FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF1934
For the quarterly period ended June 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF1934
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 August 13, 2001 was 58,429,035.
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 25
PART II - OTHER INFORMATION
Other Information 26
Signatures Signature
Page
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
June 30, December
31,
2001
2000
ASSETS
Cash and due from banks on demand $ $
87,062 90,723
Interest-bearing deposits with banks 500 427
Federal funds sold 3,000 11,125
Securities available for sale, at market 1,427,784 1,238,230
Securities held to maturity, at cost, (Market
value 310,207 398,107
$314,464 in 2001 and $398,662 in
2000)
Loans 2,549,160 2,492,874
Unearned income (1,620) (2,047)
Allowance for credit losses
(33,885) (33,601)
Net loans 2,513,655 2,457,226
Property and equipment 44,920 44,671
Other real estate owned 1,786 1,661
Other assets
142,773 130,142
TOTAL ASSETS $4,531,68 $4,372,312
7
LIABILITIES
Deposits (all domestic):
Noninterest-bearing $ $
255,868 244,010
Interest-bearing
2,958,749 2,820,136
3,214,617 3,064,146
Total deposits
Short-term borrowings 272,031 272,171
Other liabilities 27,499 44,984
Company obligated mandatorily redeemable
capital securities of subsidiary 35,000 35,000
trust
Other long-term debt 621,855
630,354
656,855
Total long-term debt 665,354
4,179,501 4,038,156
Total liabilities
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value per share,
3,000,000 shares -0- -0-
authorized, none issued
Common stock $1 par value per share,
100,000,000 shares authorized;
62,525,412 shares issued; 58,308,256 and 62,525 62,525
58,195,450 shares
outstanding at June 30, 2001 and December
31, 2000, respectively
Additional paid-in capital 66,546 67,223
Retained earnings 279,329 272,169
Accumulated other comprehensive income 1,689 (7,808)
Treasury stock (4,217,156 shares at June 30,
2001, and (53,241) (54,666)
4,329,962 at December 31, 2000, at
cost)
Unearned ESOP shares
(4,662) (5,287)
Total shareholders' equity
352,186 334,156
$4,531,68 $4,372,312
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 7
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 For the 6
Quarter Months
Ended
June 30, Ended June 30,
Ended June 30,
Ended June 30,
2001 2000 2001 2000
Interest Income
Interest and fees on loans $50,755 $51,95 $102 $103,0
5 ,977 65
Interest and dividends on
investments:
Taxable interest 23,443 21,941 46,77 44,333
4
Interest exempt from Federal 2,374 2,421 4,745 4,865
income taxes
Dividends 575 904 1,429 1,834
Interest on Federal funds sold 206 74 488 123
Interest on bank deposits
18 22 38 40
Total interest income 77,371 77,317 156,4 154,260
51
Interest Expense
Interest on deposits 31,243 27,544 63,30 53,709
0
Interest on short-term 2,709 5,612 6,233 11,774
borrowings
Interest on company obligated
mandatorily 832 831 1,663 1,662
redeemable capital securities of
subsidiary trust
mandatorily redeemable
capital
securities of subsidiary
trust
Interest on other long-term
debt 8,629 8,456 7,065 16,802
Total interest on long-term
debt 9,461 9,287 18,72 18,464
8
Total interest expense
43,413 42,443 88,26 83,947
1
Net Interest Income 33,958 34,874 68,19 70,313
0
Provision for credit losses
2,557 2,415 4,964 4,920
Net interest income after 31,401 32,459 63,22 65,393
provision for credit losses 6
for credit losses
Other Income
Securities gains 1,790 1,686 1,995 1,686
Trust income 1,256 1,402 2,550 2,764
Service charges on deposit 2,707 2,622 5,288 5,136
accounts
Other income
4,620 4,230 9,807 7,712
Total other income 10,373 9,940 19,64 17,298
0
Other Expenses
Salaries and employee benefits 13,401 12,930 27,07 26,841
0
Net occupancy expense 1,623 1,606 3,400 3,320
Furniture and equipment expense 2,254 1,948 4,380 3,808
Data processing expense 821 924 1,588 1,691
Pennsylvania shares tax expense 970 916 1,911 1,810
Other operating expenses
6,934 6,724 13,11 12,728
0
Total other expenses
26,003 25,048 51,45 50,198
9
Income before income taxes 15,771 17,351 31,40 32,493
7
Applicable income taxes
3,737 4,261 7,350 7,952
Net income $12,034 $13,090 $24,0 $24,541
57
Average Shares Outstanding 57,799, 57,515, 57,76 57,510,
443 772 0,915 617
Average Shares Outstanding 58,035, 57,566, 57,91 57,586,
Assuming Dilution 585 079 9,444 513
Assuming Dilution
Per Share Data:
Basic earnings per share $ $ $ $ 0.430
0.210 0.230 0.420
Diluted earnings per share $ $ $ $ 0.430
0.210 0.230 0.420
Cash dividends per share $ $ $ $ 0.280
0.145 0.140 0.290
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)
Accumula
Addit ted Unear Total
Commo ional Other Trea ned Shareho
n Paid- RetainedComprehe sury ESOP lders'
Stock in Earn nsive Stoc Share Equity
Capit ings Income k s
al
Balance at December 31, $62,5 $68,3 $257 $(40,304 $(55 $(6,1 $286,68
