FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C 20549 ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-11242 First Commonwealth Financial Corporation (Exact name of registrant as specified in its charter) Pennsylvania 25-1428528 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 22 North Sixth Street Indiana, PA 15701 (Address of principal executive offices) (Zip Code) 724-349-7220 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report.) Indicate a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Number of shares outstanding of issuer's common stock, $1.00 Par Value as of May 11, 2001 was 58,249,036.
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Included in Part I of this report: PAGE First Commonwealth Financial Corporation and Subsidiaries Consolidated Balance Sheets . . . . . 3 Consolidated Statements of Income. . . . . . . . . 4 Consolidated Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows. . . . . . . 6 Notes to Consolidated Financial Statements . . . . 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . 22 PART II - OTHER INFORMATION Other Information . . . . . . . . . . . . . . . . . . . . . . 23 Signatures . . . . . . . . . . . . . . . . . . . . Signature Page
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands) March 31, December 31, 2001 2000 ASSETS Cash and due from banks on demand.... $ 79,950 $ 90,723 Interest-bearing deposits with banks. 1,459 427 Federal funds sold .................. 18,300 11,125 Securities available for sale, at market.............................. 1,397,022 1,238,230 Securities held to maturity, at cost, (Market value $329,163 in 2001 and $398,662 in 2000).................. 324,543 398,107 Loans................................ 2,504,432 2,492,874 Unearned income.................... (1,803) (2,047) Allowance for credit losses........ (34,339) (33,601) Net loans....................... 2,468,290 2,457,226 Property and equipment............... 44,804 44,671 Other real estate owned.............. 1,475 1,661 Other assets......................... 143,544 130,142 TOTAL ASSETS.................... $4,479,387 $4,372,312 LIABILITIES Deposits (all domestic) Noninterest-bearing................ $ 243,634 $ 244,010 Interest-bearing................... 2,907,465 2,820,136 Total deposits.................. 3,151,099 3,064,146 Short-term borrowings................ 286,914 272,171 Other liabilities.................... 33,739 44,984 Company obligated mandatorily redeemable capital securities of subsidiary trust.................... 35,000 35,000 Other long-term debt................. 623,369 621,855 Total long-term debt............ 658,369 656,855 Total liabilities............... 4,130,121 4,038,156 SHAREHOLDERS' EQUITY Preferred stock, $1 par value per share, 3,000,000 shares authorized, none issued........................ -0- -0- Common stock $1 par value per share, 100,000,000 shares authorized; 62,525,412 shares issued; 58,222,096 and 58,195,450 shares outstanding at March 31, 2001 and December 31, 2000, respectively....................... 62,525 62,525 Additional paid-in capital........... 66,979 67,223 Retained earnings.................... 275,749 272,169 Accumulated other comprehensive income 3,272 (7,808) Treasury stock (4,303,316 shares at March 31, 2001 and 4,329,962 at December 31, 2000, at cost)........ (54,329) (54,666) Unearned ESOP shares................. (4,930) (5,287) Total shareholders' equity......... 349,266 334,156 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $4,479,387 $4,372,312 The accompanying notes are an integral part of these consolidated financial statements. 3
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands except per share data) For the Quarter Ended March 31, 2001 2000 Interest Income Interest and fees on loans....... $52,222 $51,110 Interest and dividends on investments: Taxable interest............... 23,331 22,392 Interest exempt from Federal income taxes.................. 2,371 2,444 Dividends...................... 854 930 Interest on Federal funds sold... 282 49 Interest on bank deposits........ 20 18 Total interest income......... 79,080 76,943 Interest Expense Interest on deposits............. 32,057 26,165 Interest on short-term borrowings 3,524 6,162 Interest on company obligated mandatorily redeemable capital securities of subsidiary trust.. 831 831 Interest on other long-term debt. 8,436 8,346 Total interest on long-term debt......................... 9,267 9,177 Total interest expense........ 44,848 41,504 Net Interest Income................ 34,232 35,439 Provision for credit losses...... 2,407 2,505 Net interest income after provision for credit losses................ 31,825 32,934 Other Income Securities gains................. 205 0 Trust income..................... 1,294 1,362 Service charges on deposit accounts........................ 2,581 2,514 Other income..................... 5,187 3,482 Total other income............ 9,267 7,358 Other Expenses Salaries and employee benefits... 13,669 13,911 Net occupancy expense............ 1,777 1,714 Furniture and equipment expense.. 2,126 1,860 Pennsylvania shares tax expense.. 941 894 Other operating expenses......... 6,943 6,771 Total other expenses.......... 25,456 25,150 Income before income taxes......... 15,636 15,142 Applicable income taxes.......... 3,613 3,691 Net income......................... $12,023 $11,451 Average Shares Outstanding......... 57,721,959 57,505,462 Average Shares Outstanding Assuming Dilution................ 57,802,012 57,606,948 Per Share Data: Basic earnings per share......... $0.21 $0.20 Diluted earnings per share....... $0.21 $0.20 Cash dividends per share......... $0.145 $0.140 (a) The accompanying notes are an integral part of these consolidated financial statements. 4
