income taxes added $0.04 per share in 1993. Per share data has been restated to reflect the two-for-one stock split effected in the form of an 100% stock dividend declared on January 18, 1994. Return on average assets was 1.26% and return on average equity was 12.55% during 1994, compared to 1.32% and 12.86%, respectively, for 1993. Return on average assets was 1.26% during 1992 while return on average equity was 12.30%.
The following is an analysis of the impact of changes in net income on earnings per share:
1994 1993 vs. vs. 1993 1992
Net income per share, prior year $1.27 $1.12
Increase (decrease) from changes in: Net interest income 0.12 0.17 Provision for possible loan losses 0.00 0.04 Security transactions 0.09 0.11 Other income (0.02) 0.07 Salaries and employee benefits (0.03) (0.12) Occupancy and equipment costs 0.01 (0.03) Settlement of lender liability claim 0.00 0.06 Merger expenses (0.07) (0.01) Other expenses 0.03 (0.05) Provision for income taxes (0.08) (0.13) Subtotal 1.32 1.23 Cumulative effect of change in accounting method (0.04) 0.04 Net income per share $1.28 $1.27
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. 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 $90.5 million in 1994 compared to $87.8 million in 1993 and $82.3 million in 1992. 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, 1994.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Both interest income and interest expense increased as volumes increased. Average interest earning assets increased $121.0 million in 1994 to $2.2 billion. Average loans increased $96.6 million and were supported by deposit growth and increased short-term borrowings. Average interest- bearing liabilities increased $105.0 million during 1994 while average interest-bearing liabilities grew $173.8 million during 1993. The growth in 1993 included $41.8 million related to a leveraging strategy whereby adjustable rate investments, primarily mortgage-backed securities, were funded with borrowings from the Federal Home Loan Bank and other banks. This leverage strategy added approximately $1.0 million to net interest income in 1993. The leveraged transaction for 1994 averaged $52.1 million and the related addition to net interest income was approximately $593 thousand.
Both asset yields and the cost of funds declined in 1994 and 1993. Asset yields, on a tax-equivalent basis, decreased 23 basis points (0.23%) during 1994 and 94 basis points (0.94%) during 1993. Earning asset yields declined in 1994 faster than liability costs primarily because of lower consumer loan rates. Although yields have improved each quarter of 1994, they have declined when compared to the year ended December 31, 1993. Mortgage borrowers and other borrowers refinanced loans during the low interest rate environment during 1993 fixing lower yields that carried forward into 1994. As interest rates increased, so did yields but the yields have not increased to previous levels.
Additionally, mortgage loan refinancing on a national scale had accelerated the repayments of mortgage backed securities ("MBS") during 1993 and the first quarter of 1994. Portfolio yields declined as proceeds were reinvested in securities at the then prevailing market rates. The rise in interest rates since March of 1994 has stabilized prepayments of the portfolio and corresponding portfolio yields. The primary risk of owning MBS relates to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact on prepayment speeds. As interest rates increase, prepayment speeds generally decline, resulting in a longer average life of a MBS. Conversely as interest rates decline, prepayment speeds increase, resulting in a shorter average life of a MBS. Using computer simulation models, the Corporation tests the average life and yield volatility of all MBSs under various interest rate scenarios on a continuing basis to insure that volatility falls within acceptable limits. The Corporation holds no "high risk" securities nor does the Corporation own any securities of a single issuer exceeding 10% of shareholders' equity other than U.S. Government and Agency securities.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
During 1993 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 during 1993 and early 1994. This should tend to level deposit costs if interest rates continue to rise. Net interest margin, on a tax-equivalent basis, was 4.30% during 1994 compared to 4.43% in 1993 and 4.68% during 1992. 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.
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 $2.9 million in 1994 and 1993 compared to $3.7 million in 1992. Net charge-offs against the reserve for possible loan losses were $2.0 million, or 0.16% of average total loans in 1994. This compared to $2.3 million in 1993 and $3.1 million in 1992. Net charge-offs were 0.19% and 0.28% of average total loans in 1993 and 1992, respectively. For an analysis of credit quality, see the "Credit Review" section of this discussion.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The following table presents an analysis of the consolidated reserve for possible loan losses for the five years ended December 31, 1994 (dollars in thousands):
Total other operating income increased $1.7 million in 1994 to $16.2 million. Net securities gains increased $2.0 million to $5.5 million during 1994 compared to $3.5 million in 1993 and $955 thousand in 1992. During 1994 $7.5 million of securities classified as "held-to-maturity" were sold at a net gain of $16 thousand. All but one security were called and were sold within three months of the call date. The remaining security was sold because of a significant deterioration of the issuer's creditworthiness. Also during 1994, the Corporation sold 115,000 shares of Federal Home Loan Mortgage Corporation common stock, primarily in the third and fourth quarter, with a book value of $970 thousand for a gain of $5.3 million in anticipation of a market value decline if interest rates continued to rise. During 1993 marketable equity securities with a book value of $1.6 million were sold for a $1.0 million gain. The remaining securities transactions during 1994 along with those of 1993 and 1992 were primarily the sales of U.S. Treasury securities, U.S. Government agency securities maturing within a year and proceeds were reinvested in U.S. Government agency securities with maturities of 2-4 years. Trust income decreased $106 thousand during 1994 to $2.2 million as market values of assets managed declined, reflecting the turbulent bond and stock markets, thereby reducing the billing basis for many of the trust accounts. Trust income during 1993 increased $227 thousand as core revenues increased and income from estates decreased. Service charges on deposits increased over the reporting periods primarily as average total deposits increased. It should be noted that the 1992 period only reflects the results of Central after April 30, 1992, the date of the merger, since the transaction was accounted for as a purchase transaction.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Total other operating expenses increased $1.5 million to $60.9 million in 1994 and compared to $59.4 million and $55.0 million in 1993 and 1992, respectively. Merger costs during 1994 were $1.7 million. Results for the 1992 period reflected only eight months of Central's results after the merger date.
