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 September 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
November 9, 2001 was 58,445,047.
1
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 ..12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ......................27
PART II - OTHER INFORMATION
Other Information ...........................28
Signatures ........................Signature Page
2
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
September December
30, 31,
2001 2000
ASSETS
Cash and due from banks on demand $ $
82,836 90,723
Interest-bearing deposits with banks 3,147 427
Federal funds sold 1,000 11,125
Securities available for sale, at market 1,516,927 1,238,230
Securities held to maturity, at cost, (Market
value 307,825 398,107
$316,112 in 2001 and $398,661 in
2000)
Loans 2,595,470 2,492,874
Unearned income (1,441) (2,047)
Allowance for credit losses
(33,172) (33,601)
Net loans 2,560,857 2,457,226
Property and equipment 45,601 44,671
Other real estate owned 1,716 1,661
Other assets
132,103 130,142
TOTAL ASSETS $4,652,01 $4,372,312
2
LIABILITIES
Deposits (all domestic):
Noninterest-bearing $ $
80,101 244,010
Interest-bearing
3,127,612 2,820,136
3,207,713 3,064,146
Total deposits
Short-term borrowings 371,934 272,171
Other liabilities 27,022 44,984
Company obligated mandatorily redeemable
capital securities of subsidiary 35,000 35,000
trust
Other long-term debt 621,855
629,790
656,855
Total long-term debt 664,790
4,271,459 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; 58,442,989 and 62,525 62,525
58,195,450 shares outstanding
at September 30, 2001 and December 31,
2000, respectively
Additional paid-in capital 66,038 67,223
Retained earnings 283,572 272,169
Accumulated other comprehensive income 24,352 (7,808)
Treasury stock (4,082,423 shares at September
30, 2001, and (51,540) (54,666)
4,329,962 at December 31, 2000, at
cost)
Unearned ESOP shares
(4,394) (5,287)
Total shareholders' equity
380,553 334,156
$4,652,01 $4,372,312
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2
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 9
Quarter Months
Ended Ended
September 30, 0 September 30,
30,
Ended June 30, Ended June 30,
2001 2000 2001 2000
Interest Income
Interest and fees on loans $50,847 $52,61 $153,8 $155,6
3 24 78
Interest and dividends on
investments:
Taxable interest 23,639 22,527 70,413 66,860
Interest exempt from Federal 2,432 2,399 7,177 7,264
income taxes
Dividends 615 887 2,044 2,721
Interest on Federal funds sold 3 22 491 145
Interest on bank deposits
21 23 59 63
Total interest income 77,557 78,471 234,008 232,731
Interest Expense
Interest on deposits 29,723 30,258 93,023 83,967
Interest on short-term 2,742 5,297 8,975 17,071
borrowings
Interest on company obligated
mandatorily 832 832 2,494 2,494
redeemable capital securities of
subsidiary trust
mandatorily redeemable
capital
securities of subsidiary
trust
Interest on other long-term
debt 8,703 8,347 25,769 25,149
Total interest on long-term
debt 9,535 9,179 28,263 27,643
Total interest expense
42,000 44,734 130,261 128,681
Net Interest Income 35,557 33,737 103,747 104,050
Provision for credit losses
3,542 2,505 8,506 7,425
Net interest income after 32,015 31,232 95,241 96,625
provision for credit losses
for credit losses
Other Income
Securities gains 1,330 0 3,325 1,686
Trust income 1,265 1,327 3,815 4,091
Service charges on deposit 2,804 2,704 8,092 7,840
accounts
Income from bank owned life 1,096 833 3,156 2,565
insurance
Other income
4,264 3,378 12,011 9,358
Total other income 10,759 8,242 30,399 25,540
Other Expenses
Salaries and employee benefits 13,588 13,044 40,658 39,885
Net occupancy expense 1,577 1,577 4,977 4,897
Furniture and equipment expense 2,168 2,081 6,548 5,889
Data processing expense 795 745 2,383 2,436
Pennsylvania shares tax expense 944 817 2,855 2,627
Other operating expenses
6,961 6,445 20,071 19,173
Total other expenses
26,033 24,709 77,492 74,907
Income before income taxes 16,741 14,765 48,148 47,258
Applicable income taxes
4,023 3,209 11,373 11,161
Net income $12,718 $11,556 $36,775 $36,097
Average Shares Outstanding 57,975, 57,565, 57,833, 57,529,