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (Dollars in thousands) <TABLE> <CAPTION> Accumulated Additional Other Unearned Total Common Paid-in Retained Comprehensive Treasury ESOP Shareholders' Stock Capital Earnings Income Stock Shares Equity <S> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1999......$62,525 $ 68,330 $257,773 $(40,304) $(55,448) $(6,193) $286,683 Comprehensive income Net income...................... -0- -0- 11,451 -0- -0- -0- 11,451 Other comprehensive income, net of tax: Unrealized holding gains on securities arising during the period......................... -0- -0- -0- (5,168) -0- -0- (5,168) Less: reclassification adjust- ment for gains on securities included in net income....... -0- -0- -0- -0- -0- -0- -0- Total other comprehensive income....................... -0- -0- -0- (5,168) -0- -0- (5,168) Total comprehensive income...... -0- -0- 11,451 (5,168) -0- -0- 6,283 Cash dividends declared......... -0- -0- (8,133) -0- -0- -0- (8,133) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 143 143 Discount on dividend reinvestment plan purchases................ -0- (147) -0- -0- -0- -0- (147) Treasury stock acquired......... -0- -0- -0- -0- (873) -0- (873) Treasury stock reissued......... -0- (88) -0- -0- 387 -0- 299 Tax benefit of stock options.... -0- 75 -0- -0- -0- -0- 75 Balance at March 31, 2000.........$62,525 $ 68,170 $261,091 $(45,472) $(55,934) $(6,050) $284,330 Balance at December 31, 2000......$62,525 $ 67,223 $272,169 $ (7,808) $(54,666) $(5,287) $334,156 Comprehensive income Net income...................... -0- -0- 12,023 -0- -0- -0- 12,023 Other comprehensive income, net of tax: Unrealized holding gains on securities arising during the period....................... -0- -0- -0- 11,189 -0- -0- 11,189 Less: reclassification adjust- ment for gains on securities included in net income....... -0- -0- -0- (109) -0- -0- (109) Total other comprehensive income....................... -0- -0- -0- 11,080 -0- -0- 11,080 Total comprehensive income...... -0- -0- 12,023 11,080 -0- -0- 23,103 Cash dividends declared......... -0- -0- (8,443) -0- -0- -0- (8,443) Decrease in unearned ESOP shares -0- -0- -0- -0- -0- 357 357 Discount on dividend reinvestment plan purchases................ -0- (153) -0- -0- -0- -0- (153) Treasury stock reissued......... -0- (91) -0- -0- 337 -0- 246 Balance at March 31, 2001.........$62,525 $ 66,979 $275,749 $ 3,272 $(54,329) $(4,930) $349,266 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the 3 Months Ended March 31, 2001 2000 Operating Activities Net income....................................... $12,023 $11,451 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses................... 2,407 2,505 Depreciation and amortization................. 1,824 1,773 Net gains on sales of assets.................. (1,182) (389) Income from increase in cash surrender value of bank owned life insurance................. (949) (536) Decrease in interest receivable............... 1,040 609 Decrease in interest payable.................. (14,818) (720) Increase in income taxes payable.............. 3,577 3,878 Change in deferred taxes...................... 22 (162) Other-net..................................... (4,399) (3,100) Net cash provided (used) by operating activities................................ (455) 15,309 Investing Activities Transactions with securities held to maturity: Proceeds from sales........................... -0- -0- Proceeds from maturities and redemptions...... 73,608 21,877 Transactions with securities available for sale: Proceeds from sales........................... 25,520 -0- Proceeds from maturities and redemptions...... 97,663 19,416 Purchases..................................... (264,767) (26,954) Proceeds from sales of loans and other assets.... 24,791 4,767 Investment in bank owned life insurance.......... (15,000) -0- Net decrease (increase) in time deposits with banks......................................... (1,032) 469 Net increase in loans............................ (38,350) (22,401) Purchases of premises and equipment.............. (1,584) (2,513) Net cash provided (used) by investing activities.................................. (99,151) (5,339) Financing Activities Repayments of other long-term debt............... (130) (25,117) Proceeds from issuance of other long-term debt... 2,000 28,000 Discount on dividend reinvestment plan purchases. (153) (147) Dividends paid................................... (8,440) (8,141) Net increase (decrease) in Federal funds purchased (6,150) 125,050 Net increase (decrease) in other short-term borrowings..................................... 20,893 (105,078) Sale of branch and deposits, net of cash received (9,591) -0- Net increase (decrease) in deposits.............. 97,333 (42,051) Stock option tax benefit......................... -0- 75 Purchase of treasury stock....................... -0- (873) Proceeds from sale of treasury stock............. 246 298 Net cash provided (used) by financing activities................................. 96,008 (27,984) Net increase (decrease) in cash and cash equivalents................................ (3,598) (18,014) Cash and cash equivalents at January 1............. 101,848 101,373 Cash and cash equivalents at March 31.............. $98,250 $ 83,359 The accompanying notes are an integral part of these consolidated financial statements. 6