Employee costs experienced an increase of only $666 thousand to $30.0 million. Total employee costs were $29.4 million and $26.2 million in 1993 and 1992, respectively. Salary levels are generally maintained through attrition management programs. Employee costs as a percentage of average assets was 1.31% in 1994, reduced from 1.36% in 1993 and was 1.35% in 1992.
Net occupancy expense and furniture and equipment expense remained stable over the three year period as the process of automating loan documentation and the branch network progressed. Newer equipment reduced the costs of maintenance and repairs but these costs were offset by higher depreciation expense. This upgrade 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. The Federal Deposit Insurance Corporation Improvement Act of 1992 ("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 bank subsidiaries strong capital positions and supervisory conditions, only future rate changes or major changes in deposit levels will cause a significant change in the related expense. This assessment rate is not scheduled to increase in 1995, but the prospects of a decline is being discussed by the FDIC. If a rate decrease occurs, it would probably not occur until after mid-year of 1995.
Other operating expenses increased $837 thousand in 1994 over the 1993 related period to $18.6 million. This really reflects a decrease of $863 thousand after adjusting the 1994 total for the $1.7 million of merger costs deducted. The amortization of core deposit intangibles decreased $484 thousand as the intangibles related to the Deposit Bank merger which occurred in 1984 became fully amortized. Loan collection and professional fees that were not merger related experienced decreases. The 1993 period increased in relationship to the 1992 period primarily because of two factors. The inclusion of Central for the entire period of 1993 increased this category $829 thousand and an increase in the amortization of core deposit intangibles as a result of the implementation of FAS No. 109, was $715 thousand. FAS No. 109 requires that a deferred tax liability or asset be recognized for differences between assigned values and the tax bases of the assets (except goodwill) and liabilities recognized for business combinations accounted for as purchase transactions. For purchase business combinations consummated prior to the beginning of the year for which FAS No. 109 was first applied, remaining balances of the differences between assigned values and the tax bases of these assets and liabilities must be adjusted from their net-of-tax amounts to their pretax amounts. This "gross-up" action, in effect creates a larger balance of the temporary difference that must be amortized over its expected life. Other cost increases occurred in 1993 in the process of the collection of loans or the disposition of real estate acquired in lieu of loan repayment but these costs were partially responsible for the increased recovery of previously charged off loans. The 1992 period included a nonrecurring out of court lending liability claim settlement in the amount of $1.4 million for which a subsidiary of the Corporation was a defendant.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Income tax expense was $14.2 million during 1994 representing an increase of $1.8 million over the 1993 total of $12.4 million and compared to $9.4 million in 1992. Taxable income increased $5.3 million during 1994 while taxable income increased $8.3 million in 1993. The increase in 1993 of the Federal income tax rate for corporate taxable income in excess of $10 million to 35 percent from 34 percent increased the Corporation's Federal income tax expense by $259 thousand in 1993. The Corporation's effective tax rate increased to 33.1% in 1994 from 31.1% in 1993 and 27.7% in 1992. The most significant factor for the increase in the 1994 effective rate was related to the nondeductibility of merger expenses for income tax purposes.
Liquidity
Liquidity is a measure of the Corporation's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from deposits (primary source) and the maturity or repayment of earning assets, such as securities and loans. As an additional secondary source, short-term liquidity needs may be provided through the use of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements, and borrowings from the Federal Reserve Bank. Additionally, all of the 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 $59.0 million in 1994 primarily in core customer deposit relationships. Non-core deposits, which are time deposits in denominations of $100 thousand or more represented only 6.8% of total deposits at December 31, 1994. Certificates of deposits of $100 thousand or more at December 31, 1994, 1993 and 1992 had remaining maturities as follows:
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Loans increased $166.7 million during 1994 as all categories increased, but consumer loans and real estate secured loans were the primary categories of increased volume reflecting a strengthening of consumer loan demand. Below is a schedule of loans by classification for the five years ended December 31, 1994.
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, 1994, securities available for sale had an amortized cost of $468.9 million and a market value of $443.2 million. Gross unrealized gains were $200 thousand and gross unrealized losses were $25.9 million. The decline in the market values reflects the steep interest rate rise during 1994 which has affected the entire bond market of which some analysts are calling the worst bond market in history. This market depreciation is not of major concern since the Corporation does not anticipate a need to liquidate the investments until maturity. Below is a schedule of the maturity distribution of securities held to maturity and securities available for sale at December 31, 1994.
*Yields are calculated on a tax-equivalent basis
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Interest Sensitivity
The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances. While no single number can accurately describe the impact of changes in interest rates on net interest income, interest rate sensitivity positions, or "gaps" when measured over a variety of time periods may be helpful.
An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period. If interest-sensitive assets ("ISA") exceeds interest-sensitive liabilities ("ISL") during a prescribed time period, a positive gap results. Conversely, when ISL exceeds ISA during a time period, a negative gap results.