1999 25 30 ,773 ) ,448 93) 3
)
Comprehensive income
Net income 0 0 24,5 0 0 0 24,541
41
Other comprehensive
income, net of tax:
Unrealized
holding gains on 0 0 0 986 0 0 986
securities
arising during the
period
Less:
reclassification 0
adjustment for gains 0 0 0 (1,096) 0 (1,096)
On
securities included in
net income
Total other
comprehensive income 0 0 0 (110) 0 0 (110)
Total comprehensive 0 0 24,5 (110) 0 0 24,431
income 41
Cash dividends 0 0 (16, 0 0 0 (16,267
declared 267) )
Decrease in unearned 0 0 0 0 0 286 286
ESOP shares
Discount on dividend
reinvestment plan 0 (294) 0 0 0 0 (294)
Purchases
Treasury stock 0 0 0 0 (873 0 (873)
acquired )
Treasury stock 0 (88) 0 0 387 0 299
reissued
Tax benefit of stock
options 0 75 0 0 0 0 75
Balance at June 30, 2000 $62,5 $68,0 $266 $(40,414 $(55 $(5,9 $294,34
25 23 ,047 ) ,934 07) 0
)
Balance at December 31, $62,5 $67,2 $272 $(7,808) $(54 $(5,2 $334,15
2000 25 23 ,169 ,666 87) 6
)
Comprehensive income
Net income 0 0 24,0 0 0 0 24,057
57
Other comprehensive
income, net of tax:
Unrealized 0 0 0 10,765 0 0 10,765
holding gains on
securities
arising
during the period
Less:
reclassification
adjustment for gains 0 0 0 (1,268) 0 0 (1,268)
On
securities included in
net income
Total other
comprehensive income 0 0 0 9,497 0 0 9,497
Total comprehensive 0 0 24,0 9,497 0 0 33,554
income 57
Cash dividends 0 0 (16, 0 0 0 (16,897
declared 897) )
Decrease in unearned 0 0 0 0 0 625 625
ESOP shares
Discount on dividend
reinvestment plan 0 (306) 0 0 0 0 (306)
Purchases
Treasury stock 0 0 0 0 0 0 0
acquired
Treasury stock
reissued 0 (371) 0 0 1,42 0 1,054
5
Balance at June 30, 2001 $62,5 $66,5 $279 $1,689 $(53 $(4,6 $352,18
25 46 ,329 ,241 62) 6
)
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 6
Months
Ended June 30,
2001 2000
Operating Activities
Net income $ $
24,057 24,541
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 4,964 4,920
Depreciation and amortization 3,783 3,558
Net gains on sales of assets (2,942 (1,933
) )
Income from increase in cash surrender value of (2,060 (1,732
bank owned life insurance ) )
Decrease in interest receivable 1,434 615
Increase (decrease) in interest payable (16,85 683
8)
Increase (decrease) in income taxes payable (184) 201
Change in deferred taxes (148) 30
Other-net
(3,011 (1,150
) )
Net cash provided (used) by operating
activities 9,035 29,733
Investing activities
Transactions with securities held to maturity:
Proceeds from sales 0 0
Proceeds from maturities and redemptions 87,957 40,000
Purchases 0 (4,931
)
Transactions with securities available for sale:
Proceeds from sales 71,431 16,358
Proceeds from maturities and redemptions 199,94 44,315
3
Purchases (444,3 (46,88
79) 7)
Proceeds from sales of loans and other assets 46,679 13,520
Investment in bank owned life insurance (15,00 (15,00
0) 0)
Net decrease (increase) in time deposits with banks (72) 491
Net increase in loans (108,2 (18,41
46) 5)
Purchases of premises and equipment
(3,245 (3,944
) )
Net cash provided (used) by investing activities (164,9 25,507
32)
Financing Activities
Repayments of other long-term debt (376) (25,24
0)
Proceeds from issuance of other long-term debt 9,500 29,900
Discount on dividend reinvestment plan purchases (306) (294)
Dividends paid (16,88 (16,27
2) 3)
Net increase (decrease) in Federal funds purchased (3,900 4,875
)
Net increase (decrease) in other short-term 3,760 (121,2
borrowings 06)
Sale of branch and deposits, net of cash received (9,591 0
)
Net increase (decrease) in deposits 160,85 61,543
2
Stock option tax benefit 0 75
Purchase of treasury stock 0 (873)
Proceeds from sale of treasury stock
1,054 298
Net cash provided (used) by financing activities 144,11 (67,19
1 5)
Net increase (decrease) in cash and cash (11,78 (11,95
equivalents 6) 5)
Cash and cash equivalents at January 1 101,84 101,37
8 3
Cash and cash equivalents at June 30 $90,06 $89,41
2 8
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
June 30, 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 June 30, 2001 and the results of
operations for the three month and six month periods ended June
30, 2001 and 2000, and statements of cash flows and changes in
shareholders' equity for the six month periods ended June 30,
2001 and 2000. The results of the three and six months ended
June 30, 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 six months of the year for:
Interest $105,119
$83,264
Income Taxes $ 7,650 $
7,725
Noncash investing and financing activities:
ESOP loan reductions $ 625
$ 286
Loans transferred to other real estate owned and
Repossessed assets $ 2,777
$ 3,649
Gross increase (decrease) in market value adjustment
To securities available for sale $
14,611 $ (169)
7
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED SUBSID
IARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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)