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) NOTE 1 Management Representation In the opinion of management, the unaudited interim consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of financial position as of March 31, 2001 and the results of operations for the three month periods ended March 31, 2001 and 2000, and statements of cash flows and changes in shareholders' equity for the three month periods ended March 31, 2001 and 2000. The results of the three months ended March 31, 2001 and 2000 are not necessarily indicative of the results to be expected for the entire year. The interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements of First Commonwealth Financial Corporation and Subsidiaries, including the notes thereto. NOTE 2 Cash Flow Disclosures (dollar amounts in thousands) 2001 2000 Cash paid during the first three months of the year for: Interest $44,847 $42,224 Income Taxes $ -0- $ -0- Noncash investing and financing activities: ESOP loan reductions $ 357 $ 143 Loans transferred to other real estate owned and repossessed assets $ 1,020 $ 2,349 Gross increase (decrease) in market value adjustment to securities available for sale $17,046 $(7,951) 7
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) NOTE 3 Comprehensive Income Disclosures The following table identifies the related tax effects allocated to each component of other comprehensive income in the Statements of Changes in Shareholders' Equity: (dollar amounts in thousands) <TABLE> <CAPTION> March 31, 2001 March 31, 2000 Tax Net of Tax Net of Pre-tax (Expense) Tax Pre-tax (Expense) Tax Amount Benefit Amount Amount Benefit Amount <S> <C> <C> <C> <C> <C> <C> Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period $17,214 $(6,025) $11,189 $(7,951) $2,783 $(5,168) Less: reclassification adjustment for gains realized in net income (168) 59 (109) -0- -0- -0- Net unrealized gains (losses) 17,046 (5,966) 11,080 (7,951) 2,783 (5,168) Other comprehensive income $17,046 $(5,966) $11,080 $(7,951) $2,783 $(5,168) </TABLE> NOTE 4 New Accounting Pronouncements Effective January 1, 2001, the Corporation adopted the Financial Accounting Standards Board ("FASB") statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133") as amended. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities which require that an entity recognize all derivatives as either assets or liabilities on a balance sheet and measure those instruments at fair value. Changes in the fair value of derivatives must be recognized in earnings when they occur unless the derivative qualifies as a hedge. If a derivative qualifies as hedge, a company can elect to use hedge accounting to eliminate or reduce income-statement volatility that would arise from reporting changes in a derivative's fair value in income. FAS No. 133 was amended by FASB statement No. 137 which delayed the effective date of FAS No. 133 to the first quarter of fiscal years beginning after June 15, 2000. FAS No. 133 was also amended by FAS No. 138 which addresses and clarifies issues causing implementation difficulties for numerous entities applying FAS No. 133. FAS No. 138 includes amendments to FAS No. 133 which resulted from decisions made by the FASB related to the Derivatives Implementation Group ("DIG") process. The DIG was created by the FASB to facilitate implementation by identifying issues that arise from applying the requirements of FAS No. 133 and to advise the FASB on how to resolve those issues. The Corporation currently has no freestanding derivative or hedging instruments. Management reviewed contracts from various functional areas of the Corporation to identify potential derivatives embedded within selected contracts. In accordance with the guidance provided in DIG Issue C13, management identified embedded derivatives in some loan commitments for residential mortgages where the Corporation has intent to sell to an investor such as the Federal Home Loan Mortgage Corporation ("Freddie Mac") or the Federal National Mortgage Association ("Fannie Mae"). Due to the short-term nature of these loan 8
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) NOTE 4 New Accounting Pronouncements (Continued) commitments (30 days or less) and the historical dollar amount of commitment outstanding at period end, the adoption of FAS No. 133 did not have a material impact on the Corporation's financial condition or results of operations. In September 2000, the FASB issued statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities" which replaces FASB statement No. 125, issued in June 1996. FAS No. 140 revises the standards for accounting for securitization and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of FAS No. 125. The statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. FAS No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for years ending after December 15, 2000. Implementation of FAS No. 140 did not have a material impact on the Corporation's financial condition or results of operations. 9
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS First Three Months of 2001 as Compared to the First Three Months of 2000 This discussion and the related financial data are presented to assist in the understanding and evaluation of the consolidated financial condition and results of operations of First Commonwealth Financial Corporation (the "Corporation") including its subsidiaries. In addition to historical information, this discussion and analysis contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Net income in the first quarter of 2001 was $12.0 million reflecting an increase of $572 thousand over 2000 results of $11.5 million. The increase in net income for the 2001 period was primarily the result of gains on the sale of loans, securities and a branch which were earned during the 2001 period. Basic earnings per share and diluted earnings per share were $0.21 for the three months of 2001 compared to basic earnings per share and diluted earnings per share of $0.20 for the three months of 2000. Basic earnings per share excluding gains on sale of assets was $0.19 for both the 2001 and 2000 periods. Return on average assets was 1.11% and return on average equity was 14.14% during the 2001 period, compared to 1.07% and 15.96%, respectively during the same period of 2000. 