A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively when interest rates fall during the 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, 1994 and 1993 (Dollar Amounts in Thousands):
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Final loan maturities and rate sensitivity of the loan portfolio excluding consumer installment and mortgage loans and before unearned income at December 31, 1994 were as follows (Dollar Amounts in Thousands):
Within One One to After Year 5 Years 5 Years Total
Commercial and industrial $ 71,664 $ 45,667 $ 30,691 $148,022 Financial institutions -0- 80 -0- 80 Real estate-construction 16,083 4,887 2,161 23,131 Real estate-commercial 33,022 98,469 136,926 268,417 Other 7,951 9,650 14,409 32,010 Totals $128,720 $158,753 $184,187 $471,660
Loans at fixed interest rates 94,107 80,906 Loans at variable interest rates 64,646 103,281 Totals $158,753 $184,187
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, 1994, indicated that a 300 basis point movement in interest rates in either direction would not have a significant impact on the Corporation's anticipated net interest income over the next twelve months.
Credit Review
Maintaining a high quality loan portfolio is of great importance to the Corporation. The Corporation manages the risk characteristics of the loan portfolio through the use of prudent lending policies and procedures and monitors risk through a periodic review process provided by 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.
The Corporation's written lending policy requires certain underwriting standards to be met prior to funding any loan, including requirements for credit analysis, collateral value coverage, documentation, and terms. The principal factor used to determine potential borrowers' creditworthiness is business cash flows or consumer income available to service debt payments. Secondary sources of repayment, including collateral or guarantees, are frequently obtained. The Corporation's subsidiary banks generally lend within the market served by the bank.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
The lending policy provides limits for individual and bank committees lending authorities. In addition to the bank loan approval process, requests for borrowing relationships which will exceed one million dollars must also be approved by the Corporation's Credit Committee. This Committee consists of a minimum of three members of the Corporation's board of directors.
Commercial and industrial loans are generally granted to small and middle market customers for operating, expansion or asset acquisition purposes. Operating cash flows of the business enterprise are identified as the principal source of repayment, with business assets held as collateral. Collateral margins and loan terms are based upon the purpose and structure of the transaction as set forth in loan policy.
Commercial real estate loans are granted for the acquisition or improvement of real property. Generally, commercial real estate loans do not exceed 75% of the appraised value of property pledged to secure the transaction. Repayment of such loans are expected from the operations of the subject real estate and are carefully analyzed prior to approval.
Real estate construction loans are granted for the purposes of constructing improvements to real property, both commercial and residential. On-site inspections are conducted by qualified individuals prior to periodic permanent project financing, which is generally committed prior to the commencement of construction financing.
Real estate loans secured by 1-4 family residential housing properties are granted subject to statutory limits in effect for each bank regarding the maximum percentage of appraised value of the mortgaged property. Residential loan terms are normally established in compliance with secondary market requirements. Residential mortgage portfolio interest rate risk is controlled by secondary market sales, variable interest rate loans and balloon maturities.
Loans to individuals represent financing extended to consumers for personal or household purposes, including automobile financing, education, home improvement, and personal expenditures. These loans are granted in the form of installment, credit card, or revolving credit transactions. Consumer creditworthiness is evaluated on the basis of ability to repay, stability of income sources, and past credit history.
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:
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Other than those described below, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. The following table identifies nonperforming loans at December 31. A loan is placed in a nonaccrual status at the time when ultimate collectibility of principal or interest, wholly or partially, is in doubt. Past due loans are those which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection. Renegotiated loans are those 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.
The reduction of income due to renegotiated loans was less than $50 thousand in any year presented.
Although the ratio of the reserve for possible loan losses as a percentage of nonperforming loans is lower than the Corporation's peers, other factors should be considered such as historical loan losses and nonperforming loan levels. These were favorable when compared to peer group levels over the past five years. Management believes that the reserve for possible loan losses and nonperforming loans remained safely within acceptable levels during 1994.
In May 1993, the Financial Accounting Standards Board issued Statement No. 114 "Accounting by Creditors for Impairment of a Loan" ("FAS No. 114") which was amended in October 1994 by Statement No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("FAS No. 118") which addresses the disclosure of certain loans where it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Additionally, FAS No. 118 requires the disclosure of how the creditor recognizes interest income related to these impaired loans. The Corporation is required to adopt FAS No. 114 as amended by FAS No. 118 in its fiscal year beginning January 1, 1995. While management has not definitely concluded as to the effect of implementation, it is not expected to have a material impact on the Corporation's financial condition or results of operations.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Capital Resources
Equity capital decreased $3.8 million in 1994. Dividends declared decreased equity by $13.3 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, decreased equity capital by $747 thousand. The market value adjustment to securities available for sale deducted $18.4 million from capital while the tax benefit of dividends paid to the ESOP increased equity by $81 thousand and amounts paid to fund the discount on reinvested dividends and optional cash payments reduced equity by $212 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, 1994: Percent Amount of Adjusted (in thousands) Assets
Tier I Capital $226,799 17.1 Risk-Based Requirement 53,166 4.0
Total Capital 243,758 18.3 Risk-Based Requirement 106,331 8.0
Minimum Leverage Capital 226,799 9.8 Minimum Leverage Requirement 92,410 4.0
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
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 7. Management's Discussion and Analysis
Inflation and Changing Prices (Continued)
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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets (Dollar Amounts in Thousands)
December 31, 1994 1993
Assets Cash and due from banks on demand...........$ 66,055 $ 55,767 Interest-bearing deposits with banks........ 13,686 20,534 Federal funds sold.......................... -0- 1,600 Securities available for sale............... 443,189 465,224 Securities held to maturity, market value $348,074 in 1994 and $450,451 in 1993..... 370,498 443,942
Loans....................................... 1,422,320 1,248,934 Unearned income........................... (44,526) (37,825) Reserve for possible loan losses.......... (17,337) (16,483) Net loans............................ 1,360,457 1,194,626
Property and equipment...................... 29,196 27,000 Other real estate owned..................... 2,269 5,590 Other assets................................ 49,571 38,553 Total assets.........................$2,334,921 $2,252,836
Liabilities Deposits (All Domestic): Noninterest-bearing.......................$ 199,172 $ 181,024 Interest-bearing.......................... 1,681,888 1,641,061 Total deposits....................... 1,881,060 1,822,085
Short-term borrowings....................... 201,706 176,184 Other liabilities........................... 19,424 18,294 Long-term debt.............................. 7,596 7,363 Total liabilities.................... 2,109,786 2,023,926
Shareholders' Equity Preferred stock, $1 par value per share, 3,000,000 shares authorized and unissued.............................. -0- -0- Common stock, $1 par value per share, 100,000,000 shares authorized, 22,436,628 shares issued and 22,430,728 outstanding in 1994; 22,516,705 shares issued and 22,418,497 shares outstanding in 1993...... 22,437 22,517 Additional paid-in capital.................. 77,964 79,094 Retained earnings........................... 146,814 131,380 Unrealized gain (loss) on securities available for sale, net of taxes.......... (16,802) 1,584 Treasury Stock (5,900 and 98,208 shares at December 31, 1994 and 1993, respectively at cost).................................. (82) (1,216) Unearned ESOP shares........................ (5,196) (4,449) Total shareholders' equity........... 225,135 228,910 Total liabilities and shareholders' equity..........$2,334,921 $2,252,836
The accompanying notes are an integral part of these consolidated financial statements.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Income (Dollar Amounts in Thousands, except per share data)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Cash Flows (Dollar Amounts in Thousands)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Consolidated Statements of Changes in Shareholders' Equity (Dollar Amounts in Thousands)
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992
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 for financial institutions.