June 30,
2001 June 30, 2000
Tax Net
of Tax Net of
Pre-Tax (Expense) Tax
Pre-tax (Expense) Tax
Amount Benefit Amount
Amount Benefit Amount
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period
$16,561 $(5,796) $10,765 $ 1,517 $(531) $ 986
Less: reclassification adjustment for gains realized in net
income (1,950) 682 (1,268) (1,686)
590 (1,096)
Net unrealized gains (losses) 14,611
(5,114) 9,497 (169) 59 (110)
Other comprehensive income $14,611
$(5,114) $ 9,497 $ (169) $ 59 $ (110)
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 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").
8
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
NOTE 4 New Accounting Pronouncements (continued)
Due to the short-term nature of these loan commitments (30 days
or less) and the historical dollar amount of commitments
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
Extinguishments of Liabilities" which replaces FASB statement No.
125, issued in June 1996. FAS No. 140 revises the standards for
accounting for securitizations 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.
In July 2001, the FASB issued statement No. 141, "Business
Combinations". FAS No. 141 requires the purchase method of
accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of interest method. FAS No. 141
also specifies the types of acquired intangible assets that are
required to be recognized and reported separately from goodwill.
Additional provisions of FAS No.141 include the reclassification
of certain existing recognized intangibles to goodwill and
reclassification of certain intangibles out of previously
reported goodwill upon adoption. Implementation of FAS No. 141
is not expected to have a material impact on the Corporation's
financial condition or results of operations.
In July 2001, the FASB issued statement No. 142, "Goodwill and
Other Intangible Assets", which is effective for fiscal years
beginning after December 15, 2001. FAS 142 requires that
goodwill and other intangible assets with indefinite useful
lives, including goodwill recorded in past business combinations,
no longer be amortized, but instead be tested for impairment at
least annually and written down and charged to results of
operations only in the periods in which the recorded value is
more than the estimated fair value. The statement also requires
the Corporation to complete a transitional goodwill impairment
test six months from the date of adoption including the
identification of reporting units for the purpose of assessing
potential future impairments of goodwill. After identifying its
reporting units, the Corporation must determine the carrying
value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible
assets to those reporting units and then determine the fair value
of each reporting unit. If the carrying value of any reporting
unit exceeds its fair value, then detailed fair values for each
of the assigned assets (excluding goodwill) and liabilities will
be determined to calculate the amount of goodwill impairment, if
any. Any transitional impairment loss resulting from the
adoption of FAS No. 142 will be recognized as the
9
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
NOTE 4 New Accounting Pronouncements (continued)
effect of a change in accounting principle in the Corporation's
income statement. As of June 30, 2001, the Corporation had
goodwill, net of accumulated amortization, of approximately $6.4
million, which would be subject to the transitional assessment
provisions of FAS No. 142. Goodwill amortization expense was
$838 thousand during fiscal 2000, or $0.014 per share. The
elimination of goodwill amortization is expected to reduce other
operating expenses in periods beginning after December 31, 2001,
by $838 thousand annually. Management is currently assessing but
has not yet determined the full impact of FAS No. 142 on the
Corporation's financial condition or results of operations.
NOTE 5 Legal Proceedings
In 1994 a subsidiary Bank and its President at that time, were
named as defendants in a lender liability action. The plaintiff
seeks damages in excess of $375 thousand, plus punitive damages.
Although the Company intends to vigorously defend itself, it is
not possible to evaluate the likelihood of an unfavorable outcome
or the amount or range of potential loss. A jury trial has been
scheduled for the first quarter 2002.
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 Six Months of 2001 as Compared to the First Six 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 for the first six months of 2001 was $24.1 million
reflecting a decrease of $484 thousand compared to 2000 results
of $24.5 million. The decrease in net income for the 2001 period
was primarily the result of decreases in net interest income
which were partially offset by increases in non-interest income.