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 $34.2 million for the three months of 2001 compared to $35.4 million for the same period of 2000. Net interest margin (net interest income, on a tax-equivalent basis, as a percentage of average earning assets) was 3.55% for the three months of 2001 compared to 3.71% for the three months of 2000. The reduction in net interest margin for the 2001 period compared to 2000 resulted primarily from deposit rate increases which were greater than loan yield increases compared to the 2000 period. The yield on loans increased by 27 basis points (0.27%) for the first quarter of 2001 compared to the first quarter of 2000, while deposit costs increased by 57 basis points (0.57%) over the same time period. 10
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Three Months of 2001 as Compared to the First Three Months of 2000 (Continued) The following table shows the effect of changes in volumes and rates on interest income and interest expense. Analysis of Changes in Net Interest Income (dollar amounts in thousands) 2001 Change from 2000 Total Change Due Change Due Change To Volume To Rate Interest-earning assets: Time deposits with banks $ 2 $ 5 $ (3) Securities 790 1,693 (903) Federal funds sold 233 213 20 Loans 1,112 (47) 1,159 Total interest income 2,137 1,864 273 Interest-bearing liabilities: Deposits 5,892 2,274 3,618 Short-term borrowings (2,638) (2,589) (49) Long-term debt 90 231 (141) Total interest expense 3,344 (84) 3,428 Net interest income $(1,207) $1,948 $(3,155) Interest and fees on loans increased $1.1 million for 2001 over 2000 levels, primarily as a result of rate increases in all loan categories. The total yield on loans for the first three months of 2001 was 8.61%, representing an increase of 27 basis points (0.27%) compared to loan yields for the first quarter of 2000. Average loans for the three months of 2001 decreased $4.5 million compared to averages for the three months of 2000 as decreases in average consumer loans were partially offset by increases in commercial loans and municipal loans. Interest income on investments increased $790 thousand for the first quarter of 2001 compared to the corresponding period of 2000 and included increases due to volume for asset backed securities and corporate bonds. Average balances of corporate bonds and asset backed securities increased $85.7 million and $26.2 million, respectively for the first quarter of 2001 compared to 2000 averages. Increases in investment income due to volume were partially offset by decreases in investment income due to rate as yields on investments for the first three months of 2001 were 6.70% compared to investment yields of 6.88% for the first three months of 2000. 11
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Three Months of 2001 as Compared to the First Three Months of 2000 (Continued) Interest on deposits increased $5.9 million for the 2001 period compared to 2000, as interest on time deposits increased $5.8 million for the three months of 2001 compared to 2000. Average time deposits increased $223.0 million for the three months of 2001 compared to 2000 averages resulting in an increase in interest expense due to volume of $2.5 million. The cost of time deposits for the three months of 2001 increased by 72 basis points (0.72%) compared to 2000 costs of 5.22% resulting in an increase in interest expense due to rate of $3.3 million. Interest expense on short-term borrowings decreased $2.6 million for the three months of 2001 compared to the three months of 2000 as the average balance of short-term borrowings decreased by $174.8 million over 2000 averages. The cost of short-term borrowings for the 2001 period also decreased by 23 basis points (0.23%) compared to 2000 costs of 5.57%. Interest expense on long-term debt increased $90 thousand for the three months of 2001 compared to 2000 period. Average long-term debt for the first quarter of 2001 increased by $16.1 million compared to 2000 averages as short-term borrowings from the Federal Home Loan Bank were termed out, to take advantage of declining interest rates. The provision for credit losses was $2.4 million for the three months of 2001 compared to $2.5 million during the three months of 2000. Net charge-offs against the allowance for credit losses were $1.7 million in the 2001 period compared to $2.2 million in the 2000 period, reflecting a decrease of $572 thousand. The 2001 decrease in net charge-offs included decreases in net charge-offs for commercial loans not secured by real estate of $548 thousand and decreases in net charge-offs for loans to individuals of $400 thousand compared to 2000 net charge-offs. The aforementioned decreases in net charge-offs during the first quarter of 2001 were partially offset by increases in net charge- offs for loans secured by residential real estate of $117 thousand and loans secured by commercial real estate of $238 thousand compared to 2000 net charge-offs. The provision for credit losses as a percent of net charge-offs was 144.22% at March 31, 2001 compared to 111.78% at March 31, 2000. See the "Credit Review" section for an analysis of the quality of the loan portfolio. 12