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.
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
Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as securities held-to-maturity and are reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are to be classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as securities available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of deferred taxes.
The Corporation had securities classified as either held-to-maturity or available-for-sale. The Corporation does not engage in trading activities. Net gain or loss on the sale of securities was determined by using the specific identification method.
Prior to the implementation of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("FAS No. 115"), effective December 31, 1993, investment securities were stated at cost adjusted for amortization of premium and accretion of discount. Marketable equity securities were carried at the lower of aggregate cost or market value.
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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Loans (Continued)
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 fair value less selling costs at the time of acquisition. Expenses related to holding the property, net of rental income, are generally charged against earnings in the current period. Other real estate also includes properties that have in substance been foreclosed. At December 31, 1994 and 1993 these properties did not represent a significant amount.
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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 1--Statement of Accounting Policies (Continued)
Cash Flow Statement
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and Federal funds sold. Generally, Federal funds are sold for one-day periods.
Supplemental Disclosures
Cash paid during the year for:
1994 1993 1992
Interest $68,576 $68,379 $76,062 Income taxes $13,234 $11,334 $10,402
Noncash Investing and Financing Activities
The Corporation borrowed $1,730 in 1994 and $250 in 1993 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 $983 in 1994 and $714 in each of the two years ending in 1993 were made by the ESOP thereby reducing the outstanding amount related to unearned ESOP shares to $5,196 at December 31, 1994.
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 poolings 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.
NOTE 2--Business Combination
Effective September 29, 1994 the Corporation acquired all of the outstanding common shares of Reliable Financial Corporation ("Reliable"), a savings and loan holding company headquartered in Bridgeville, Pennsylvania. Each of the 1,410,194 outstanding shares were exchanged for 1.6 shares of the Corporation's common stock. Effective September 27, 1994 the Corporation acquired all of the outstanding common shares of United National Bancorporation ("United"), a bank holding company headquartered in Chambersburg, Pennsylvania. Each of the 769,147 outstanding shares were exchanged for two shares of the Corporation's common stock. The mergers were accounted for as poolings of interests, and accordingly, all financial statements were restated as though the mergers had occurred at the beginning of the earliest period presented.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 2--Business Combination (Continued)
The following table reconciles net interest income and net income as previously reported and as restated for the mergers. Results of the six month period ended June 30, 1994 were unaudited.
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 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 $6,359 during 1994 and $4,485 during 1993.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 4--Securities Available For Sale
Below is an analysis of the amortized cost and approximate fair values of securities available for sale at December 31, 1994 and 1993:
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 1.5 to 32 years and have an anticipated average life to maturity ranging from less than one year to 20 years.
The amortized cost and estimated market value of debt securities at December 31, 1994, 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 $ 21,780 $ 21,473 Due after 1 but within 5 years 148,687 141,034 Due after 5 but within 10 years 10,375 9,915 Due after 10 years 499 488 181,341 172,910 Mortgage backed securities 272,713 256,196 Total debt securities $454,054 $429,106
Proceeds from the sales of securities available for sale were $51,427 during 1994. Gross gains of $5,610 and gross losses of $90 were realized on those sales.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 5--Securities Held to Maturity
Below is an analysis of the amortized cost and approximate fair values of debt securities held to maturity at December 31:
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 1.5 to 32 years and have an anticipated average life to maturity ranging from less than one year to 20 years.
The amortized cost and estimated market value of debt securities at December 31, 1994, 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 $ 17,628 $ 17,560 Due after 1 but within 5 years 120,891 114,574 Due after 5 but within 10 years 39,899 37,394 Due after 10 years 3,241 3,067 181,659 172,595 Mortgage backed securities 188,839 175,479 Total debt securities $370,498 $348,074
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 5--Securities Held to Maturity (Continued)
Proceeds from the sales of securities held to maturity were $7,476 in 1994. Gross gains of $42 and gross losses of $26 were recognized during 1994. Most of these securities were called and sold within three months of the call date. One security was sold because of a significant deterioration of the issuer's creditworthiness. Proceeds from the sale of securities held to maturity were $99,479 and $19,280 during 1993 and 1992, respectively. Gross gains of $3,545 and $1,099 and gross losses of $17 and $144 were realized on those sales during 1993 and 1992, respectively.