Non-interest income, excluding
10
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
First Six Months of 2001 as Compared to the First Six Months of
2000 (Continued)
gains on asset sales, increased $1.3 million for the six months
of 2001 compared to 2000. Basic earnings per share and diluted
earnings per share were $0.42 for the six months of 2001 compared
to basic earnings per share and diluted earnings per share of
$0.43 for the six months of 2000. Basic earnings per share
excluding gains on sale of assets was $0.38 for the 2001 period
compared to $0.40 for the 2000 period. Return on average assets
was 1.09% and return on average equity was 13.91% during the 2001
period, compared to 1.15% and 17.00%, 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
$68.2 million for the six months of 2001 compared to $70.3
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 3.49% for the six months of 2001
compared to 3.70% for the six months of 2000. The reduction in
net interest margin for the 2001 period compared to 2000 resulted
primarily from deposit rate increases combined with declining
investment yields compared to the 2000 period. The cost of
deposits increased by 37 basis points (0.37%) for the first half
of 2001 compared to the first half of 2000, while investment
yields decreased by 26 basis points (0.26%) over the same time
period. The Corporation continues to expand its fee-based
services to offset persistent pressure on net interest income.
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
Change To Volume Due To
Rate
Interest-earning assets:
Time deposits with banks $ $ $
(2) 10 (12)
Securities
1,916 4,502 (2,586)
Federal funds sold
365 437 (72)
Loans
(88) 395 (483)
Total interest income
2,191 5,344 (3,153)
Interest-bearing liabilities:
Deposits
9,591 5,050 4,541
Short-term debt
(5,541) (4,639) (902)
Long-term debt
264 562 (298)
Total interest expense
4,314 973 3,341
Net interest income $ $ 4,371 $
(2,123) (6,494)
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 Six Months of 2001 as Compared to the First Six Months of
2000 (Continued)
Interest and fees on loans decreased $88 thousand for 2001 over
2000 levels as volume increases were offset by rate decreases.
The total yield on loans for the first six months of 2001 was
8.41%, compared to loan yields of 8.40% for the first six months
of 2000. Average loans for the six months of 2001 increased $5.0
million compared to averages for the six months of 2000 as
increases in commercial loans and municipal loans were partially
offset by reductions in average consumer loans.
Interest income on investments increased $1.9 million for the
first half 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 $101.4 million and $26.3
million, respectively for the first six months 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 six months of 2001
were 6.63% compared to investment yields of 6.89% for the first
six months of 2000.
Interest on deposits increased $9.6 million for the 2001 period
compared to 2000, as interest on time deposits increased $9.8
million for the six months of 2001 compared to 2000. Average
time deposits increased $216.7 million for the six months of 2001
compared to 2000 averages, resulting in an increase in interest
expense due to volume
of $5.1 million. The cost of time deposits for the six months of
2001 increased by 48 basis points (0.48%) compared to 2000 costs
of 5.34% resulting in an increase in interest expense due to rate
of $4.7 million.
Interest expense on short-term borrowings decreased $5.5 million
for the six months of 2001 compared to the six months of 2000 as
the average balance of short-term borrowings decreased by $151.0
million over 2000 averages. The cost of short-term borrowings
for the 2001 period also decreased by 90 basis points (0.90%)
compared to 2000 costs of 5.74%.
Interest expense on long-term debt increased $264 thousand for
the six months of 2001 compared to the 2000 period as increases
in interest expense due to volume were partially offset by
decreases in interest expense due to rate. Average long-term
debt for the first half of 2001 increased by $19.5 million
compared to 2000 averages as maturities were extended for short
term borrowings from the Federal Home Loan Bank, to take
advantage of declining interest rates.
The provision for credit losses was $5.0 million for the six
months of 2001 compared to $4.9 million during the six months of
2000. Net charge-offs against the allowance for credit losses
were $4.7 million in the 2001 period, reflecting a decrease of
$58 thousand compared to 2000 levels. The 2001 period included
decreases in net charge-offs for commercial loans not secured by
real estate of $1.1 million and decreases in net charge-offs for
loans to individuals of $452 thousand compared to 2000 net charge-
offs.
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 Six Months of 2001 as Compared to the First Six Months of
2000 (Continued)
The aforementioned decreases in net charge-offs during the first
half of 2001 were partially offset by increases in net charge-
offs for loans secured by residential real estate of $745
thousand and loans secured by commercial real estate of $625
thousand compared to 2000 net charge-offs. The provision for
credit losses as a percent of net charge-offs was 106.07% at June
30, 2001 compared to 103.84% at June 30, 2000. See the "Credit
Review" section for an analysis of the quality of the loan
portfolio.
Below is an analysis of the consolidated allowance for credit
losses for the six month periods ended June 30, 2001 and 2000.