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Three Months of 2001 as Compared to the First Three Months of 2000 (Continued) Below is an analysis of the consolidated allowance for credit losses for the three month periods ended March 31, 2001 and 2000. 2001 2000 (Amounts in thousands) Balance January 1, $33,601 $33,539 Loans charged off: Commercial, financial and agricultural 217 839 Real estate-construction -0- -0- Real estate-commercial 238 -0- Real estate-residential 322 191 Loans to individuals 1,057 1,464 Lease financing receivables 115 97 Total loans charged off 1,949 2,591 Recoveries of previously charged off loans: Commercial, financial and agricultural 66 132 Real estate-construction -0- -0- Real estate-commercial -0- -0- Real estate-residential 21 7 Loans to individuals 188 195 Lease financing receivables 5 16 Total recoveries 280 350 Net charge offs 1,669 2,241 Provision charged to operations 2,407 2,505 Balance March 31, $34,339 $33,803 Net securities gains of $205 thousand during the first quarter of 2001 resulted primarily from sales and calls of fixed rate U.S. government agency securities classified as securities "available for sale" with a book value of $39.9 million. There were no securities transactions during the 2000 period that resulted in gains or losses. 13
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Three Months of 2001 as Compared to the First Three Months of 2000 (Continued) Service charges on deposits for the first quarter of 2001 increased $67 thousand compared to the first quarter of 2000 as a result of increases in NSF and account analysis fees. Gains on the sale of loans were $336 thousand for the three months of 2001 compared to gains on sale of loans of $3 thousand for the three months of 2000. Gains on sale of loans for the 2001 period resulted primarily from the sale of $12.9 million of 30 year residential mortgage loans with significant prepayment exposure during falling rates. Other income for the first quarter of 2001 was $4.9 million representing an increase of $1.4 million compared to the first quarter of 2000. As a result of branch analysis including the evaluation of the potential sale or consolidation of branches competing in the same market area, the Corporation sold one of its branches located in Bethel Park, Pennsylvania. The premium on the sale of $10.4 million of deposits from the branch resulted in a gain of $767 thousand, while an additional gain of $10 thousand resulted from the sale office furniture and equipment. Other income for the three months of 2001 also reflected increases in income from bank owned life insurance, ATM and debit card fees, merchant discount and utility processing fees of $413 thousand, $278 thousand, $74 thousand and $132 thousand, respectively over 2000 revenues. Noninterest expense was $25.5 million for the three months of 2001 reflecting an increase of $306 thousand over the 2000 level of $25.2 million. Total noninterest expense as a percent of average assets was 2.34% for both 2001 and 2000 periods. Employee costs were $13.7 million in 2001, representing 1.26% of average assets on an annualized basis compared to $13.9 million or 1.30% of average assets on an annualized basis for 2000. Salary costs for the 2001 period remained stable compared to 2000 at $10.7 million. Employee benefit costs for the first three months of 2001 reflected decreases of $259 thousand over the first three months of 2000 and included decreases in health insurance costs of $36 thousand, decreases in 401(k) plan expenses of $97 thousand and decreases in expenses of the Corporation's employee stock ownership plan of $105 thousand compared to the first three months of 2000. Furniture and equipment expenses of $2.2 million for the first three months of 2001 reflected increases of $266 thousand over 2000 levels and included increases in computer software depreciation and software maintenance. Other operating expenses for the 2001 period were $6.2 million reflecting an increase of $172 thousand over the 2000 amount of $6.0 million. The first three months of 2001 included increases in collection and repossession expenses and legal fees of $110 thousand and $87 14
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS (Continued) First Three Months of 2001 as Compared to the First Three Months of 2000 (Continued) thousand, respectively compared to 2000 levels. Postage costs during 2001 include rate increases and may be further impacted throughout the year by increased direct mail communications to customers for required privacy mailings. Other operating expenses for the first quarter of 2001 reflected decreases in advertising and promotions of $79 thousand and $87 thousand, respectively compared to the first quarter of 2000. Income tax expense was $3.6 million for the three months of 2001 compared to $3.7 million for the same period of 2000. The Corporation's effective tax rate was 23.1% for the 2001 period compared to 24.4% for the corresponding period of 2000. The reduction of the Corporation's effective tax rate for 2001 was primarily the result of increased tax free income from municipal loans and bank owned life insurance during 2001 compared to the 2000 period. LIQUIDITY Liquidity is a measure of the Corporation's ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from deposits (primary source) and the maturity or repayment of earning assets, such as securities and loans. As an additional secondary source, short-term liquidity needs may be provided through the use of overnight Federal funds purchased, borrowings through the use of lines available for repurchase agreements, and borrowings from the Federal Reserve Bank. Additionally, the banking subsidiaries are members of the Federal Home Loan Bank and may borrow under overnight and term borrowing arrangements. The sale of earning assets may also provide an additional source of liquidity. The Corporation monitors liquidity through regular computations of prescribed liquidity ratios. The Corporation actively manages liquidity within a defined range and has developed liquidity contingency plans, including ensuring availability of alternate funding sources to maintain liquidity under a variety of business conditions. In addition to the previously described funding sources the Corporation's ability to access the capital markets was demonstrated during 1999 through the issuance of $35 million of capital securities. 15