At December 31, 1993 securities held to maturity included marketable equity securities with a cost basis of $970 and an unrealized gain of $3,796 along with nonmarketable equity securities in the amount of $1,478. Nonmarketable equity securities were primarily Federal Home Loan Bank stock and Federal Reserve Bank stock. These equities had not been classified as securities available for sale since they were holdings of Reliable and United prior to the merger and neither entity had implemented FAS No. 115 until after December 31, 1993.
Securities held to maturity and available for sale with a book value of $336,273 and $263,809 were pledged at December 31, 1994 and 1993, respectively, to secure public deposits and for other purposes required or permitted by law.
NOTE 6--Loans (all domestic)
Loans at year end were divided among these general categories:
December 31, 1994 1993
Commercial, financial, agricultural and other $ 180,373 $ 179,227 Real estate loans: Construction and land development 23,131 12,980 1-4 Family dwellings 587,734 511,889 Other real estate loans 268,417 238,864 Loans to individuals for household, family and other personal expenditures 332,167 279,357 Leases, net of unearned income 30,498 26,617 Subtotal 1,422,320 1,248,934 Unearned income (44,526) (37,825) Total loans and leases $1,377,794 $1,211,109
Most of the Corporation's business activity was with customers located within Pennsylvania. The portfolio is well diversified, and as of December 31, 1994 and 1993, there were no significant concentrations of credit.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 7--Reserve for Possible Loan Losses
Description of changes:
1994 1993 1992
Reserve balance at January 1 $16,483 $15,828 $10,681
Additions: Recoveries of previously charged off loans 1,134 1,588 1,151 Provision charged to operating expense 2,896 2,920 3,744 From acquisition -0- -0- 4,501 Deductions: Loans charged off 3,176 3,853 4,249 Reserve balance at December 31 $17,337 $16,483 $15,828
In May 1993, the Financial Accounting Standards Board issued Statement No. 114 "Accounting by Creditors for Impairment of a Loan" ("FAS No. 114") which was amended in October 1994 by Statement No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("FAS No. 118") which addresses the disclosure of certain loans where it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Additionally, FAS No. 118 requires the disclosure of how the creditor recognizes interest income related to these impaired loans. The Corporation is required to adopt FAS No. 114, as amended by FAS No. 118, in its fiscal year beginning January 1, 1995. While management has not definitely concluded as to the effect of implementation, it is not expected to have a material impact on the Corporation's financial condition nor results of operations.
NOTE 8--Financial Instruments with Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amount of those instruments reflects the extent of involvement the Corporation has in particular classes of financial instruments.
As of December 31, 1994 the Corporation does not own or trade any other financial instruments with significant off-balance-sheet risk including derivatives such as futures, forwards, interest rate swaps, option contracts and the like, although such instruments may be appropriate to use in the future to manage interest rate risk.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 8--Financial Instruments with Off-Balance-Sheet Risk (Continued)
The Corporation's exposure to credit loss in the event of nonperformance by the other party of the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit written is represented by the contract or notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The following table identifies the notional amount of those instruments at December 31, 1994 and 1993.
1994 1993
Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $212,751 $191,184 Standby letters of credit $ 18,505 $ 18,398 Commercial letters of credit $ 65 $ 65
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, 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:
1994 1993
Land $ 4,453 $ 4,155 Buildings and improvements 28,818 26,013 Leasehold improvements 4,429 4,341 Furniture and equipment 24,988 23,677 Subtotal 62,688 58,186 Less accumulated depreciation and amortization 33,492 31,186
Total premises and equipment $29,196 $27,000
Depreciation and amortization related to premises and equipment was $3,499 in 1994, $3,393 and $2,996, in 1993 and 1992, respectively.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 10--Interest-Bearing Deposits
Components of interest-bearing deposits at December 31 were as follows:
1994 1993
NOW and Super NOW accounts $ 223,915 $ 225,610 Savings and MMDA accounts 463,906 495,591 Time deposits 994,067 919,860 Total interest-bearing deposits $1,681,888 $1,641,061
Included in time deposits at December 31 were certificates of deposit in denominations of $100 or more maturing as follows:
1994 1993
3 months or less $ 37,968 $ 21,229 3 to 6 months 10,191 16,078 6 to 12 months 17,885 17,996 Over 12 months 61,841 48,645 Total $127,885 $103,948
Interest expense related to $100 or greater certificates of deposit amounted to $6,148 in 1994, $5,750 in 1993, and $7,842 in 1992.