2001 2000
(Amounts in thousands)
Balance January 1, $ 33,601 $ 33,539
Loans charged off:
Commercial, financial and agricultural 2,027
860
Real estate-construction
0 0
Real estate-commercial
625 0
Real estate-residential 1,110
338
Loans to individuals 2,344 2,812
Lease financing receivables
306 226
Total loans charged off 5,245 5,403
Recoveries of previously charged off
loans:
Commercial, financial and agricultural
101 192
Real estate-construction
0 0
Real estate-commercial
0 0
Real estate-residential
42 15
Loans to individuals
417 433
Lease financing receivables
5 25
Total recoveries 565
665
Net charge offs 4,680 4,738
Provision charged to operations 4,964 4,920
Balance, June 30, $ 33,885 $ 33,721
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 Six Months of 2001 as Compared to the First Six Months of
2000 (Continued)
Net securities gains were $2.0 million during the first half of
2001 compared to $1.7 million for the first half of 2000.
Securities gains during the six months of 2001 resulted primarily
from the sales of fixed rate corporate bonds and U.S. government
agency securities classified as securities "Available for sale"
with book values of $37.4 and $54.9 million, respectively. The
securities gains during 2000 resulted primarily from the sale of
Pennsylvania bank stocks with a book value of $14.2 million.
Service charges on deposits for the first six months of 2001
increased $152 thousand compared to the first six months of 2000
primarily as a result of increases in NSF and account analysis
fees.
Other income for the first half of 2001 was $9.8 million
representing an increase of $2.1 million compared to $7.7 million
reported for the first half of 2000. Gains on the sale of loans
were $568 thousand for the six months of 2001 compared to gains
on sale of loans of $73 thousand for the six 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
interest rates. As a result of branch analysis including the
evaluation of the potential sale or consolidation of branches
competing in the same market area, the Corporation sold one of
its branches located in Bethel Park, Pennsylvania during 2001.
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 of office furniture
and equipment. Other income from the six months of 2001 also
reflected increases in income from bank owned life insurance,
debit and credit card interchange, merchant discount and utility
processing fees of $328 thousand, $153 thousand, $109 thousand
and $132 thousand, respectively over 2000 revenues. The first
half of 2001 also included increases in insurance commissions of
$225 thousand over the first half of 2000. Fee based revenue,
such as insurance commissions, has been positively impacted by
implementation of an integrated advisory sales model to integrate
products between the Corporation's bank, insurance and trust
subsidiaries as well as utilization of an employee team to
deliver products and services to commercial customers through our
"Total Solutions Financial Management" approach.
Non-interest expense was $51.5 million for the six months of 2001
reflecting an increase of $1.3 million over the 2000 level of
$50.2 million. Total non-interest expense as a percent of
average assets was 2.34% for both the 2001 and 2000 periods.
Employee costs were $27.1 million for the first half of 2001,
representing 1.25% of average assets on an annualized basis
compared to $26.8 million or 1.23% of average assets on an
annualized basis for 2000. Salary costs for the first half of
2001 increased $496 thousand or 2.39% compared to 2000 levels of
$20.8 million. Employee benefit costs for the first six months
of 2001 reflected decreases of $267 thousand over the first six
months of 2000 and included decreases in health insurance costs
and the Corporation's employee stock ownership plan when compared
to the first six months of 2000.
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 Six Months of 2001 as Compared to the First Six Months of
2000 (Continued)
Furniture and equipment expenses of $4.4 million for the first
six months of 2001 reflected increases of $572 thousand over 2000
levels and included increases in computer software depreciation
and software maintenance, primarily related to the upgrade of the
core banking software. Other operating expenses for the 2001
period were $14.7 million reflecting an increase of $279 thousand
over the 2000 amount of $14.4 million. The first six months of
2001 included increases in collection and repossession expenses,
legal fees, express freight, postage and telephone expense when
compared to 2000 levels. The first half of 2001 also included
increases in losses on sale of leased vehicles as the used auto
market continues to be weak compared to published residual values
in prior periods. The operating expenses for the first six
months of 2001 reflected decreases in advertising and promotions,
outside data processing expenses and other professional fees when
compared to the first six months of 2000.
Income tax expense was $7.4 million for the six months of 2001
compared to $8.0 million for the same period of 2000. The
Corporation's effective tax rate was 23.40% for the 2001 period
compared to 24.47% 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.
Three Months ended June 30, 2001 as Compared to the Three Months
Ended June 30, 2000
Net income was $12.0 million for the second quarter of 2001, a
decrease of $1.1 million compared to 2000 results of $13.1
million. Basic and diluted earnings per share was $0.21 during
the 2001 quarter compared to $0.23 for the same period of 2000.
Return on average assets was 1.08% and return on average equity
was 13.69% during the 2001 quarter, compared to 1.22% and 18.03%
respectively, during the 2000 quarter. Net interest income for
the second quarter of 2001 of $34.0 million represented a
decrease of $916 thousand compared to the second quarter of 2000
as loan and investment yields fell faster than the cost of funds.