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY (Continued) Net loans increased $11.1 million in the first three months of 2001 as increases in commercial loans and increases in loans to individuals were partially offset by decreases in residential real estate loans. The decrease in residential real estate loans during 2001 was partially the result of the previously discussed residential mortgage sale. Total deposits increased $87.0 million for the first three months of 2001 and included increases in time deposits of $81.1 million and increases in total savings deposits of $6.2 million. Customers continue to reinvest savings deposits in higher yielding investments both within and outside the commercial banking industry. Savings deposit increases during 2001 occurred primarily in money market deposit accounts. Marketable securities that the Corporation holds in its investment portfolio are an additional source of liquidity. These securities are classified as "securities available for sale" and while the Corporation does not have specific intentions to sell these securities they have been designated as "available for sale" because they may be sold for the purpose of obtaining future liquidity, for management of interest rate risk or as part of the implementation of tax management strategies. As of March 31, 2001 securities available for sale had an amortized cost of $1,392.0 million and an approximate fair value of $1,397.0 million. Interest Sensitivity The objective of interest rate sensitivity management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances. While no single number can accurately describe the impact of changes in interest rates on net interest income, interest rate sensitivity positions, or "gaps", when measured over a variety of time periods, may be helpful. An asset or liability is considered to be interest-sensitive if the rate it yields or bears is subject to change within a predetermined time period. If interest-sensitive assets ("ISA") exceed interest-sensitive liabilities ("ISL") during the prescribed time period, a positive gap results. Conversely, when ISL exceeds ISA during a time period, a negative gap results. A positive gap tends to indicate that earnings will be impacted favorably if interest rates rise during the period and negatively when interest rates fall during the time period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes. In other words, as interest rates fall, a negative gap should tend to produce a positive effect on earnings, and when interest rates rise, a negative gap should tend to affect earnings negatively. 16
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Sensitivity (Continued) The primary components of ISA include adjustable rate loans and investments, loan repayments, investment maturities and money market investments. The primary components of ISL include maturing certificates of deposit, money market deposits, savings deposits, NOW accounts and short-term borrowings. The following table lists the amounts and ratios of assets and liabilities with rates or yields subject to change within the periods indicated as of March 31, 2001 and December 31, 2000 (Dollar amounts in thousands): March 31, 2001 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 623,362 $ 133,185 $240,662 $ 997,209 Investments.............. 123,748 73,828 103,146 300,722 Other interest-earning assets.................. 19,759 -0- -0- 19,759 Total interest-sensitive assets................ 766,869 207,013 343,808 1,317,690 Certificates of deposits. 380,458 320,082 422,857 1,123,397 Other deposits........... 1,015,837 -0- -0- 1,015,837 Borrowings............... 290,662 500 2,957 294,119 Total interest-sensitive liabilities........... 1,686,957 320,582 425,814 2,433,353 GAP....................$ (920,088) $(113,569) $(82,006) $(1,115,663) ISA/ISL.................. 0.45 0.65 0.81 0.54 Gap/Total assets......... 20.54% 2.54% 1.83% 24.91% December 31, 2000 0-90 91-180 181-365 Cumulative Days Days Days 0-365 Days Loans....................$ 621,536 $130,374 $ 244,605 $ 996,515 Investments.............. 130,220 47,279 105,423 282,922 Other interest-earning assets.................. 11,552 -0- -0- 11,552 Total interest-sensitive assets................ 763,308 177,653 350,028 1,290,989 Certificates of deposits. 274,963 264,805 470,828 1,010,596 Other deposits........... 1,018,205 -0- -0- 1,018,205 Borrowings............... 274,673 884 457 276,014 Total interest-sensitive liabilities........... 1,567,841 265,689 471,285 2,304,815 GAP....................$ (804,533) $(88,036) $(121,257) $(1,013,826) ISA/ISL.................. 0.49 0.67 0.74 0.56 Gap/Total assets......... 18.40% 2.01% 2.77% 23.19% 17