650 411 280 015
Average Shares Outstanding 58,342, 57,601, 58,062, 57,591,
Assuming Dilution 525 162 021 432
Assuming Dilution
Per Share Data:
Basic earnings per share $ $ $ $ 0.630
0.220 0.200 0.640
Diluted earnings per share $ $ $ 0.630 $ 0.630
0.220 0.200
Cash dividends per share $ $ $ 0.435 $ 0.420
0.145 0.140
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 36,0 0 0 0 36,097
97
Other comprehensive
income, net of tax:
Unrealized
holding gains on 0 0 0 12,960 0 0 12,960
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 11,864 0 0 11,864
Total comprehensive 0 0 36,0 11,864 0 0 47,961
income 97
Cash dividends 0 0 (24, 0 0 0 (24,412
declared 412) )
Decrease in unearned 0 0 0 0 0 429 429
ESOP shares
Discount on dividend
reinvestment plan 0 (443) 0 0 0 0 (443)
purchases
Treasury stock 0 0 0 0 (873 0 (873)
acquired )
Treasury stock 0 (369) 0 0 1,52 0 1,151
reissued 0
Tax benefit of stock
options 0 75 0 0 0 0 75
Balance at September 30, $62,5 $67,5 $269 $(28,440 $(54 $(5,7 $310,57
2000 25 93 ,458 ) ,801 64) 1
)
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 36,7 0 0 0 36,775
75
Other comprehensive
income, net of tax:
Unrealized 0 0 0 34,287 0 0 34,287
holding gains on
securities
arising
during the period
Less:
reclassification
adjustment for gains 0 0 0 (2,127) 0 0 (2,127)
on
securities included in
net income
Total other
comprehensive income 0 0 0 32,160 0 0 32,160
Total comprehensive 0 0 36,7 32,160 0 0 68,935
income 75
Cash dividends 0 0 (25, 0 0 0 (25,372
declared 372) )
Decrease in unearned 0 0 0 0 0 893 893
ESOP shares
Discount on dividend
reinvestment plan 0 (460) 0 0 0 0 (460)
purchases
Treasury stock
reissued 0 (725) 0 0 3,12 0 2,401
6
Balance at September 30, $62,5 $66,0 $283 $24,352 $(51 $(4,3 $380,55
2001 25 38 ,572 ,540 94) 3
)
The accompanying notes are an integral part of these consolidated financial
statements.
5
FIRST COMMONWEALTH FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the 9
Months
Ended
September 30,
2001 2000
Operating Activities
Net income $ $
36,775 36,097
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 8,506 7,425
Depreciation and amortization 5,625 5,415
Net gains on sales of assets (4,456 (1,775
) )
Income from increase in cash surrender value of (3,156 (2,565
bank owned life insurance ) )
Decrease in interest receivable 999 13
Increase (decrease) in interest payable (18,84 2,475
1)
Increase in income taxes payable 945 1,089
Change in deferred taxes (74) 658
Other-net
(3,083 (1,487
) )
Net cash provided (used) by operating
activities 23,240 47,345
Investing Activities
Transactions with securities held to maturity:
Proceeds from sales 0 0
Proceeds from maturities and redemptions 109,05 52,288
7
Purchases (18,62 (8,926
9) )
Transactions with securities available for sale:
Proceeds from sales 85,657 16,358
Proceeds from maturities and redemptions 342,07 73,463
1
Purchases (653,6 (122,8
93) 96)
Proceeds from sales of loans and other assets 69,219 24,963
Investment in bank owned life insurance (15,00 (15,00
0) 0)
Net decrease (increase) in time deposits with banks (2,719 650
)
Net increase in loans (181,3 (24,03
88) 6)
Purchases of premises and equipment
(5,379 (5,848
) )
Net cash provided (used) by investing activities (270,8
04) (8,984
)
Financing Activities
Repayments of other long-term debt (673) (50,36
5)
Proceeds from issuance of other long-term debt 9,500 34,900
Discount on dividend reinvestment plan purchases (460) (443)
Dividends paid (25,33 (24,40
5) 7)
Net increase in Federal funds purchased 67,525 8,025
Net increase (decrease) in other short-term 32,238 (
borrowings 78,452
)
Sale of branch and deposits, net of cash received (9,591 0
)
Net increase in deposits 153,94 53,143
7
Stock option tax benefit 0 75
Purchase of treasury stock 0 (873)
Proceeds from sale of treasury stock
2,401 298
Net cash provided (used) by financing activities 229,55 (58,09
2 9)
Net increase (decrease) in cash and cash (18,01 (19,73
equivalents 2) 8)
Cash and cash equivalents at January 1 101,84 101,37
8 3
Cash and cash equivalents at September 30 $83,83 $81,63
6 5
The accompanying notes are an integral part of these consolidated financial
statements.
6
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 2001 and the results of
operations for the three month and nine month periods ended
September 30, 2001 and 2000, and statements of cash flows and
changes in shareholders' equity for the nine month periods ended
September 30, 2001 and 2000. The results of the three and nine
months ended September 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 nine months of the year for:
Interest $149,102
$126,206
Income Taxes $ 10,206 $ 9,410
Noncash investing and financing activities:
ESOP loan reductions $ 893
$ 429
Loans transferred to other real estate owned and
repossessed assets $ 3,743
$ 4,733
Gross increase in market value adjustment
to securities available for sale $
49,477 $ 18,252
Treasury stock reissued for insurance agency interest
acquired $
0 $ 852
7
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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)
September 30, 2001
September 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
$52,750 $(18,463) $34,287 $19,938 $(6,978) $12,960
Less: reclassification adjustment for gains realized in net
income (3,273) 1,146 (2,127) (1,686)
590 (1,096)
Net unrealized gains (losses) 49,477
(17,317) 32,160 18,252 (6,388) 11,864
Other comprehensive income $49,477
$(17,317) $32,160 $18,252 $(6,388) $11,864
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 a 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
September 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
September 30, 2001
(Unaudited)
NOTE 4 New Accounting Pronouncements (continued)
effect of a change in accounting principle in the Corporation's
income statement. As of September 30, 2001, the Corporation had
goodwill, net of accumulated amortization, of approximately $6.0
million, which would be subject to the transitional assessment
provisions of FAS No. 142. Goodwill amortization expense was
$837 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.
In June 2001, the FASB issued statement No. 143, "Accounting for
Asset Retirement Obligations" which is effective for financial
statements issued for fiscal years beginning after June 15, 2002.
The statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and associated asset retirement costs. FAS No. 143
requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset and subsequently
allocated to expense over the asset's useful life.
Implementation of FAS No. 143 is not expected to have a material
impact on the Corporation's financial condition or results of
operations.
In August 2001, the FASB issued statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" which is
effective for financial statements issued for fiscal years
beginning after December 15, 2001, including interim periods.
This statement supersedes FASB Statement No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". This statement does not apply to goodwill;
intangible assets not being amortized; long-term customer
relationships of a financial institution, such as core deposit
intangibles, credit card intangibles and servicing assets;
financial instruments, including investments in equity securities
accounted for under the cost or equity method and deferred tax
assets. FAS No. 144 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances, such
as a significant decrease in the market value of an asset or the
extent or manner in which an asset is used indicate that the
carrying amount of an asset may not be recoverable. If there is
an indication that the carrying amount of an asset may not be
recoverable, future undiscounted cash flows expected to result
from the use and disposition of the asset are estimated. If the
sum of the expected cash flows is less than the carrying value of
the asset a loss is recognized for the difference between the
carrying value and the market value of the asset. FAS No. 144
requires that long-lived assets to be abandoned or exchanged for
similar productive assets be considered held and used until
disposal. If an entity plans to abandon a
10
FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
NOTE 4 New Accounting Pronouncements (continued)
long-lived asset before the end of its previously estimated
useful life, depreciation estimates should be revised to reflect
the use of the asset over its shortened useful life. A long-
lived asset that has been temporarily idled should not be
accounted for as if abandoned. This statement also requires
measurement of long-lived assets classified as held for sale at
the lower of their carrying amount or fail value less cost to
sell and to cease depreciation or amortization on these assets.
Discontinued operations will therefore no longer be measured at
net realizable value or include future operating losses that have
not yet occurred. Long-lived assets classified as held for sale
after the balance sheet date but before issuance of financial
statements are to be retroactively reclassified as held for sale
at the balance sheet date. Implementation of FAS No. 144 is not
expected to have a material impact 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 Corporation 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.
11
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Nine Months of 2001 as Compared to the First Nine 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 nine months of 2001 was $36.8 million
reflecting an increase of $678 thousand compared to 2000 results
of $36.1 million. The increase in net income for the 2001 period
was primarily the result of increases in non-interest income
which were partially offset by decreases in net interest income.
Non-interest income, excluding
gains on asset sales, increased $2.2 million or 9% for the nine
months of 2001 compared to 2000. Gains on the sale of assets
includes securities gains of $3.3 million and $1.7 million in
2001 and 2000, respectively, as well as $999 thousand gain on the
sale of a branch and a block of mortgages in 2001. Basic
earnings per share were $0.64 for the nine months of 2001
compared to basic earnings per share of $0.63 for the nine months
of 2000. Diluted earnings per share were $0.63 for both the 2001
and 2000 nine month periods. Return on average assets was 1.09%
and return on average equity was 13.84% during the 2001 period,
compared to 1.12% and 16.29%, respectively during the same period
of 2000.
Net interest income, the most significant component of earnings,
is the amount by which interest income generated from earning
assets exceeds interest expense on liabilities. Net interest
income was $103.7 million for the nine months of 2001 compared to
$104.1 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 nine months of 2001
compared to 3.64% for the nine 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
loan and investment yields compared to the 2000 period. The cost
of deposits increased by 13 basis points (0.13%) for the first
nine months of 2001 compared to the first nine months of 2000,
while loan and investment yields decreased by 18 basis points
(0.18%) and 35 basis points (0.35%), respectively over the same
time period. The Corporation continues to expand its fee-based
services to offset persistent pressure on net interest income.
12
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 Nine Months of 2001 as Compared to the First Nine 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
Change To Volume Due To
Rate
Interest-earning assets:
Time deposits with banks $ $ $
(4) 16 (20)
Securities
2,789 7,824 (5,035)
Federal funds sold
346 426 (80)
Loans
(1,854) 2,368 (4,222)
Total interest income 10,634
1,277 (9,357)
Interest-bearing liabilities:
Deposits
9,056 8,269 787
Short-term debt
(8,096) (5,384) (2,712)
Long-term debt
620 1,170 (550)
Total interest expense
1,580 4,055 (2,475)
Net interest income $ $ 6,579 $
(303) (6,882)
Interest and fees on loans decreased $1.9 million for 2001 over
2000 levels as volume increases were offset by rate decreases.
The total yield on loans for the first nine months of 2001 was
8.28%, compared to loan yields of 8.46% for the first nine months
of 2000. Average loans for the nine months of 2001 increased
$32.2 million compared to averages for the nine months of 2000 as
increases in commercial loans and municipal loans were partially
offset by decreases in average consumer loans.
Interest income on investments increased $2.8 million for the
first nine months of 2001 compared to the corresponding period of
2000 and included increases due to volume for corporate bonds and
asset backed securities. Average balances of corporate bonds and
asset backed securities increased $102.7 million and $27.5
million, respectively for the first nine 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 nine months of 2001
were 6.54% compared to investment yields of 6.89% for the first
nine months of 2000.
13
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 2001 as Compared to the First Nine Months of
2000 (Continued)
Interest on deposits increased $9.1 million for the 2001 period
compared to 2000, as interest on time deposits increased $10.2
million for the nine months of 2001 compared to 2000. Average
time deposits increased $186.5 million for the nine months of
2001 compared to 2000 averages, resulting in an increase in
interest expense due to volume
of $7.8 million. The cost of time deposits for the nine months
of 2001 increased by 20 basis points (0.20%) compared to 2000
costs of 5.49% resulting in an increase in interest expense due
to rate of $2.4 million. The increase in interest expense on
time deposits for the 2001 period compared to 2000 was partially
offset by decreases in interest expense on savings deposits,
primarily due to rate decreases during the same time period.
Interest expense on short-term borrowings decreased $8.1 million
for the nine months of 2001 compared to the nine months of 2000
as the average balance of short-term borrowings decreased by
$111.8 million over 2000 averages. The cost of short-term
borrowings for the 2001 period also decreased by 151 basis points
(1.51%) compared to 2000 costs of 5.88%.
Interest expense on long-term debt increased $620 thousand for
the nine 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 nine months of 2001 increased by $26.9 million
compared to 2000 averages as maturities were extended for short-
term borrowings from the Federal Home Loan Bank, to take
advantage of lower interest rates.
The provision for credit losses was $8.5 million for the nine
months of 2001 compared to $7.4 million during the nine months of
2000. Net charge-offs against the allowance for credit losses
were $8.9 million in the 2001 period, reflecting an increase of
$2.7 million compared to 2000 levels. The 2001 period included
increases in net charge-offs for commercial loans of $1.9 million
and increases in net charge-offs for consumer real estate loans
of $1.1 million compared to 2000 net charge-offs. The
aforementioned increases in net charge-offs during the nine
months of 2001 were partially offset by decreases in net charge-
offs for loans to individuals of $721 thousand compared to 2000
net charge-offs. See the "Credit Review" section for an analysis
of the quality of the loan portfolio.
14
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 2001 as Compared to the First Nine Months of
2000 (Continued)
Below is an analysis of the consolidated allowance for credit
losses for the nine month periods ended September 30, 2001 and
2000.
2001 2000
(Amounts in thousands)
Balance January 1, $ 33,601 $ 33,539
Loans charged off:
Commercial, financial and agricultural 2,413 2,304
Real estate-construction
0 0
Real estate-commercial 1,963
43
Real estate-residential 1,616
491
Loans to individuals 3,406 4,171
Lease financing receivables
392 297
Total loans charged off 9,790 7,306
Recoveries of previously charged off
loans:
Commercial, financial and agricultural
217 344
Real estate-construction
0 0
Real estate-commercial
0 0
Real estate-residential
48 28
Loans to individuals
585 629
Lease financing receivables
5 25
Total recoveries 855 1,026
Net charge offs 8,935 6,280
Provision charged to operations 8,506 7,425
Balance, September 30, $ 33,172 $ 34,684
15
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
First Nine Months of 2001 as Compared to the First Nine Months of
2000 (Continued)
Net securities gains were $3.3 million during the first nine
months of 2001 compared to $1.7 million for the first nine months
of 2000. Securities gains during the nine months of 2001
resulted primarily from the sales of fixed rate corporate bonds
classified as securities "available for sale" and Pennsylvania
bank stocks with book values of $37.4 million and $12.7 million,
respectively. The securities gains during 2000 resulted
primarily from the sale of Pennsylvania bank stocks with a book
value of $14.4 million.
Service charges on deposits for the first nine months of 2001
increased $252 thousand compared to the first nine months of 2000
primarily as a result of increases in NSF fees. Income from bank
owned life insurance was $3.2 million for the first nine months
of 2001 compared to $2.6 million for the first nine months of
2000. The 2001 period included an additional investment in bank
owned life insurance of $15.0 million compared to 2000 levels.
Other income for the first nine months of 2001 was $12.0 million
representing an increase of $2.6 million compared to $9.4 million
reported for the first nine months of 2000. Gains on the sale of
loans were $889 thousand for the nine months of 2001 compared to
gains on sale of loans of $162 thousand for the nine 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. Other income for the
nine months of 2001 also reflected increases in debit and credit
card interchange, merchant discount and letter of credit fees of
$140 thousand, $166 thousand and $81 thousand, respectively over
2000 revenues. 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 Management"
approach. The first nine months of 2001 also included increases
in insurance and services to commercial customers through our
"Total Solutions Financial commissions of $921 thousand over the
first nine months of 2000.
Non-interest expense was $77.5 million for the nine months of
2001 reflecting an increase of $2.6 million over the 2000 level
of $74.9 million. Total non-interest expense as a percent of
average assets was 2.31% for the 2001 period compared to 2.32%
for the 2000 period. Employee costs were $40.7 million for the
first nine months of 2001, representing 1.21% of average assets
on an annualized basis compared to $39.9 million
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)
First Nine Months of 2001 as Compared to the First Nine Months of
2000 (Continued)
or 1.24% of average assets on an annualized basis for 2000.
Salary costs for the first nine months of 2001 increased $1.0
million or 3.31% compared to 2000 levels of $31.1 million.
Employee benefit costs for the first nine months of 2001
reflected decreases of $256 thousand over the first nine months
of 2000 and included decreases in health insurance costs of $103
thousand and decreases in expenses of the Corporation's employee
stock ownership plan of $222 thousand compared to the first nine
months 2000.
Furniture and equipment expenses of $6.5 million for the first
nine months of 2001 reflected increases of $659 thousand over
2000 levels and included increases in computer software
depreciation and software maintenance of $240 thousand and $351
thousand, respectively, primarily related to the upgrade of the
core banking software. Other operating expenses for the 2001
period were $20.1 million reflecting an increase of $898 thousand
over the 2000 amount of $19.2 million. The first nine months of
2001 included increases in filing and recording fees, legal fees,
postage, printing and telephone expense of $179 thousand, $206
thousand, $275 thousand, $140 thousand and $273 thousand,
respectively compared to 2000 levels. The 2001 period 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. Other operating expenses for
the first nine months of 2001 reflected decreases in insurance
expense, promotions and other professional fees compared to the
first nine months of 2000.
Income tax expense was $11.4 million for the nine months of 2001
compared to $11.2 million for the same period of 2000. The
Corporation's effective tax rate was 23.62% for the 2001 and 2000
periods.
Three Months ended September 30, 2001 as Compared to the Three
Months Ended September 30, 2000
Net income was $12.7 million for the third quarter of 2001, an
increase of $1.1 million compared to 2000 results of $11.6
million. Basic and diluted earnings per share were $0.22 during
the 2001 quarter compared to $0.20 for the same period of 2000.
Return on average assets was 1.10% and return on average equity
was 13.72% during the 2001 quarter, compared to 1.07% and 14.97%
respectively, during the 2000 quarter. Net interest income for
the third quarter of 2001 of $35.6 million represented an
increase of $1.8 million compared to the third quarter of 2000,
primarily as a result of volume increases for loans and
investments combined with rate decreases for deposits. Net
interest margin (net interest income, on a tax-equivalent basis,
as a percentage of
17
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended September 30, 2001 as Compared to the Three
Months Ended
September 30, 2000 (Continued)
average earning assets) for the 2001 period was 3.48%, reflecting
a decrease of 5 basis points (0.05%) from 3.53% reported in 2000.
Interest and fees on loans for the three months ended September
30, 2001 decreased $1.8 million compared to the three months
ended September 30, 2000, primarily as a result of rate
decreases, most notably for variable rate commercial loans. The
total yield on loans for the third quarter of 2001 was 8.02%
representing a decrease of 55 basis points (0.55%) compared to
yields for the third quarter of 2000. Decreases in interest and
fees on loans due to rate for the third quarter of 2001 compared
to the third quarter of 2000 were partially offset by increases
in interest income due to volume for commercial loans. Average
loans for the third quarter of 2001 increased $85.8 million
compared to averages for the third quarter of 2000 and included
increases in commercial loans and municipal loans which were
partially offset by decreases in residential mortgage loans.
Interest income on investments for the three months ended
September 30, 2001 was $26.7 million, reflecting an increase of
$873 thousand compared to the three months ended September 30,
2000. Volume increases for corporate bonds and U.S. government
agency securities increased interest income by $2.0 million and
$771 thousand, respectively compared to interest income for the
third quarter of 2000. Average corporate bonds for the third
quarter of 2001 increased $105.0 million compared to 2000
averages while average U.S. government agency securities
increased by $46.1 million over the same time period. Yields on
investments for the three months ending September 30, 2001 were
6.37% compared to 6.88% for the same period of 2000 reflecting a
decrease of 51 basis points (0.51%) which resulted in a decrease
in interest income due to rate of $2.4 million for the third
quarter of 2001 compared to the third quarter of 2000.
Interest on deposits for the third quarter of 2001 was $29.7
million reflecting a decrease of $535 thousand compared to the
third quarter of 2000 as rate decreases were partially offset by
volume increases compared to 2000 levels. Deposit costs were
3.66% for the third quarter of 2001 compared to 4.00% for the
third quarter of 2000, resulting in a decrease in interest
expense due to rate of $3.5 million. The cost of total savings
deposits decreased 50 basis points (0.50%) for the third quarter
of 2001 compared to the third quarter of 2000 while the cost of
time deposits decreased 35 basis points (0.35%) over the same
time period, reflecting lower market interest rates. Average
deposits increased $216.3 million for the three months ended
September 30, 2001 compared to 2000 averages, resulting in an
increase in interest expense due to volume of $2.9 million.
Included in the increase in average deposits for the third
quarter of 2001 compared to the third quarter of 2000 was an
increase of $126.9 million in average time deposits and an
increase in total savings deposits of $68.7 million.
18
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended September 30, 2001 as Compared to the Three
Months Ended
September 30, 2000 (Continued)
Interest on short-term borrowings for the third quarter of 2001
decreased $2.6 million compared to the third quarter of 2000 as
both volumes and rates decreased compared to 2000 levels.
Average short-term borrowings decreased $34.6 million for the
third quarter of 2001 compared to the corresponding period of
2000. The cost of short-term borrowings for the third quarter of
2001 was 3.57% compared to 6.21% for the third quarter of 2000.
Interest on long-term debt for the three months ended September
30, 2001 increased $357 thousand over the three months ended
September 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 $3.5 million for the three months
ended September 30, 2001 compared to $2.5 million for the three
months ended September 30, 2000. Net charge-offs for the third
quarter of 2001 were $4.3 million, compared to net charge-offs of
$1.5 million for the third quarter of 2000. Net charge-offs for
the third quarter of 2001 included increases in charge-offs of
residential mortgage loans and commercial loans of $360 thousand
and $2.6 million respectively, compared to 2000 levels.
Net securities gains were $1.3 million for the three months ended
September 30, 2001 while there were no securities gains for the
three months ended September 30, 2000. The securities gains
during the third quarter of 2001 resulted primarily from the sale
of Pennsylvania bank stocks with a book value of $12.7 million.
Income from bank owned life insurance increased $263 thousand for
the third quarter of 2001 compared to the third quarter of 2000.
Other income for the three months ended September 30, 2001 was
$4.3 million, an increase of $886 thousand over $3.4 million
reported for the three months ended September 30, 2000.
Insurance commissions increased $697 thousand for the third
quarter of 2001 compared to the third quarter of 2000. Other
income for the third quarter of 2001 also reflected increases in
gain on sale of loans, debit card interchange, SBA servicing
revenue, and mutual fund revenue compared to amounts reported for
the third quarter of 2000.
Total noninterest expense for the three months ended September
30, 2001 was $26.0 million reflecting an increase of $1.3 million
over the $24.7 million that was reported for the corresponding
period of 2000. Employee costs were $13.6 million during the
third quarter of 2001 reflecting an increase of $544 thousand
over 2000 levels. Salaries increased by $534 thousand for the
third quarter of 2001 compared to third quarter of 2000, while
employee benefit costs remained flat over the same time period.
19
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Three Months ended September 30, 2001 as Compared to the Three
Months Ended
September 30, 2000 (Continued)
Other operating expenses for the three months ended September 30,
2001 were $7.0 million compared to $6.4 million for the
corresponding period of 2000. The third quarter of 2001 included
increases in filing and recording fees, legal fees, postage,
printing and telephone expense of $141 thousand, $118 thousand,
$146 thousand, $136 thousand and $124 thousand, respectively
compared to 2000 levels. The third quarter of 2001 also included
increases in losses on sale of leased vehicles. Cost decreases
for the third quarter of 2001 included a reduction in collection
and repossession expenses, check printing and deferred loan
origination costs compared to the third quarter of 2000.
Income taxes were $4.0 million for the third quarter of 2001
compared to $3.2 million for the third quarter of 2000. The
Corporation's effective tax rate was 24.03% for the 2001 period
compared to 21.73% for the corresponding period of 2000.
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 $103.6 million in the first nine 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 $143.6 million
for the first nine months of 2001 as total savings deposits
increased $313.2 million compared to year-end 2000.
20
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY (Continued)
Demand deposits and time deposits reflected decreases of $163.9
million and $5.7 million for the first nine months of 2001. The
increase in total savings deposits during 2001 resulted primarily
from increases in a high yield money market deposit product.
Interest-bearing deposits at September 30, 2001 include
reallocations from demand deposits and reallocations from NOW
accounts into MMDA accounts for nonpersonal deposit accounts.
These reallocations are based on a formula approved by the
regulatory authorities and have been made to reduce the
Corporation's reserve requirement. In periods prior to the third
quarter of 2001 these reallocations from demand deposits and NOW
accounts into MMDA accounts included amounts for personal
accounts only, and although permitted by the regulatory
authorities, did not include amounts related to nonpersonal
deposit accounts. Time deposits for the first nine months of
2001 included 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
September 30, 2001 securities "available for sale" had an
amortized cost of $1,479.4 million and an approximate fair value
of $1,516.9 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
21
ITEM 2 FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest Sensitivity (Continued)
positive effect on earnings, and when interest rates rise, a
negative gap should tend to affect earnings negatively.
The primary components of ISA include adjustable rate loans and
investments, loan repayments, investment maturities and money
market investments. The primary components of ISL include
maturing certificates of deposit, money market deposits, savings
deposits, NOW accounts and short-term borrowings.
The following table lists the amounts and ratios of assets and
liabilities with rates or yields subject to change within the
periods indicated as of September 30, 2001 and
December 31, 2000 (Dollar amounts in thousands):
September 30, 2001
0-90 91-180 181-365 Cumulativ
Days Days Days e
0-365
Days
Loans $ $ $ $1,233,23
802,699 143,327 287,208 4
Investments 160,043 73,395 204,172 437,610
Other interest-earning
assets 4,147 -0- -0- 4,147
Total interest- 491,380
sensitive assets 966,889 216,722 1,674,991
Certificates of deposits 449,471 225,983 458,164 1,133,618
Other deposits 1,129,5 -0- -0- 1,129,548
48
Borrowings
372,229 2,600 350 375,179
Total interest- 458,514
sensitive liabilities 1,951,2 228,583 2,638,345
48
GAP $(984,3 $(11,86 $ 32,866 $
59) 1) (963,354)
ISA/ISL
0.50 0.95 1.07 0.63
Gap/Total assets 21.16% 0.25% 0.71% 20.71%
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%
22
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
September 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.
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
The following table identifies amounts of loan losses and
nonperforming loans. Past due loans are those which were
contractually past due 90 days or more as to interest or
principal payments but are well secured and in the process of
collection. Renegotiated loans are those loans which terms have
been renegotiated to provide a reduction or deferral of principal
or interest as a result of the deteriorating financial position
of the borrower and are in compliance with the restructured
terms.