Although average deposits for the second quarter of 2001
reflected strong growth compared to average deposits for the
second quarter of 2000, as the Corporation as well as the banking
industry in general saw the migration of funds from the stock and
bond markets, growth was primarily in higher cost deposits. Net
interest margin (net interest income, on a tax-equivalent basis,
as a percentage of average earning assets) for the 2001 period
was 3.44%, reflecting a decrease of 24 basis points (0.24%) from
3.68% reported in 2000.
15
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended June 30, 2001 as Compared to the Three Months
Ended
June 30, 2000 (Continued)
Interest and fees on loans for the three months ended June 30,
2001 decreased $1.2 million compared to the three months ended
June 30, 2000, primarily as a result of rate decreases. The
total yields on loans for the second quarter of 2001 was 8.22%
representing a decrease of 24 basis points (0.24%) compared to
yields for the second quarter of 2000. Decreases in interest and
fees on loans due to rate for the second quarter of 2001 compared
to the second quarter of 2000 were partially offset by
increases in interest income due to volume for commercial loans.
Average loans for the second quarter of 2001 increased $14.3
million compared to averages for the second quarter of 2000 and
included increases in commercial loans and municipal loans which
were partially offset by decreases in consumer loans.
Interest income on investments for the three months ended June
30, 2001 was $26.4 million, reflecting an increase of $1.1
million compared to the three months ended
June 30, 2000. Volume increases for corporate bonds and asset
backed securities increased interest income by $2.3 million and
$451 thousand, respectively compared to interest income for the
second quarter of 2000. Average corporate bonds for the second
quarter of 2001 increased $117.0 million compared to 2000
averages while average asset backed securities increased by $26.3
million over the same time period. Yields on investments for the
three months ended June 30, 2001 were 6.56% compared to 6.90% for
the same period of 2000 reflecting a decrease of 34 basis points
(0.34%) which resulted in a decrease in interest income due to
rate of $1.7 million for the second quarter of 2001 compared to
the second quarter of 2000.
Interest on deposits for the second quarter of 2001 was $31.2
million reflecting an increase of $3.7 million compared to the
second quarter of 2000 as both volumes and rates increased over
2000 levels. Average time deposits increased $210.4 million for
the three months ended June 30, 2001 compared to 2000 averages,
resulting in an increase in interest expense due to volume of
$2.6 million. The cost of time deposits for the second quarter
of 2001 increased by 25 basis points (0.25%) compared to 2000
costs of 5.46%, resulting in an increase in interest expense due
to rate of $1.4 million for the 2001 quarter compared to 2000.
Deposit costs for the second quarter of 2001 were positively
impacted by rate decreases in total savings deposits as these
deposits repriced to reflect lower market interest rates. The
cost of total savings deposits was 2.31% for the second quarter
of 2001 compared to 2.47% for the second quarter of 2000.
Interest on short-term borrowings for the second quarter of 2001
decreased $2.1 million due to volume compared to the second
quarter of 2000 as average short-term borrowings decreased $127.0
million over the same time period. Interest on short-term
borrowings during the second quarter of 2001 also reflected rate
increases in all categories. The cost of short-term borrowings
for the second quarter of 2001 was
16
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended June 30, 2001 as Compared to the Three Months
Ended
June 30, 2000 (Continued)
4.32% compared to 5.94% for the second quarter of 2000. Interest
on long-term debt for the three months ended June 30, 2001
increased $174 thousand over the three months ended June 30,
2000. Long term debt increases during 2001 were primarily the
result of extending the maturity of borrowings from the Federal
Home Loan Bank.
Provision for credit losses was $2.6 million for the three months
ended June 30, 2001 compared to $2.4 million for the three months
ended June 30, 2000. Net charge-offs for the second quarter of
2001 were $3.0 million, compared to net charge-offs of $2.5
million for the second quarter of 2000. Net charge-offs for the
second quarter of 2001 included increases in net charge-offs of
residential mortgage loans and commercial loans not secured by
real estate of $628 thousand and $387 thousand respectively,
compared to 2000 levels.
Net securities gains were $1.8 million for the three months ended
June 30, 2001 compared to $1.7 million for the three months ended
June 30, 2000. Securities gains during the second quarter of
2001 resulted primarily from sales of fixed rate corporate bonds
classified as securities "available for sale" with book values of
$37.4 million. The securities gains during 2000 resulted
primarily from the sale of Pennsylvania bank stocks with a book
value of $14.2 million.
Service charges on deposits were $2.7 million for the second
quarter of 2001 compared to $2.6 million for the second quarter
of 2000. The 2001 period includes increases in NSF and account
analysis fees compared to 2000 levels. Other income for the
three months ended June 30, 2001 was $4.6 million, an increase of
$390 thousand over $4.2 million reported for the three months
ended June 30, 2000. Gains on the sale of loans were $232
thousand for the second quarter of 2001 compared to gains on
sales of loans of $70 thousand for the second quarter of 2000.