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest Sensitivity (Continued) Although the periodic gap analysis provides management with a method of measuring current interest rate risk, it only measures rate sensitivity at a specific point in time. Therefore, to more precisely measure the impact of interest rate changes on the Corporation's net interest income, management simulates the potential effects of changing interest rates through computer modeling. The income simulation model used by the Corporation captures all assets, liabilities, and off-balance sheet financial instruments, accounting for significant variables that are believed to be affected by interest rates. These variables include prepayment speeds on mortgage loans and mortgage backed securities, cash flows from loans, deposits and investments and balance sheet growth assumptions. The model also captures embedded options, such as interest rate caps/floors or call options, and accounts for changes in rate relationships as various rate indices lead or lag changes in market rates. The Corporation is then better able to implement strategies which would include an acceleration of a deposit rate reduction or lag in a deposit rate increase. The repricing strategies for loans would be inversely related. The Corporation's asset/liability management policy guidelines limit interest rate risk exposure for the succeeding twelve month period. Simulations are prepared under the base case where interest rates remain flat and most likely case where interest rates are defined using projections of economic factors. Additional simulations are produced estimating the impact on net interest income of a 300 basis point (3.00%) movement upward or downward from the base case scenario. The Corporation's current asset/liability management policy indicates that a 300 basis point (3.00%) change in interest rates up or down cannot result in more than a 7.5% change in net interest income when compared to a base case, without Board approval and a strategy in place to reduce interest rate risk below the established maximum level. The analysis at March 31, 2001, indicated that a 300 basis point (3.00%) movement in interest rates in either direction over the next twelve months would not have a significant impact on the Corporation's anticipated net interest income over that time frame and the Corporation's position would remain well within current policy guidelines. The Corporation's "Asset/Liability Management Committee" ("ALCO") is responsible for the identification, assessment and management of interest rate risk exposure, liquidity, capital adequacy and investment portfolio position. The primary objective of the ALCO process is to ensure that the Corporation's balance sheet structure maintains prudent levels of risk within the context of currently known and forecasted economic conditions and to establish strategies which provide the Corporation with appropriate compensation for the assumption of those risks. The ALCO attempts to mitigate interest rate risk through the use of strategies such as asset disposition, asset and liability pricing and matched maturity funding. The ALCO strategies are established by the Corporation's senior management and are approved by the Corporation's board of directors. 18
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW The following table identifies amounts of loan losses and nonperforming loans. Past due loans are those which were contractually past due 90 days or more as to interest or principal payments but are well secured and in the process of collection. Renegotiated loans are those loans which terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower and are in compliance with the restructured terms. At March 31, 2001 2000 (amounts in thousands) Nonperforming Loans: Loans on nonaccrual basis $ 9,447 $ 11,643 Past due loans 21,751 14,468 Renegotiated loans 2,250 1,482 Total Nonperforming Loans $ 33,448 $ 27,593 Other real estate owned $ 1,475 $ 1,840 Loans outstanding at end of period $2,502,629 $2,515,717 Average loans outstanding (year-to-date) $2,503,187 $2,507,679 Nonperforming loans as percent of total loans 1.34% 1.10% Provision for credit losses $ 2,407 $ 2,505 Net charge-offs $ 1,669 $ 2,241 Net charge-offs as percent of average loans outstanding 0.07% 0.09% Provision for credit losses as percent of net charge-offs 144.22% 111.78% Allowance for credit losses as percent of average loans outstanding 1.37% 1.35% Allowance for credit losses as percent of end-of-period loans outstanding 1.37% 1.34% Allowance for credit losses as percent of nonperforming loans 102.66% 122.51% 19
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW (Continued) The Corporation considers a loan to be impaired when, based on current information and events, it is probable that the Corporation will be unable to collect principal or interest due according to the contractual terms of the loan. Loan impairment is measured based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Payments received on impaired loans are applied against the recorded investment in the loan. For loans other than those that the Corporation expects repayment through liquidation of the collateral, when the remaining recorded investment in the impaired loan is less than or equal to the present value of the expected cash flows, income is recorded on a cash basis. Impaired loans include loans on a nonaccrual basis and renegotiated loans. The following table identifies impaired loans, and information regarding the relationship of impaired loans to the reserve for credit losses at March 31, 2001 and March 31, 2000: 2001 2000 (amounts in thousands) Recorded investment in impaired loans at end of period $11,697 $13,125 Year to date average balance of impaired loans $12,171 $12,932 Allowance for credit losses related to impaired loans $ 2,373 $ 2,928 Impaired loans with an allocation of the allowance for credit losses $ 3,730 $ 5,568 Impaired loans with no allocation of the allowance for credit losses $ 