NOTE 11--Short-term Borrowings
Short-term borrowings at December 31 were as follows:
1994 1993 Ending Average Average Ending Average Average Balance Balance Rate Balance Balance Rate
Federal funds purchased $ 66,175 $ 54,222 4.39% $ 46,155 $ 23,085 3.10% Borrowings from FHLB 66,944 57,488 4.60 62,276 22,674 3.32 Securities sold under agreements to repurchase 61,564 49,359 4.18 48,185 45,428 4.22 Treasury, tax and loan note option 7,023 7,860 3.88 19,568 8,756 2.91
Total $201,706 $168,929 4.38% $176,184 $99,943 3.64%
Maximum total at any month-end $201,706 $176,184
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands, except per share data)
NOTE 11--Short-term Borrowings (Continued)
Interest expense on short-term borrowings for the years ended December 31 is detailed below:
1994 1993 1992
Federal funds purchased $2,381 $ 715 $ 169 Borrowings from FHLB 2,646 753 -0- Securities sold under agreements to repurchase 2,062 1,918 1,231 Treasury, tax and loan note option 305 255 353 Total interest on short-term borrowings $7,394 $3,641 $1,753
NOTE 12--Long-Term Debt
Long-term debt at December 31, 1994 follows:
Amount Rate
Bank subordinated notes due September, 1997 $ 716 8.38% ESOP loan due September, 1997 1,964 80% of Prime Bank loan due December, 1997 1,500 Prime ESOP loan due March, 2001 2,232 Prime ESOP loan due March, 2004 1,000 Prime Mortgage note due October, 2003 184 6.26%
Total long-term debt $7,596
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:
1995 1996 1997 1998 1999 Thereafter
Loan payments $1,588 $1,589 $1,518 $520 $521 $1,144 Note maturities -0- -0- 716 -0- -0- -0-
Total $1,588 $1,589 $2,234 $520 $521 $1,144
NOTE 13--Common Share Commitments
At December 31, 1994 the Corporation had 100,000,000 common shares authorized and 22,430,728 shares outstanding after reflecting the two-for- one stock split effected in the form of a 100% stock dividend declared January 18, 1994 and poolings of interests which occurred during 1994. Outstanding shares were also reduced by treasury stock acquired. 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.
Treasury stock was acquired and consists of 5,900 of the Corporation's shares at December 31, 1994. The Corporation purchased these shares at an average price per share of $13.88. The Corporation intends to continue to acquire treasury shares, so long as favorable market conditions exist, until a total of 117,422 shares has been acquired. These treasury shares are expected to be reissued upon exercise of various stock option plans assumed by the Corporation in the merger transactions with Reliable and United.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 14--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 $865 in 1993. This benefit was primarily due to lower tax rates in the year that FAS No. 109 was adopted compared to the tax rates in the prior years when the timing differences were recognized.
The income tax provision consists of:
1994 1993 1992
Current tax provision for income exclusive of securities transactions: Federal $10,599 $11,228 $8,994 State 455 224 259 Securities transactions 2,323 1,308 344 Total current tax provision 13,377 12,760 9,597
Deferred tax provision (credit) 849 (316) (204) Total tax provision $14,226 $12,444 $9,393
Temporary differences between financial statement carrying amounts and tax bases of assets and liabilities that represent significant portions of the deferred tax assets (liabilities) at December 31, 1994 and 1993 were as follows:
1994 1993
Deferred tax assets: Reserve for possible loan losses $ 4,909 $ 4,521 Alternative minimum tax carryforward 591 1,181 Unrealized loss on securities available for sale 9,047 -0- Other 352 362
Deferred tax liabilities: Accumulated accretion of bond discount (277) (278) Unrealized gain on securities available for sale -0- (851) Lease financing deduction (3,429) (2,354) Loan origination fees and costs (154) (572) Accumulated depreciation (397) (303) Basis difference in assets acquired (2,065) (2,191) Other (167) (154)
Net deferred tax asset (liability) $ 8,410 $ (639)
Management does not feel a need to establish a valuation allowance against the deferred tax asset because of the Corporation's ability to recover these future deductions through carrybacks.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 14--Income Taxes (Continued)
The total tax provision for financial reporting purposes differs from the amount computed by applying the statutory income tax rate to income before income taxes. The differences are as follows:
The Corporation has not recognized a deferred tax liability for differences resulting from the bad debt reserve for tax purposes prior to December 31, 1987 of Reliable, its savings bank subsidiary. Should amounts previously claimed as bad debt deductions for Reliable be used for any purpose other than to absorb bad debts or if the separate savings bank subsidiary is eliminated (which is not currently anticipated), a tax liability of approximately $1,369 would be incurred, using tax rates in effect as of December 31, 1994.
NOTE 15--Retirement Plans
All employees with at least one year of service are eligible to participate in the employee stock ownership plan ("ESOP"). Contributions to the plan are determined by the board of directors, and are based upon a prescribed percentage of the annual compensation of all participants. The ESOP acquired 110,225 shares and 15,454 shares of the Corporation's common stock in 1994 and 1993, respectively, at a corresponding cost of $1,730 and $250, which the Corporation borrowed and concurrently loaned these amounts to the ESOP. These amounts represent leveraged and unallocated shares, and accordingly have been recorded as long-term debt and the offset as a reduction of the common shareholders' equity (see NOTE 16). Contributions to the plan were $1,070 in 1994, $622 in 1993 and $680 in 1992.
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 $1,137 in 1994, $1,181 in 1993 and $1,007 in 1992.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 15--Retirement Plans (Continued)
Employees of United were covered by a noncontributory defined benefit plan which covered substantially all of its employees. During 1994 $92 was accrued to fund the plan. No contributions were made during 1993 and 1992. The net periodic cost was $49 during 1994. The plan is expected to be terminated during 1995 and the employees will be included in the Corporation's employee stock ownership plan and 401(k) plan. At December 31, 1994 there were sufficient assets to cover the entire benefit liability.
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 recorded during 1993.
NOTE 16--Unearned ESOP Shares
The Corporation had borrowed amounts which were concurrently loaned to the First Commonwealth Financial Corporation Employee Stock Ownership Plan Trust ("ESOP") on the same terms. The combined balances of the ESOP related loans were $5,196 at December 31, 1994.
The loans have been recorded as long-term debt on the Corporation's consolidated balance sheets. A like amount of unearned ESOP shares was recorded as a reduction of common shareholders' equity. Unearned ESOP shares, included as a component of shareholders' equity, represents the Corporation's prepayment of future compensation expense. Repayment of the loans will occur over a ten year period from contributions to the ESOP by the Corporation and dividends on ESOP shares. The shares acquired by the ESOP are held in a suspense account and will be released to the ESOP for allocation to the plan participants as the loan is reduced. At December 31, 1994 a total of 89,513 shares were allocated to participants resulting in 395,902 shares remaining in suspense. Interest on this loan was $312 in 1994 and $245 in 1993 and $286 in 1992. Dividends on common shares held in the ESOP used for debt service were $478 in 1994, $417 in 1993 and $351 in 1992.
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. During 1994 this matter was decided 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 operations or financial position of the Corporation and its subsidiaries.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
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 1994. 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 1994.
Balances December 31, 1993 $27,650 Advances 12,530 Repayments (11,477) Other (4,358) Balances December 31, 1994 $24,345
Two loans to a director, were past due at December 31, 1994 and were carried on a nonaccrual status during 1994 due to cash flow deficiencies. The original loans were made on substantially the same terms as those prevailing at the time for comparable transactions. The original balances of these loans were $1,969 and the recorded balance of these loans at December 31, 1994 was reduced to $921. 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 financial institutions by banking regulators. During 1994, dividends from subsidiary banks were restricted not to exceed $63,699. 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 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, 1994 was $1,446 and income from its investment was $285 during 1994.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 21--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only)
Balance Sheets
December 31, 1994 1993
Assets Cash $ 2,120 $ 2,571 Investment in subsidiaries 224,522 229,511 Investment in jointly-owned company 1,446 1,162 Premises and equipment 2,283 1,181 Dividends receivable from subsidiaries 4,638 3,679 Receivable from related parties 275 440 Other assets 1,575 279
Total assets $236,859 $238,823
Liabilities and Shareholders' Equity Accrued expenses and other liabilities $ 1,439 $ 947 Dividends payable 3,589 2,517 Loans payable 6,696 6,449 Shareholders' equity 225,135 228,910 Total liabilities and shareholders' equity $236,859 $238,823
Statements of Income
Years Ended December 31,
1994 1993 1992
Dividends from subsidiaries $17,260 $13,490 $11,082 Operating expenses (7,561) (5,598) (4,893)
Income before taxes and equity in undistributed earnings of subsidiaries 9,699 7,892 6,189 Applicable income tax benefits 2,673 1,782 1,433 Income before equity in undistributed earnings of subsidiaries 12,372 9,674 7,622 Equity in undistributed earnings of subsidiaries 16,364 18,736 16,912
Net income $28,736 $28,410 $24,534
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 21--Condensed Financial Information of First Commonwealth Financial Corporation (parent company only) (Continued)
Statements of Cash Flows
Years Ended December 31,
1994 1993 1992
Operating Activities Net income $ 28,736 $ 28,410 $ 24,534 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,001 1,190 865 Increase in prepaid income taxes (112) (262) (298) Undistributed equity in subsidiaries (16,364) (18,736) (16,912) Other - net (935) (11) (165)
Net cash provided by operating activities 12,326 10,591 8,024
Investing Activities Purchases of premises and equipment (1,372) (499) (106) Acquisition and additional investment in subsidiary, net of cash received 186 (1,000) (3,950) Net cash used by investing activities (1,186) (1,499) (4,056)
Financing Activities Proceeds from issuance of long-term debt -0- -0- 2,500 Repayment of long-term debt (500) (500) -0- Tax benefit of ESOP dividend 81 84 119 Discount on dividend reinvestment plan purchases (212) (159) (124) Treasury stock acquired (82) -0- -0- Cash dividends paid (10,878) (8,571) (6,860) Net cash used by financing activities (11,591) (9,146) (4,365)
Net decrease in cash (451) (54) (397) Cash at beginning of year 2,571 2,625 3,022
Cash at end of year $ 2,120 $ 2,571 $ 2,625
Supplemental schedule of noncash investing and financing activities
The Corporation borrowed $1,730 in 1994 and $250 in 1993 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 $983 in 1994 and $714 in each of the two years ending in 1993 were made by the ESOP thereby reducing the outstanding amount related to unearned ESOP shares to $5,196 at December 31, 1994.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 22--Fair Values of Financial Instruments
Below are various estimated fair values at December 31, 1994 and 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 securities held to maturity and securities available for sale are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of nonmarketable equity securities, such as Federal 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.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements Years Ended December 31, 1994, 1993 and 1992 (Dollar Amounts in Thousands)
NOTE 22--Fair Values of Financial Instruments (Continued)
Short-term borrowings: The carrying amounts of short-term borrowings such as Federal funds purchased, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and treasury, tax and loan notes approximate their fair values.
Long-term debt: The carrying amounts of variable rate debt approximate their fair values at the report date. Fair values of fixed rate debt are estimated by discounting the future cash flows using the Corporation's estimated incremental borrowing rate for similar types of borrowing arrangements.
The following table presents carrying amounts and estimated fair values of the Corporation's financial instruments at December 31, 1994 and 1993.
1994 1993 Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value
Financial assets Cash and due from banks $ 66,055 $ 66,055 $ 55,767 $ 55,767 Interest-bearing deposits with banks 13,686 13,686 20,534 20,534 Federal funds sold -0- -0- 1,600 1,600 Securities available for sale 443,189 443,189 465,224 465,224 Investments held to maturity 370,498 348,074 443,942 450,451 Loans, net of reserve 1,360,457 1,377,391 1,194,626 1,245,460
Financial liabilities Deposits 1,881,060 1,868,375 1,822,085 1,838,183 Short-term borrowings 201,706 201,706 176,184 176,184 Long-term debt 7,596 7,619 7,363 7,433
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders First Commonwealth Financial Corporation
We have audited the consolidated balance sheet of First Commonwealth Financial Corporation and subsidiaries as of December 31, 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of First Commonwealth Financial Corporation and subsidiaries as of December 31, 1993 and for each of the two years in the period ended December 31, 1993, were audited by other auditors whose report dated March 2, 1994, expressed an unqualified opinion on those statements prior to restatement for the transactions accounted for as poolings of interests as described in Note 2 to the financial statements.
The consolidated financial statements as of December 31, 1993 and for each of the two years in the period then ended have been restated to reflect the poolings of interests with Reliable Financial Corporation and United National Bancorporation as described in Note 2 to the consolidated financial statements. These 1993 and 1992 financial statements were audited and reported on separately by other auditors, whose reports expressed unqualified opinions on such financial statements. We have audited the combination of the accompanying consolidated financial statements for 1993 and 1992 after restatement for the 1994 poolings of interests. In our opinion, such consolidated statements have been properly combined on the basis described in Note 2.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1994 financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Commonwealth Financial Corporation and subsidiaries as of December 31, 1994, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 14, the Corporation changed its method of accounting for investments and income taxes during 1993.
GRANT THORNTON LLP
Pittsburgh, Pennsylvania January 26, 1995
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders of First Commonwealth Financial Corporation Indiana, Pennsylvania
We have audited the 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 two years in the period ended December 31, 1993 prior to restatement for the transactions accounted for as poolings of interests. These consolidated 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 audits 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 two years in the period ended December 31, 1993 prior to restatement for the transactions accounted for as poolings of interests, 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 & KELLY
Indiana, Pennsylvania March 2, 1994
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 8. Financial Statements and Supplementary Data
Quarterly Summary of Financial Data - Unaudited (Dollar Amounts in Thousands, except per share data)
The unaudited quarterly results of operations for the years ended December 31, 1994 and 1993 are as follows. All amounts have been restated to reflect poolings of interests.
(a) Average number of shares outstanding has been restated to reflect two-for-one stock split effected in the form of a 100% stock dividend declared January 18, 1994.
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 9
ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 22, 1994 is incorporated herein by reference in response to the listing of directors.
The table below lists the current executive officers of the Corporation.
Name Age Positions Held During the Past Five Years
E. James Trimarchi 72 Chairman of the Board, Chairman of the Board of FCTC and Chairman of the Board of CSC; Director of NBOC, Unitas Bank, RFC, RSB and CTCLIC, Former President and Chief Executive Officer of the Corporation
Joseph E. O'Dell 49 President and Chief Executive Officer of the Corporation, Assistant Secretary/ Treasurer of the Corporation, Director of Unitas Bank, RFC, RSB and FCTC, Vice Chairman of the Board of CSC; Former Senior Executive Vice President and Chief Operating Officer of the Corporation
Gerard M. Thomchick 39 Senior Executive Vice President and Chief Operating Officer of the Corporation; President, Chief Executive Officer and Director of CTCLIC; Director of Deposit, Central and FCTC
David R. Tomb, Jr. 63 Vice President, Secretary and Treasurer of the Corporation; Director of NBOC Leechburg, CSC, PBWPA and CTCLIC
John J. Dolan 38 Senior Vice President, Comptroller and Chief Financial Officer of the Corporation, Chief Financial Officer/Comptroller of CTCLIC, Treasurer and Assistant Secretary of FCTC, Director of PBT
George E. Dash 44 Senior Vice President/Sales and Marketing, Director of Central
Johnston A. Glass 45 President and Chief Executive Officer of NBOC, Director of the Corporation
William Miksich 59 President, Chief Executive Officer and Director of Deposit Bank
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 the Corporation serve at the pleasure of the Board of Directors of the Corporation and for a term of office extending through the election and qualification of their successors.
FIRST COMMONWEALTH FINANCIAL CORPORATION
ITEM 11
ITEM 11 - MANAGEMENT RENUMERATION Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 22, 1995 is incorporated herein by reference in response to this item.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 22, 1995 is incorporated herein by reference in response to this item.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information appearing in the definitive Proxy Statement related to the annual meeting of security holders to be held April 22, 1995 is incorporated herein by reference in response to this item.
FIRST COMMONWEALTH FINANCIAL CORPORATION
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(A) Documents Filed as Part of this Report
1) Financial Statements All financial statements of the registrant as set forth under Item 8 of this Report on Form 10-K.
2) Financial Statement Schedules
Schedule Number Description Page
I Indebtedness to Related Parties N/A II Guarantees of Securities of Other Issuers N/A
Page Number or Exhibit Incorporated by 3) Number Description Reference to
3.1 Articles of Incorporation Exhibit 3(i) to the Corporation's quarterly report on Form 10Q for the quarter ended March 31,
3.2 By-Laws of Registrant Exhibit 3.2 to Form S-4 filed October 15, 1993
10.1 Employment Contract Exhibit 10.2 to Form S-4 Sumner E. Brumbaugh Filed October 15, 1993
10.2 Employment Contract Exhibit 10.3 to Form S-4 Robert F. Koslow filed October 15, 1993
10.3 Employment Contract Exhibit 10.4 to Form S-4 Stephen Grippi filed August 29, 1994
21.1 Subsidiaries of the Registrant
23.1 Consent of Grant Thornton LLP Certified Public Accountants
23.2 Consent of Jarrett Stokes & Kelly Certified Public Accountants
24.1 Power of Attorney
(B) Report of Form 8-K (1) From 8-K dated October 20, 1994 reporting the Corporation's intent to buy back shares of its common stock to be used to cover outstanding stock options.
FIRST COMMONWEALTH FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Indiana, Pennsylvania, on the 22nd day of March 1995.
FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant)
/S/JOSEPH E. O'DELL Joseph E. O'Dell, President and Chief Executive Officer