Other income for the second quarter of 2001 also reflected
increases in letter of credit fees, utility processing fees, ATM
interchange and mutual fund revenue compared to amounts reported
for the second quarter of 2000.
Total noninterest expense for the three months ended June 30,
2001 was $26.0 million reflecting an increase of $955 thousand
over the $25.0 million that was reported for the corresponding
period of 2000. Employee costs were $13.4 million during the
second quarter of 2001 reflecting an increase of $471 thousand
over 2000 levels. Salaries increased by $480 thousand for the
second quarter of 2001 compared to second quarter of 2000, while
employee benefit costs remained flat over the same time period.
Furniture and equipment expenses increased $306 thousand for the
second quarter of 2001 compared to the second quarter of 2000,
primarily as a result of increases in software depreciation and
software maintenance costs. Other operating expenses for
17
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended June 30, 2001 as Compared to the Three Months
Ended
June 30, 2000 (Continued)
the three months ended June 30, 2001 were $6.9 million compared
to $6.7 million for the corresponding period of 2000. Collection
and repo expenses, postage and telephone costs reflected
increases for the three months ended June 30, 2001
compared to the three months ended June 30, 2000. Cost decreases
for the second quarter of 2001 included a reduction in outside
data processing expenses, other professional fees and deferred
loan origination costs compared to the second quarter of 2000.
Income taxes were $3.7 million for the second quarter of 2001
compared to $4.3 million for the second quarter of 2000. The
Corporation's effective tax rate was 23.70% for the 2001 period
compared to 24.56% for the corresponding period of 2000. The
Corporation's effective tax rate for 2001 reflects the effect of
tax credits and increased municipal loan income compared to 2000
levels.
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.
Net loans increased $56.4 million in the first six months of 2001
as increases in commercial loans, municipal loans and loans to
individuals were partially offset by decreases in residential
real estate loans. The decrease in residential real estate loans
was partially the result of the previously discussed residential
mortgage sale during the first quarter of 2001. Total deposits
increased $150.5 million for the six months of 2001
18
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY (Continued)
and included increases in demand deposits of $11.9 million, total
savings deposits of $95.8 million and time deposits of $42.8
million. The increase in total savings deposits during 2001
resulted primarily from increases in a high yield money market
deposit
product. Time deposits for the six months of 2001 reflects a
decrease of $21.1 million in brokered time deposits. Strong
deposit growth during 2001 continues as customers return to the
safety of traditional banking products due to the uncertainties
of the stock and bond markets.
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 June
30, 2001 securities available for sale had an amortized cost of
$1,425.2 million and an approximate fair value of $1,427.8
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 exceed ISA during a time period, a negative gap results.
A positive gap tends to indicate that earnings will be impacted
favorably if interest rates rise during the period and negatively
when interest rates fall during the time period. A negative gap
tends to indicate that earnings will be affected inversely to
interest rate changes. In other words, as interest rates fall, a
negative gap should tend to produce a positive effect on
earnings, and when interest rates rise, a negative gap should
tend to affect earnings negatively.
The primary components of ISA include adjustable rate loans and
investments, loan repayments, investment maturities and money
market investments. The primary components of ISL include
maturing certificates of deposit, money market deposits, savings
deposits, NOW accounts and short-term borrowings.
19
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Sensitivity (Continued)
The following table lists the amounts and ratios of assets and
liabilities with rates or yields subject to change within the
periods indicated as of June 30, 2001 and
December 31, 2000 (Dollar amounts in thousands):
June 30, 2001
0-90 91-180 181-365 Cumulativ
Days Days Days e
0-365
Days
Loans $ $ $ $1,118,32
732,470 143,417 242,438 5
Investments 109,404 60,896 150,694 320,994
Other interest-earning
assets 3,500 -0- -0- 3,500
Total interest- 393,132
sensitive assets 845,374 204,313 1,442,819
Certificates of deposits 441,593 297,778 394,815 1,134,186
Other deposits 1,108,4 -0- -0- 1,108,429
29
Borrowings
275,441 677 2,850 278,968
Total interest- 397,665
sensitive liabilities 1,825,4 298,455 2,521,583
63
GAP $(980,0 $(94,14 $(4,533) $(1,078,7
89) 2) 64)
ISA/ISL 0.46 0.68 0.99 0.57
Gap/Total assets 21.63% 2.08% 0.10% 23.80%
December 31, 2000
0-90 91-180 181-365 Cumulativ
Days Days Days e
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 1,018,2 -0- -0- 1,018,205
05
Borrowings
274,673 884 457 276,014
Total interest-
sensitive liabilities 1,567,8 265,689 471,285 2,304,815
41
GAP $(804,5 $(88,03 $(121,25 $(1,013,8
33) 6) 7) 26)
ISA/ISL 0.49 0.67 0.74 0.56
Gap/Total assets 18.40% 2.01% 2.77% 23.19%
20
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Sensitivity (Continued)
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
June 30, 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.
21
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 June 30,
2001 2000
(amounts in
thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ $
8,937 11,427
Past due loans 20,500 15,360
Renegotiated loans
2,237 1,638
Total Nonperforming Loans $ $
31,674 28,425
Other real estate owned $ $
1,786 1,752
Loans outstanding at end of period $2,547,5 $2,500,42
40 2
Average loans outstanding (year-to-date) $2,515,9 $2,511,02
91 0
Nonperforming loans as percent of total 1.24% 1.14%
loans
Provision for credit losses $ $
4,964 4,920
Net charge-offs $ $
4,680 4,738
Net charge-offs as percent of average 0.19% 0.19%
loans outstanding
Provision for credit losses as percent of 106.07% 103.84%
net charge-offs
Allowance for credit losses as percent of 1.35% 1.34%
average loans outstanding
Allowance for credit losses as percent of 1.33% 1.35%
end-of-period loans outstanding
Allowance for credit losses as percent of 106.98% 118.63%
nonperforming loans
22
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW (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 June 30, 2001 and June 30, 2000:
2001 2000
(amounts in
thousands)
Recorded investment in impaired loans at $11,174 $13,065
end of period
Year to date average balance of impaired $12,052 $13,023
loans
Allowance for credit losses related to $ 1,669 $ 2,696
impaired loans
Impaired loans with an allocation of the $ 3,661 $ 5,192
allowance for credit losses
Impaired loans with no allocation of the $ 7,513 $ 7,873
allowance for credit losses
Year to date income recorded on impaired $ $
loans on a cash basis 233 277
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 June 30, 2001, there
were no significant concentrations of credit.
Nonperforming loans at June 30, 2001 increased $3.2 million
compared to 2000 levels and included increases in past due loans
of $5.1 million and increases in renegotiated loans of $599
thousand which were partially offset by decreases in nonaccrual
loans of $2.5 million. Past due loans reflected increases in
past due loans secured by residential real estate of $1.0 million
and past due commercial loans of $4.6 million compared to 2000
levels. Past due loans at June 30, 2001 reflected a decrease of
past due loans
23
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW (Continued)
and leases to individuals of $552 thousand. The increase in
renegotiated loans at
June 30, 2001 compared to 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 $3.3
million which were partially offset by increases in nonaccrual
loans secured by residential real estate of $849 thousand
compared to the same period of 2000. Nonperforming loan levels
have decreased for the first two quarters of 2001 compared to
year-end 2000 amounts of $35.0 million. Nonperforming loans as a
percent of total loans has also decreased for the first two
quarters of 2001 compared to year-end 2000, while the allowance
for credit losses as a percent of nonperforming loans has
increased over the same time frame. Nonperforming loans as a
percent of total loans was 1.24% at
June 30, 2001 compared to 1.41% at December 31, 2000 and 1.14% at
June 30, 2000, while the allowance for credit losses as a percent
of nonperforming loans was 106.98%, 95.87% and 118.63%,
respectively for the same periods.
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. Despite the
uncertainty of the economy and the potential for additional
charge offs, management believes that the allowance for credit
losses and nonperforming loans remain safely within acceptable
levels.
CAPITAL RESOURCES
Equity capital increased $18.0 million in the first six months of
2001. Dividends declared reduced equity by $16.9 million during
the 2001 period, while earnings retention was $7.2 million,
representing an earnings retention rate of 29.76%. 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 $625 thousand. Amounts paid to fund
the discount on reinvested dividends reduced equity by $306
thousand. The market value adjustment to securities available for
sale increased equity by $9.5 million. Proceeds from the
reissuance of treasury shares to fund stock options exercised
increased equity by $1.1 million during 2001.
24
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)
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 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
June 30, 2001:
Percent
Amount Of Adjusted
(in Assets
thousands)
Tier I Capital $377,914 12.8%
Risk-Based Requirement 117,962 4.0
Total Capital 411,799 14.0
Risk-Based Requirement 235,924 8.0
Minimum Leverage Capital 377,914 8.5
Minimum Leverage Requirement 134,128 3.0
At June 30, 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.
25
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.
See NOTE 5 to the consolidated financial statements for
additional information.
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
On April 23, 2001, the Corporation held its regularly
scheduled annual meeting
of shareholders. The following proposal was considered
and acted upon.
Proposal 1
The following directors were elected for terms to expire
in 2004:
David S. Dahlmann
Ronald C. Geiser
Johnston A. Glass
Robert F. Koslow
Joseph W. Proske
E. James Trimarchi
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
26
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: AUGUST 13, 2001 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: AUGUST 13, 2001 /S/ John J. Dolan
John J. Dolan, Executive Vice
President and Chief Financial Officer