At September 30,
2001 2000
(amounts in
thousands)
Nonperforming Loans:
Loans on nonaccrual basis $ $
23,068 11,953
Past due loans 20,449 17,687
Renegotiated loans
835 1,630
Total Nonperforming Loans $ $
44,352 31,270
Other real estate owned $ $
1,716 1,224
Loans outstanding at end of period $2,594,0 $2,493,98
29 7
Average loans outstanding (year-to-date) $2,537,1 $2,504,99
92 8
Nonperforming loans as percent of total 1.71% 1.25%
loans
Provision for credit losses $ $
8,506 7,425
Net charge-offs $ $
8,935 6,280
Net charge-offs as percent of average 0.35% 0.25%
loans outstanding
Provision for credit losses as percent of 95.20% 118.23%
net charge-offs
Allowance for credit losses as percent of 1.31% 1.38%
average loans outstanding
Allowance for credit losses as percent of 1.28% 1.39%
end-of-period loans outstanding
Allowance for credit losses as percent of 74.79% 110.92%
nonperforming loans
24
ITEM 2. FIRST COMMONWEALTH FINANCIAL CORPORATION AND CONSOLIDATED
SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
CREDIT REVIEW (Continued)
The Corporation considers a loan to be impaired when, based on
current information and events, it is probable that the
Corporation will be unable to collect principal or interest due
according to the contractual terms of the loan. Loan impairment
is measured based on the present value of expected cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.
Payments received on impaired loans are applied against the
recorded investment in the loan. For loans other than those that
the Corporation expects repayment through liquidation of the
collateral, when the remaining recorded investment in the
impaired loan is less than or equal to the present value of the
expected cash flows, income is recorded on a cash basis.
Impaired loans include loans on a nonaccrual basis and
renegotiated loans.
The following table identifies impaired loans, and information
regarding the relationship of impaired loans to the reserve for
credit losses at September 30, 2001 and
September 30, 2000:
2001 2000
(amounts in
thousands)
Recorded investment in impaired loans at $23,903 $13,583
end of period
Year-to-date average balance of impaired $13,332 $13,166
loans
Allowance for credit losses related to $ 3,242 $ 2,483
impaired loans
Impaired loans with an allocation of the $15,683 $ 5,200
allowance for credit losses
Impaired loans with no allocation of the $ 8,220 $ 8,383
allowance for credit losses
Year-to-date income recorded on impaired $ $
loans on a cash basis 379 300
Other than those described above, there are no material credits
that management has serious doubts as to the borrower's ability
to comply with the present loan repayment terms. Additionally,
the portfolio is well diversified and as of September 30, 2001,
there were no significant concentrations of credit.
Nonperforming loans at September 30, 2001 increased $13.1 million
compared to 2000 levels primarily because of the inclusion of two
loans in the 2001 period. One is a $6.7 million credit that is
not past due and carries an 80% guaranty of a U.S. governmental
agency but is experiencing cash flow difficulties and has been
placed in nonaccrual status. A resolution of this credit is
expected by the end of the first quarter 2002.
25
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 second credit is in the amount of $5.9 million and the
Corporation is in the process of liquidating the collateral. The
Corporation anticipates a final resolution of this credit by the
end of 2001 without significant loss. Nonperforming loans were
$35.0 million at December 31, 2000 and $31.7 million at June 30,
2001. Nonperforming loans as a percent of total loans was 1.71%
at September 30, 2001 compared to 1.41% at December 31, 2000 and
1.25% at September 30, 2000, while the allowance for credit
losses as a percent of nonperforming loans was 74.79%, 95.87% and
110.92%, 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. Management attempts to
minimize loan losses by analyzing and modifying collection
techniques on a periodic basis. The Corporation feels that the
allowance for credit losses is adequate at this time. The
uncertain economic conditions presents a risk to the industry but
management feels that its risk management process is thorough and
serves as an early warning system so that an appropriate response
will be promptly implemented.
CAPITAL RESOURCES
Equity capital increased $46.4 million in the first nine months
of 2001. Dividends declared reduced equity by $25.4 million
during the 2001 period, while earnings retention was $11.4
million, representing an earnings retention rate of 31.01%. 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 $893 thousand. Amounts paid to
fund the discount on reinvested dividends reduced equity by $460
thousand. The market value adjustment to securities available for
sale increased equity by $32.2 million. Proceeds from the
reissuance of treasury shares to fund stock options exercised
increased equity by $2.4 million during 2001.
26
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
September 30, 2001:
Percent
Amount Of Adjusted
(in Assets
thousands)
Tier I Capital $383,975 12.7%
Risk-Based Requirement 120,763 4.0
Total Capital 417,147 13.8
Risk-Based Requirement 241,526 8.0
Minimum Leverage Capital 383,975 8.4
Minimum Leverage Requirement 137,296 3.0
At September 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.
27
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
Not applicable.
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
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRST COMMONWEALTH FINANCIAL CORPORATION
(Registrant)
DATED: NOVEMBER 13, 2001 /S/ Joseph E. O'Dell
Joseph E. O'Dell, President and
Chief Executive Officer
DATED: NOVEMBER 13, 2001 /S/ John J. Dolan
John J. Dolan, Executive Vice
President and Chief Financial Officer
29