7,967 $ 7,557 Year to date income recorded on impaired loans on a cash basis $ 194 $ 199 Other than those described above, there are no material credits that management has serious doubts as to the borrower's ability to comply with the present loan repayment terms. Additionally, the portfolio is well diversified and as of March 31, 2001, there were no significant concentrations of credit. Nonperforming loans at March 31, 2001 increased $5.9 million compared to 2000 levels and included increases in past due loans of $7.3 million and increases in renegotiated loans of $768 thousand which were partially offset by decreases in nonaccrual loans of $2.2 million. Past due loans reflected increases in past due loans secured by residential real estate of $2.8 million and past due commercial loans of $5.5 million compared to 2000 levels. Past due loans at March 31, 2001 reflected a decrease of past due loans and leases to individuals of $724 thousand. The increase in renegotiated loans at March 31, 2001 compared to 20
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CREDIT REVIEW (Continued) the corresponding period of 2000 was the result of the modification of loan terms for one commercial borrower during the third quarter of 2000. Nonaccrual loans reflected decreases in nonaccrual commercial loans of $1.6 million and nonaccrual loans secured by residential real estate of $565 thousand compared to the same period of 2000. Nonperforming loans as a percent of total loans was 1.34% at March 31, 2001 compared to 1.41% at December 31, 2000 and 1.10% at March 31, 2000. The Corporation's loan portfolio continues to be monitored by senior management to identify potential portfolio risks and detect potential credit deterioration in the early stages. Credit risk is mitigated through the use of sound underwriting policies and collateral requirements. Early in 2000, the Corporation initiated an additional level of approval for credit relationships between $500 thousand and $1.0 million. This procedure requires approval of those credits by a committee consisting of senior lenders of the Corporation. Management attempts to minimize loan losses by analyzing and modifying collection techniques on a periodic basis. Management believes that the allowance for credit losses and nonperforming loans remain safely within acceptable levels. CAPITAL RESOURCES Equity capital increased $15.1 million in the first three months of 2001. Dividends declared reduced equity by $8.4 million during the 2001 period, while earnings retention was $3.6 million, representing an earnings retention rate of 29.78%. The retained net income remains in permanent capital to fund future growth and expansion. Payments by the Corporation's Employee Stock Ownership Plan ("ESOP") to reduce debt it incurred to acquire the Corporation's common stock for future distribution as employee compensation, net of fair value adjustments to Unearned ESOP shares, increased equity by $357 thousand. Amounts paid to fund the discount on reinvested dividends reduced equity by $153 thousand. The market value adjustment to securities available for sale increased equity by $11.1 million. Proceeds from the reissuance of treasury shares to fund stock options exercised increased equity by $246 thousand during 2001. 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. 21
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) CAPITAL RESOURCES (Continued) The Federal Reserve Board has issued risk-based capital adequacy guidelines which are designed principally as a measure of credit risk. These guidelines require: (1) at least 50% of a banking organization's total capital be common and other "core" equity capital ("Tier I Capital"); (2) assets and off-balance-sheet items be weighted according to risk; (3) the total capital to risk-weighted assets ratio be at least 8%; and (4) a minimum leverage ratio of Tier I capital to average total assets. The minimum leverage ratio is not specifically defined, but is generally expected to be 3-5 percent for all but the most highly rated banks, as determined by a regulatory rating system. The table below presents the Corporation's capital position at March 31, 2001: Percent Amount of Adjusted (in thousands) Assets Tier I Capital $373,054 13.0% Risk-Based Requirement 114,774 4.0 Total Capital 407,394 14.2 Risk-Based Requirement 229,548 8.0 Minimum Leverage Capital 373,054 8.5 Minimum Leverage Requirement 132,031 3.0 At March 31, 2001 the Corporation's banking subsidiaries are considered well capitalized as defined by the Federal Deposit Insurance Corporation Improvement Act of 1991. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information appearing in Item 2 of this report under the caption "Interest Sensitivity" is incorporated herein by reference in response to this item. 22
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There were no material legal proceedings to which the Corporation or its subsidiaries are a party, or of which any of their property is the subject, except proceedings which arise in the normal course of business and, in the opinion of management, will not have a material adverse effect on the consolidated operations or financial position of the Corporation and its subsidiaries. ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 3.0 Amendment of the Corporation's By-Laws (b) Reports on Form 8-K None 23
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST COMMONWEALTH FINANCIAL CORPORATION (Registrant) DATED: MAY 14, 2001 /S/ Joseph E. O'Dell Joseph E. O'Dell, President and Chief Executive Officer DATED: MAY 14, 2001 /S/ John J. Dolan John J. Dolan, Executive Vice President and Chief Financial Officer 1337: